Turnkey Rental Property a good idea for a first-timer?
Homeowner · Palmdale, CA · Member since 2014 · 9 posts · 6 votes
Turnkey Rental Property a good idea for a first-timer?
Most Popular Reply
Eric FernwoodBusiness Member
Realtor · Las Vegas, NV · Member since 2014 · 994 posts · 1k+ votesHello @Cassandra Boyett ,
Buying turnkey can be an excellent purchase method but remember that this is only a purchase method, it does not assure you that you are buying in a “long term good” location, getting a good property or that you are going to get good tenants.
You have heard the old adage that the three most important things to consider in real estate are location, location and location. This is still true. When you are considering a property in any “location” you need to think long term. Do your homework and make an informed guess whether the state/city/area is still likely to be a good place to own a property in 15 or 20 years? What is happening today or this year is almost irrelevant because real estate is a long term (multiyear) proposition. Some of the key indicators you should consider are:
• Population migration - are people moving in or out? If they are generally moving out of the state/county/area then the value of your investment in 5 or 10 years is going to be much less than today. Here is a page that provide population shifts by city.
• The value of a property is no better than the jobs around it. This does not mean just that there are jobs, the earning power of jobs needs to be stable or increasing. For example, if the state/county/area trend is from manufacturing jobs to lower paying service jobs, your rent is going to go down and the value of your property will fall.
• Property price trends - If property prices are trending down in an area, that is because there is less demand. If there is less demand to purchase, then there will likely be less demand for renting in that area too. And, if property prices are going down, rents will also go down and even if you decide to cut your losses and sell you probably can’t even sell the property at break even.
The following two points are not criteria but something to keep in mind. 1) As long as you buy in a good area (see all the above), all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. However, if you buy in a bad (or trending down) area, there is little or nothing you can do to make money over the long term. 2) To quote a former president, "Trust, but verify"; never take others claims at face value. With the internet, you can validate any claims made by others. The data is there and all you have to do is to spend sometime and the claims will be either validated or you will know that you need to find someone else to deal with.
Below is the process model I recommend. The property profile and profitability are explained in details in this thread - http://www.biggerpockets.com/forums/12/topics/1527...
Best Wishes,
Eric Fernwood
FERNWOOD Team, KW VIP Realty520 Reviews
106 Replies
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
@Bob Bowling
I do have investing experience, I own rental properties. None of the turnkey folks do the buying for anyone, they just offer the product. I don't give any money to turnkey people, I buy houses and buying the houses is the only place my money ever goes. I've seen all of the properties I own as well. I don't prefer to go see them that often, but I've certainly seen all of them in-person.
@Jay Hinrichs
What you say is fair, anyone can call me biased because I can make money off a deal, absolutely. There are several things that go into that though, one being that everyone on the planet asks me to refer for them and I won't refer to just anyone. Oftentimes the offer is for more than I currently make, but I turn them down because I don't like or trust what they sell, or I don't think the value they claim to be there is really there. Believe it or not, I only refer people to companies that I have personally bought through myself and no one else. That way I know what I'm talking about and can personally vouch for their service and the product. But more importantly than all that, in terms of the current discussion, because I can make money off several different markets, I can give unbiased advice when it comes to choosing a market, because I really don't care which one someone buys in....my financial gain is the same no matter what. So that allows me to suggest the best market given the desires and from there who I think the best turnkey provider is.
But, at the end of the day, if you read all my forum posts to whatever topic is going on, you would know that I'm barely even biased in those regards. All I can tell people is what I like and what my experiences have been. If someone wants to flip, or buy locally, or wholesale, or buy from a turnkey provider I have no affiliation with...all things I don't do myself...you'll see very clearly that I support all of that. No one thing is right for everyone, and just because I like something doesn't mean someone else will or it's right for them. Quite often I tell people turnkeys aren't for them. So yes, I make money off particular providers, but I'd be impressed if you can find somewhere where I've ever blatantly told someone they should buy one particular thing from a particular provider, with the underlying reason being I'd make money off of it. I don't do that.
In terms of what I say in my posts, I am always willing and ready to give people "concrete and real advice", should they ask for it. What I don't do on these forums, that a lot of people do, is start spouting off advice when no one asked for it. If I respond with something short, like I live in SoCal and only invest out-of-state... it's usually because the post only said or asked something very generic, so I responded generic. If someone asks for more information or something concrete, I will back up what I said. Otherwise, I prefer not to be a forum-hog. Like I'm doing right now, but you asked, so I answered.
