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 · 995 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
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes11y
Fund activity dried up a lot in Memphis Jay. Ali is quite wrong about good deals being all but finished. It is getting easier to buy every week here now.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Thanks! I appreciate your support. We are due for some pancakes soon with Matt!
Thanks for the apology, I appreciate it. And I did say, Memphis is still a good place to invest. I didn't say it was finished.
Oh nice, I didn't realize your presence in Atlanta was so big back then. I probably didn't know you back then, but I was investing there at the same time. Very cool. As far as the markets I like now, it would need to be a separate thread for me to go into details as to why on all of them...but my favorites are Philly, Dallas, Houston, Trenton, and Chicago. In that order. They all offer something different. For turnkeys at least, Philly and Trenton are similar offerings in terms of property type, price and returns...whereas Dallas and Houston are more similar into regards. You will get bigger nicer properties in Dallas and Houston with more appreciation potential, but with the trade-off being lower cash flow, a lot thanks to the TX property taxes and insurance costs, as you mentioned in a previous post. Chicago is more like Philly and Trenton but at a higher price tag and bigger properties. Not quite as high on the cash flow but still much higher than the TX cities.
- 11yWilliam HollyPro MemberInvestor · Trenton, NJ · Member since 2012 · 88 posts · 5 votes
@Ali
@Ali Boone undefined
I hope you find your way to Trenton. I'm a turnkey operator here and the the opportunity is great. So great I don't even need to sell it lol. Good Luck
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
I'm already hooked up with you @William Holly through Matt. He was supposed to do an email intro between you and I and he never did. But don't worry, I'm there :)
- 11yWilliam HollyPro MemberInvestor · Trenton, NJ · Member since 2012 · 88 posts · 5 votes
@Ali
@Ali Boone undefined, cool. I see your a night crawler lol. My California investors are trying to buy up as many properties as they can! We do right by our investors and have fun while doing so. Can't wait to meet you!
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Awesome @William Holly ! And yep, very much a night crawler :) Almost 3am here. I have way more energy late night than any other time.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes11y
Originally posted by @Ali Boone:
Awesome @William Holly ! And yep, very much a night crawler :) Almost 3am here. I have way more energy late night than any other time.
Hi Ali, what are the property tax rates for Philly and Trenton? Are you invested there now? I like PA but the taxes always kill my longterm math. Why would you advise Philly Trenton over Indy/Memphis for remote investors? Thanks again, matt ...my@ thingy not working on tab.
- Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes11y
A smart alternative to buying little green houses in states you would never want to visit is to invest in a syndicated apartment complex (think: red hotels).
Apartments are better investments than houses because of the economies of scale: maintenance is cheaper, occupancy and therefore income is more stable, the number of units you own = the amount of diversification you have, and banks love to lend on them.
Keep in mind, apartments are one of the most stable (read: safe) investments an investor can make. That is why pension funds and insurance companies LOVE to invest in them; because theirs is an ultra conservative "can't lose" strategy.
Apartments are a great hedge against inflation. Banks love to lend on them, Uncle Sam gives all kinds of tax benefits, your tenants retire your mortgage and pay all your expenses INCLUDING maintenance and capital improvements, they cash flow, and they appreciate.
Most of my investors realize an 18% annualized return or better on the apartment deals we do (**includes cash flow distributions, principle reduction, appreciation, and tax benefits) and never have to qualify for a loan or fix leaky toilets.
Smart investors have some kind of multifamily investment in their portfolio.
- Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes11y
Originally posted by @Eric Fernwood:
Hello @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
Great post Eric.
While I would agree that location, location, location is very important, it is even better advice when considering investing into a turnkey operation, an equity fund, or a syndication that you pick your PEOPLE, PEOPLE, PEOPLE, first and foremost.
You can't do a good deal with bad people.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matt Skinner How do you handle potential security issues with your deals are you doing a 500 series type offering ? Or are you putting folks into a llc as a non managing member?
I would add though just like sfr,s. Muti needs to be chosen for location and quality of asset plenty of c and d class muti,s go bk with loss of capital to all... I agree with your assessment though on quality muti with top shelf Sponser. Along with top quality mh parks.
- Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes11y
Yes @Jay Hinrichs
We have used several different Reg D 500 series offerings (506 I think allows only accredited investors but allows you raise unlimited funds... ). We form a single purpose LLC for each asset we purchase and then divide up ownership percentages based on contribution. So if you own 10% you get 10% of the cash flow, tax benefits, appreciation, and depreciation.
We use this model for buying apartments and for doing development projects.
Consequently, this is how Magic Johnson (and associates) raised $2Billion dollars to buy the Dodgers. Same type of private offering.
- Developer · Los Angeles, CA · Member since 2014 · 123 posts · 123 votes11y
Originally posted by @Ali Boone:
Awesome @William Holly ! And yep, very much a night crawler :) Almost 3am here. I have way more energy late night than any other time.
Love your website. I just signed up for you newsletter.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matt Skinner My securities Attornies in Oregon seem to think there is some exposure when you put different investors who do not know each other into an llc. So we did the 500 route. There is one 500 that allows up to 35 non accreds
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes11y
Ali, I think property taxes are 5.6% Trenton and 6% for Philly. Correct me if I am wrong guys. That could be 40% of gross rents. I know there is some hot gentrification but outside of that , thats a tough nut to swallow no? I can't see that as doable overtime. Or is there some low tax pocket zones maybe.
- Investor and Realtor · Milwaukee, WI · Member since 2013 · 46 posts · 18 votes11y
Wow, some high level good stuff @Jay Hinrichs and @Matt Skinner. Got to get my old school note book to write down some points to learn later:)
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kingsley Siribour Na just talking about raising money for deals... and of course everyone has an opinion and every state is a little different as well.... raising money in a pooled type of environment is Tomato Toemato depends on who you talk to
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Awesome! Definitely stay connected and reach out anytime!
- Investor · New York City, NY · Member since 2014 · 40 posts · 37 votes11y
Hi All, ( @Ali Boone @Jay Hinrichs @Cassandra Boyett , @Chris Clothier etc)
Just reading through this thread and I think it is very informative with great information and real discussions involved multile perspective from different sides and it is up to each reader to digest the different imformation and due their due diligence. I will add my perspective to the mix. I apologzie for the insanely long email as I realize this is such a common debate and just wanted to share my view.
Interesting, I have properties in many of the markets mentioned Memphis, Charlotte, Chicago, Philly, etc. At the end of the day, investors have different risk and return appetities, different visions, goals, and objectives they are looking to accomplish and of course different paces / timing at which they want to acheive it in. What I would think most investors would be consistent is against their particular strategy optimizing the risk / reward. As why would you ever want to take more risk than is normal for a level of return or vice versa have a lower return couple with higher risk. As many posters have alluded to, their are different paths to get their such as whoelsaling, turnkey, do it yourself, invest only locally, etc. In my portfolio I both have turnkeys AND markets where I have properties that in which I have my own team and operations to acquire, rehab, and tenant my own properties (full disclosure I do not sell any properties to investors, I only buy and rehab for my own portfolio). In every purchase I do, i use the format that I think optimized my return at the lowest level of risk.
For newbies, the key is you can do harm in any path. I sometimes purchase from wholesalers directly (and while there are great and credible wholesalers - many are junk and new investors can be easily scammed). I often build my own operations in the market myself and instead of selling to an investor I am simply using it as a platform to create strong rental properties for myself. However this has challenges for newbies as well - buying yourself is another way you can get saddled with a terrible investment even with some D&D (I say this as I have been invetsing in real estate for 15 years and made every type of mistake in the beginning and that really allowed me to hone my strategy and approach). In many markets, just a few streets down could make the difference of a good buy or bad buy, not truly understanding how to scope repairs and rehab costs and needs, over-estimating ARV or rent is sadly far too common, etc. So while you may think you are getting a cheaper deal, you may in fact be setting yourself up for a worse deal. If you are new to a market that has a lot of big players there is a risk that the inventory being shown to you is the properties that those in the know didn't want (and then you have to wonder why, unfortunately often times our egos get in the way to take a step back and question your great deal as hard as you might). In addition, if you want to optimize acqusition you need to have capital or funding flexibility as the best properties will often need to be purchased all cash, close quickly, etc. And as mentioned, I have purchased Turnkey and while I do 100% stand behind there are great turnkey companies out there delivering real value to their clients, there are far too many crappy companies that give the niche a bad name and will definitely sell you an overpriced property with lipstick rennovations and not a rehab. In these cases it is hard to bounce back from a bad purchase. So you do have to be very careful in evaluating turnkey companies, understanding their reputation, talking to investors, understanding the average number of properties purchased by their clients (the old rip me off once your bad, do it twice my bad If people have bought 20 properties then to some extent it has been meeting that investor's expectations), do they actually benefit from scale or volume in a way you couldn't, etc. So each path has risks and makes sense in different scenarios. So the take away as a new investor is in any path you need to do your homework and realize that in every path you can make a bad investment.