- Real Estate Investor · OR · Member since 2012 · 390 posts · 133 votes11y
wow Bob, take a breath. This is a friendly forum where we all get to share our views without people yelling. I don't understand why you are so upset but of couse you are entitled to your feelings.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Melodee Lucido:
wow Bob, take a breath. This is a friendly forum where we all get to share our views without people yelling. I don't understand why you are so upset but of couse you are entitled to your feelings.
Sorry, but I don't get charging friends for recommendations. Obviously you have no problem with that. I think a friendly action would be treating your friends a little less monetary.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ali Boone Are you a licensed RE broker in any state?
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
I'm a licensed RE agent in CA but not a broker. My license is hung with a brokerage.
Sorry, I didn't see your comment before I responded to Jay and Bob. But in response, I have plenty of experience with Memphis. I went to school outside of Nashville and have been to Memphis a ton a ton for various reasons outside of business, but for business, understanding the dynamics of a particular market and knowing the cycle of a market doesn't always require being physically in the market. In fact, had I not been in Memphis so many times, I might have bought into more of what I knew about Memphis as a good market a few years ago and bought there. But I don't like Memphis, originally it was because I have been there and just don't like it, but Memphis as a market in general has gone through it's real estate cycle pretty hard in the last few years and based on where it is in that cycle, I have even less interest in it. However! If someone wants Memphis, I do tell them that while it's not a market I personally prefer, there are in fact deals there and I would recommend Memphis over a lot of other markets people might suggest. And! I will even tell them who I think the best turnkey providers there are, even though I don't make a penny off any Memphis turnkeys providers.
And not to beat a dead horse, but I can get paid off referrals from direct providers if I wanted to, so your first statement isn't true. I just choose not to work directly with providers. But, no offense, if I were to turn your own statement back on you- I'm pretty sure you are a turnkey company, so of course you would argue that dealing directly with a turnkey company is the way to go.
I can guarantee you, if anyone asks me, I will not tell them to who to deal with in terms of direct turnkey providers or affiliates. Instead I give the pros and cons of doing it either way.
Hey you! How are you? :)
I'm sorry the thread has gotten completely off-topic from your original question! Somehow this tends to happen anytime out-of-state investing comes up.
- Real Estate Investor · OR · Member since 2012 · 390 posts · 133 votes11y
"I'm sorry the thread has gotten completely off-topic from your original question! Somehow this tends to happen anytime out-of-state investing comes up."
@Ali Boone umm yeah. right. I'm not even wasting any more time beating this poor dead horse. Back to work for me.
I'm doing good girl. We have to catch up soon :-)
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes11y
People with vested interest and poverty mentality like to attack their competitors, even though their comments are incredibly ill informed sometimes. So just ignore it all :-).
A good deal in any city can come from a turnkey, a local, out of state, even a donkey who cares.
The critical point is to make sure you know enough to know whether it is a good deal or not. If you can't figure that out then don't buy from anybody.
And anybody pushing their own barrows as hard as some are doing here probably have said barrow full of bovine eschatology.
- Investor and Realtor · Milwaukee, WI · Member since 2013 · 46 posts · 18 votes11y
May be we can have a category to move off-topic responses when it becomes so unrelated to original issues.
Anyway, in regards to Cassandra's original questions, it still boils down to the basics: solid team and making sure the numbers add up because numbers don't lie.:)
- Homeowner · Palmdale, CA · Member since 2014 · 9 posts · 6 votes11y
Thank you everyone! This has all been very interesting (in one way or another lol) and has given me a lot to think about :)
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ali Boone what would be great is for you to maybe explain why you don't like Memphis currently and why you like your other markets.. what factors given your experience would lead you to that conclusion?
That is the kind of information that would be relevant and useful from someone in your position. I personally know Memphis pretty well but don't know Philly at all... I am doing business in Chicago right now and I really like the Multi market there..
And of course you have the heard mentality rushing to anything Texas !!... However in my mind when buying in Texas one does need to be mindful of tax's and expansive soils.