For me, when I do my own research, analysis, and due diligence and decide I want to enter a market because I feel that it meets a host of investment criteria I have (such as price to rent rations, tax rates, diversity of economy, population migration to, etc) as well as where I feel that market sits in it's real estate cycle I then look at what is the best way for me to further learn and enter the market at the lowest risk that meet my return hurdles as I prepare for a larger presence / operations. This is where many mistakes can be made one either side of the coin - do it yourself or turnkey. Either way you need to ensure you understand and are intelligent about the the market. I recommend regardless of path forward, reaching out to all the different players including other investors, turnkeys, property managers, brokers, local real estate attorneys, etc and understand all their perspectives (what themes are you hearing that are the same, where are the differences, test one opinion or perspective against a different particpant, etc). This will give you the info to decide the best path forward and the level of both risk and reward you want. Talking to all particpants regardless of path has truly helped me immensely - after you have 20 conversations it is easy to see through a lot of the bull and with different stakeholders that have different interests and incentives will ensure some light gets through. Reagrdless of path, even if you want to be passive, it is your capital and hard earned money and you owe it to yourself to know you truly understood why you invested as you did.
The reason I have purchased turn-key in some areas and timing is pure risk / reward optimization at that time. First and foremost, I realize that a turn-key provider will make money off of me. I respect that they should be compensated for a service they provide like anyone else - however, being an active investor I hate giving up part of my deals. That said, there is a difference in how I analyze the mark-up. I realize that the turn-key will make money above and beyond what THEIR all-in costs for the property (acquistion, rehab, etc) but what i look to understand is how much of a mark-up if any is it from what MY relative all-in costs would have been in the same scenario. These are actually two different things. I have purchased turn-key in scenarios where the turnkey clearly made profit / mark-up on me, BUT because for instance they purchased 60 properties at a time (their acqusiiton prices had some economies of scale then if you purchased individually and potentially having to purchase all cash), they did similar rehab / redevelopment where they purchase tiles, flooring, furnaces, appliances, etc in large volume at one time and got significant discounts from vendors, Lowes, etc that I just couldn't match, they have full time contractors which I could support, etc. And in some cases the specific streets / neighborhoods my analysis told me I wanted, there simply was no inventory as it was always sntached up first. In those cases, there was economic value to me that balances the margin they made and I ended up at an all-in price point similar to where I thought I might be on my own and with less risk (any unexpected suprises on rehab, having to tenant it by close with a tenant I approved, not having to sacrafice on street or neighborhood I wanted, etc).
I ask myself, if I wanted to purchase a good property (based on my criteria) can I find it. If I can, I ask myself why other larger players in the market didn't purchase it? If I feel in a given market the inventory is extremely tight particulary for my harsher quality criteria, then I might conclude I am probably getting the left overs which often can mean higher risk. Sometimes, I will run a few properties that are out there that I am looking at by different turn-keys to see what they think (and understand why they didn't buy it. I take the info with a grain of salt, but sometimes their analysis makes sense and you can validate it and helps you have further enlightment on mistakes that could be made out there if you do decide to do it yourself which I mentioned I often do). Don't be afraid to marshall all the resources around you to be as knowledgeable as you can and good quality turnkey operators will understand and appreciate that as well since they believe there is a value they bring. If not, that is a sign right away. If I truly believe that inventory is crazy tight and there are other really saavy investors out there than there could be some risks that sometimes people overlook - potential to buy a dud even after doing due diligence than someone with deeper local knowledge understood and in some instances the best deals are off of all cash offers and whether you are prepared to do that. On the other hand, in some markets there are many fragmented players, there is a good amount of inventory, etc and my analysis points that I can find good properties at similar price points to turnkeys in the streets / areas I want and I don't need to have an acquisition mark-up. All it really requires it some effort and time. In this case, I am willing to do that and that becomes a non benefit of turnkey for me. I recognize that for others that have a desire for less effort this isn't as relevant.