With many of the mid west or upper rust belt type cities for someone who is new to TK or investing out of state they really need to understand the demographics of the ares what we class as D and C and B and A what that really means.
And I agree with you someone out of state is going to take a huge risk trying to compete with Turn key guys for inventory and to get the homes rehabbed without running into yet another set of problems IE theft.. vandalism being overcharged.
@Cassandra Boyett I like the idea ( if you can do it and it worked for you and family) of buying a 4 plex with one of your loan slots as owner occ... live there for a period of time then move on.. leaving the 4 plex as a rental.. great cash flow close to home so you can keep an eye on it.. Its all about owning doors.. so if you can use ONE mortgage slot for 4 doors as opposed to 1 door and your really long term buy and hold then its about doors as much as anything.
When you talk to those in the business of owning rentals homes if you cannot realistically in a fairly short time get scale IE own 10 to 20 SFR's in the low value markets ( compared to much of the West coast) then those folks would tell you to not buy them period.. Look for other investments.. owning a couple of long distance properties that might make you a few hundred a month is not a long term buy and hold strategy. The other thing you might want to consider is for instance some of the crowdfunding opportunities if you qualify... As well as some of the folks on BP here that set up JV deals with investors... @?dawnatasai does this in Milwaukee for instance.. there your buying at true cost and have a partner that is there managing the units.. so In essance your not out of state and out of control.. Also James Wise in Ohio is a RE broker who does JV deals.. those types of deals are much safer than trying to buy 1 SFR 10 states away.. You may want to consider following up with those folks as well and see what they have to offer.
AS well as a really GOOD Hard money lender in your area could put you into some good short term loans.. those will perform and its passive as long as the HML is a top tier company Like in your area Bruce Norris at the Norris group..
So there is some ideas for you to ponder while you take it all in...
- 11yDawn AnastasiPro MemberRental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
You kind of butchered my name there but I got what you were trying to say. :)
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Dawn Anastasi its the thought that counts :)
- 11yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by @Dean Letfus:
I am sure Ali has disclosed she get s a cut from memphisinvest on sales she generates. It's not like it's a secret :-)
I appreciate you mentioning our name, but you are incorrect and I would like you to remove your suggestion that we have paid any referral to @Ali Boone or her company. There would be nothing wrong with it if in fact it were disclosed properly including on the HUD, but it has not happened. She has not referred to our company and I believe she states as much later in this thread. This thread really has nothing to do with me or our company and I try to stay out of these forums unless I think I can add something that hasn't already been said considering TK is exactly what we do. However, you are incorrect and apparently have failed to read most of Ali's post about how she thinks Memphis is a market that is on the decline. I like Ali and I enjoy reading her articles on the BP blog and I like her company, but we have never done business together and she has never referred a buyer to any of our companies and I absolutely disagree that Memphis is not a good market for some investors.
Again, your call, you can leave your comments out there with the little smiley face, or you can remove them because they are factually incorrect and I know you are a person who prefers facts over innuendo, rumor and bs remarks about secrets.
- 11yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Unfortunately, there is no single definition of what turnkey investing is or how a turnkey company operates or exactly what you can or should expect as an investor. The term has become so convoluted and over-used that it is nothing more than a marketing hype term now.
In my opinion, as an investor your mindset for buying a turnkey property is that you want your investment to be passive and that you are not looking to do much of the heavy lifting yourself. In this scenario, your best bet is to research markets that make sense to you - not just because they are familiar as you mentioned in your post (family in AR/TN), but because they make sense for your long-term goals. For that matter, there are areas much closer to Palmdale that may make sense and be more affordable, yet still be a passive investment for you. Simply being familiar and hearing an area is good, although a big reason a lot of people do invest, is not always a good one.
You have to know the economics of an area and dig into the jobs, population and industry expectations for an MSA. Is it going to grow, how long are you planning on holding and during that period are there good things currently planned for the area. The list can be long, but you have to know more about the area itself. And THEN you can look at companies.
My personal definition of turnkey is:
- a company has located a property
- they have purchased the property (so they own it - not they are simply selling MLS or other peoples stuff)
- they do a complete renovation that is documented for a future buyer including before and after pictures and a detailed accounting of what was spent and where that money was spent.
- you as a buyer cannot purchase the property until after the renovation is completed so you can hire an independent inspector to walk the property for you.