Next I think of rehab. I know that the turnkey provider will make money on me based on their all in cost, but I compare objectively what I think a typical rehab might cost me (managing it long distance and not having my construction volume / scale built out yet) versus does the turnkey truly have a large enough operation / scale that their rehab cost would be significantly less than mine (as mentioned do they bulk buy flooring, appliances, etc). If I feel that initially, I will be able to only acquire either the left-over properties outside of my first choice streets, or a property at a much higher relative purchase price due to less local relationshops AND I think that my rehab cost will be much higher than the turnkey's, if I did it myself I might end up at an all-in cost for doing it myself that could actually be the same. For me at the end of the day, like many posters, I don't want to pay a mark-up that just takes away from what is in the deal for me. What I do want if I buy turnkey is to know that the company created value that i couldn't which offsets the mark-up (again that value could be access to the type of property I want that just isn't easily available to me on my own since all the players have picked the good inventory or their rehab is substantially less than mine would be, etc so that we land on the same all-in price either way). To be fair, many turn-keys are simply not able to create the above and beyond value, but there are some out there.
In many cases for me, turnkeys will end up not providing enough value where I am much better doing it myself (keep in mind again I am generally more active) and in other cases when I look at the risk and what ultimately it may cost me to replicate I could end up worse off doing it on my own.
If I do purchase turn-key it is usually when I first enter the market and it allows me continue to validate / learn the lanscape of the market and then I tend to go off on my own when it comes to scale the market and by doing that I have helped de-risk my protfolio over the long haul.
Hope this was helpful.
Cheers,
Eric
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Kind of like hiring a fishing guide when your new to the water.. you pay 500 a day for them to take you to the fish show you what they are biting on.. etc etc... once you have some experience you can recreate it on your own...
I think out of state investing has to be done with the mind set that one is going to scale it.. One or two out of state rentals is not going to do much for you in the cash flow markets. If you happen to choose poorly your going to have a bleeder and wish you never did it.. Even if you do well you locked up significant capital for a very modest gain and a huge risk.
I think most of the folks that think they need to go to cheaper markets if they just stepped back and looked at small multi in their own markets they will see they can achieve the same results with far less risk's and properties that are sold on the open market as opposed to in heavy turn key markets were you have two values.. the value that one has to pay from a Turn Key company and the value that you would pay off the street from someone who bought from a turn key company a few years ago and needs to exit.. they will in most instances never sell for what they have in them..( and that is systemic of the market not necessarily turn key) as in these heavy rental markets those in the Know and someone like you will back into the cash flow numbers and that sets value.. the ARV that are bandied about are in my mind fictional at best.
- Investor · New York City, NY · Member since 2014 · 40 posts · 37 votes11y
I agree. I do think it makes sense if you enter a market to have the thought of wanting to build a portfolio there. That allows you to ammortize some of the upfront costs whether tangible (visiting the market) or intangible (hours of research, phone calls, etc) across a number of properties instead of one. In addition, even from a property management perspective, you want the best PM of course, but you want to have a few properties so that you can achieve scale with that PM and attain better fees and costs. Just one example of costs that scale or are optimized if you build a portfolio versus a property.
When I speak with new investors, I always tell them that real estate is an interesting asset type - risk actually declines with additional purchases if you buy right which is always the case with other assets (e.g. buying more gold bars doesn't make your existing gold bars less risky unless you are cost averaging down). If you buy a fantastic property, you will eventually have a bad tenant or have some unexpected maintenance and often times it is the timing of when that hits that can have the bigger impact. Your one property could just not perform like it should be based on similar probabilities and averages due to some bad luck. My example is when you have 1 property, you may use a vacancy allowance of 1 month, but the truth is you only have two types of occupancy - 100% (occupied) or 0% (vacant). If you have 4 properties, now you can now have much wider set of an occupancy rate (0,20,40,60,80,100). Like a coin flip, if you purchase truly great properties than the more homes you have the more you will head towards averages. And that has been key for me. I don't chase the highest returns, I seek to reduce variability - I like to have a low standard deviation of return.