- the company operates a property management company that can manage the property for you on-going after purchase should you choose. THIS SHOULD NOT BE REQUIRED, BUT ONLY OFFERED AS A BENEFIT AND YOU SHOULD BE COMFORTABLE SAYING NO AND KNOWING THE PROPERTY WILL STILL PERFORM AS YOU EXPECT.
- if a guarantee is used to market the company or as a key reason to buy a property, I highly suggest you ask the company to offer that guarantee in year three. It only stands to reason that if it is newly renovated and rented, you should not need a written guarantee should you? You should expect that any quality company will stand by their work anyway so put that guarantee on the third year of ownership. See how quickly they back away...- Lastly, there should be some form or plan for communication with you as an owner after you purchase.
I am a fan of companies that own all aspects of the business and give you as an investor the ability to have one on-going contact for any questions or issues rather than calling the company that sold you the property with questions about the property, but having to call the manager for management questions or the renovation company for renovation questions. I am also a fan of those companies that offer management in-house so you again have one point of contact and that company can help you control and navigate your experience as an out of state owner.
As an investor, you pay for these services, but everything should be rolled up into the price of the home on the front end and then clearly explained as to what your management costs will be. That would be the case with any management company. You should not, again in my opinion, be expected to purchase the property (they make a mark up), then fund the renovation (they make a mark up), then fund the marketing of the property for rental (they make a mark up).
You will find that most quality turnkey companies around the country and there are several in different cities that I am aware of and personally know, will operate in the above fashion. They will be transparent with pricing (and germane to this conversation any referral fees paid will only be paid to a licensed broker and disclosed on the HUD), transparent with their process and you will not feel pressured to purchase or like you have to make quick decisions.
If you read through this again and follow these steps as well as research this exact topic here on BP, you will become very familiar with how to research, what steps to take and even if an out of area investment is the right one. I think @Jay Hinrichs mentions that there are other ways to get passive income, but not all of them include you as the owner of deed. That does not mean they are not good options, but as a passive investor you have lots of opportunity.
Sorry for the long comment after a very long forum thread, but there is a lot for you to consider and the answers are just not clear and cut and dry. You have to dig a little.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
@Dean Letfus
I'm glad Chris just posted that because I didn't see your comment before. For you and all concerned, that is correct, I have never received a referral fee or commission from MemphisInvest. And if anyone really pays attention to my posts, you'll see that despite not receiving referral fees from MemphisInvest or @Chris Clothier, I still recommend anyone buying in Memphis to be sure to buy from them! (and that still stands true) (and I still won't get a referral fee for anyone who listens to me and buys from them). How's that for some unbiased recommendations? :)
@Cassandra Boyett
I'm still sorry your thread has been overtaken.
@Jay Hinrichs
Totally. As I said before, the only reason I don't offer up more information or more depth on my thoughts initially is if someone didn't ask. I try to stick with the initial question someone posts to start with, and then if someone has follow-up questions, I'm happy to respond with more details. Reason being, as with this thread right now, people's questions end up completely ignored because people take over the thread with their own thoughts and issues, completely off-track from the initial question. Normally I would say let's start a separate thread to talk on my thoughts on Memphis so we don't take this one over, but that ship has long sailed so why not.
My preference to not invest in Memphis is simply a personal preference. When I started investing originally, long before I was even in the real estate biz, Memphis was a huge market and I had every chance to buy there. I didn't though, just because I don't like the market. And when I say that, I don't mean in terms of investor pros or cons, I just mean I'm not attracted to Memphis myself, either to visit, live or invest in. If you want more reasons why I don't like Memphis as a city, I'm happy to share offline but they have nothing to do with investing. But those aren't what you are asking for, you want more sound factual information.
From the investing perspective, as I said, Memphis is still a better city to invest in than a lot of cities someone could pick. There are a lot of numbers behind-the-scenes both about Memphis and about other cities that you could compare Memphis to, but I'm not going to include those here because I'd be typing for an hour. The short of it is this- Memphis was a hot boomin' market for a long time. It was really one of the frontrunners for turnkeys in my opinion and when investors started realizing this capability of investing outside of their local markets, Memphis was it. Everyone flocked there, turnkey providers were popping up all over the place, and it was happening. That was...what, ballpark 2009-2011ish? It started before then, but those were really hot years. People have been investing there since then as well, but I'd say those years were Memphis' real heydays. Towards the end of that period, and into 2012, what really sucked Memphis dry for what inventory was left after all the individual investors came in was the hedge funds. Atlanta around this time was in exactly the same boat- hedge funds came in and started eating both those cities alive. They were not only buying up all the properties they could find, they were also buying up turnkey companies! The hedge funds kept a huge presence at least through 2012, still into 2013 but not as heavy, and there may even be some trickling residue left from them now. What all of that caused, both in Atlanta and Memphis, was a couple things: 1. serious lack of inventory (add Charlotte into this category to). I mean, what was left was the bare bones. and 2. prices jumped tremendously. When prices jump, returns get lower.
So what is left of Memphis now, in my opinion, is the bottom of the barrel properties (I don't mean physically, they can still be in great shape. I mean in terms of what the hedge funds didn't buy up) and they are priced high enough that the returns on them (cash flow) are just not as high as other markets out there right now. The main period of growth has already happened in Memphis, what is left are only so-so properties in comparison with what else is out there, and the returns are lower than some other markets with nicer properties. So investing in Memphis is still a fine move, but why would I buy there if I could buy in a different market with equal or higher returns, for nicer properties, and more room for growth?
I wrote an article a few months ago that talks about this, specifically about the 'expansion cycle' of a market, and it hits on Memphis specifically-
http://www.biggerpockets.com/renewsblog/2014/08/02...
I'd be typing for hours to cover every fact and spec about Memphis, but for for anyone interested in investing, all you have to do is look up turnkey properties in Memphis and compare them against other markets out there right now and look at the price for the properties, the property types, and the returns. Then if someone still deems Memphis the way to go, then rock on, buy 'em up! :)
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Okay I'm not doing well with the naming people link thing apparently.
See last post.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Oh, one more comment to... I would even put Indy in the same category as well. It's still great to invest there, but I see better stuff in other markets now.
I do think though that if anyone wants to get into major market debating, we should open up a new thread.
- Homeowner · Pittsburgh, PA · Member since 2014 · 854 posts · 511 votes11y
I feel like I am watching a Battle Royal
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes11y
Apologies @Ali Boone if I was wrong. I would have bet my mother I had seen you post it somewhere ages ago :-). Anyway the point remains that even if you were then so what. It's not evil. People buying turnkey still need to know enough to know whether they are buying a good deal or not!
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ali Boone great response the kind of in depth information that is relevant to newbie type investors.. I was not aware of the Hedge fund activity in Memphis.. I certainly was in Atlanta as I was down there in 2012 just before them.. I bought 43 homes before they totally priced me out of the market. But then like any good investor I sold them all to them 18 months later for a fabulous gain...
So what are the markets you like these days??? and the reasons you like them... I think the audience would get a benefit from your perspective....
Myself if I was asked.. I like the thought of taking your mortgage slot and buying a 4 plex or at least a duplex.. since the mortgage slots are finite for the good financing.. I think its all about doors if one is looking for long term cash flow.
- 11yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
I feel like a real dummy looking at all of these lengthy and very well composed posts ;)
Typing = My achilles lol
Also, loving the heat on this thread :)
Thanks and have a great day.
- 11yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by @Dean Letfus:
Apologies @Ali Boone if I was wrong. I would have bet my mother I had seen you post it somewhere ages ago :-). Anyway the point remains that even if you were then so what. It's not evil. People buying turnkey still need to know enough to know whether they are buying a good deal or not!
After reading your response and re-reading your original one sentence post, I can read it in a different light and hope you meant it with less menace toward myself or Ali. I did not think it was a fair comment to make toward her or to include my company in the thread. There is enough mud slung around here and i took the secret comment to mean that Ali or I would not disclose it.
I voted for your apology to Ali because I appreciated you posting it to her. Just for the record, Ali is a witty writer and straight shooter with people so from what I know of her, I do not believe she would mislead an investor if they wanted more in depth help from her. My opinion of her is that she would absolutely disclose any pay or relationship. Whether she does that in public I could not care less, as long as she is disclosing to anyone she is working closely with to help guide them in buying. Anyway, I appreciate the apology to her.
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes11y
You've lost me Chris no one accused anybody of anything. Anyway as long as you're happy now :-)
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