The reason I do invest outside of one area is that I am very conservative so once I started to build large sized portfolios (first I diversified within different neighborhoods and formats I liked to have some protecttion) but then I wanted geographic / market diversity. You just never know when an individual market could be hit by local micro-economic issues that no one expected or some terrible natural disaster hits so as I built my cash flow, I wanted to be able to better hedge and minimize the risk. It does lead to having to constantly develop new teams, new duplicate models, but allows me to sleep a little better at night.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
for those reasons I think a first time investor using a mortgage slot ( not paying cash) should look at nice duplex 4 plex the risk of having a 100% vacancy is less.. and those properties sell for accepted cap rates within their market.. Not inflated values that tend to happen in SFR's and especially through marketing companies that are pitching for Turn Key.
The fact is so many want to get started in this business thinking they need to be a buy and hold investor and if in fact they would have started close to home were they can manage the asset easily.. Many of them would have done much better and or have not lost a bunch.
I can't tell you how many e mails I get from Out of country and CA buy and hold investors who just want out. they though they wanted buy and hold they were gong to start with one or two. it goes OK first year but from the first tenant turn over and forward they soon realize this is not going they way they inteneded it.. And like you said if you keep acquiring and make a business out of it.. you can mitigate that... Not to pick on Memphis but I have one client who e mailed me.. They have 3 rentasl they bought from a Top flight Turn Key in Memphis.. first year was fine as stated then the turn over then the bad renters then. So now 3 years later. One house is boarded.. One house they tried to sell owner contract to get out of it.. And the buyer is ripping the rents so they need to foreclose.. And the last one the Hud tenant just got kicked off of section 8 and the house is vacant and needs a full turn over... They have run out of their cash reserves and what reserves they have are paying the mortgages on the 3 properties to protect their 800 credit score.. When trying to market the properties as we know if a house is not perfect the only buyer is wholesaler so they are getting offers at 50% less than they paid for them from the very people that sold them the properties or other wholesalers in the market place.. This is a very real and common scenario. Had this person used that same amount of capital in CA. they could have easily bought a duplex or 4 plex.. And could have for sure bought one in PHX and VEgas.. and probably not be in this wipe out scenario.. that's the stuff that bothers me seeing good hardworking people buy into a dream when they really have no business being landlords in the first place. at least not landlords in Renter dominated mid west markets... those that are successful in those markets scale and want to create a business. those that buy a few and think ( well I don't know what they think) I think its 50/50 over a 5 year period whether they take a loss of capital and potential foreclosure for lack of production of the asset.
Eric your experienced where do you think all this inventory comes from... It surely is not the poor subprime homeowner who lost their home most of that inventory has been cycled.. these homes come from Landlords that failed.. and many do.. No one talks about the failure rate of landlords out of state... Its only Blue Sky which in my mind leads folks into a false sense of security...
Last point is out of state folks can mitigate this buy buying at the top end of the market the issues as described above are generally 1000 and under rents... move up to 1200 to 1500 rents that tend to be market rents and success rate is far better.. as your renter demographic goes up exponentially.
- Investor · New York City, NY · Member since 2014 · 40 posts · 37 votes11y
Hi Jay,
Couldn't agree with you more about some of the keys to success - at it's simplest you need tenant's that PAY (by that I mean high quality tenants) and tenants that STAY (people underestimate the importance of length of tenancy as turn-over is a killer of returns). And the foundations which everything sits on its strong property management.
I couldn't agree more with what you said about rents. I believe that in every market there is an invisible line on rents that correlates to different types / class of tenants. For example, I always want properties that have rents that are decently above and beyond the median rent. That is ultimately one of the reason that while I do own multi-families (particulalry in Chicago) I think some newer investors chase the returns on duplexes not truly understanding the trade-offs. For instance, if I showed someone a SFH that rented for $1100, and for the same purchase price I showed someone a duplex that rented for $1300 ($650 a side) most people will see the duplex as a much better investment (higher rent to purchase rate). However, I would argue a $650 a month tenant is a distinctively different type of tenant than the one $1100. So while it could look better on paper, more often than not a duplex like this is in a worse area and will have far more tenant quality issues and its net yield (not the gross) will often end up much lower than the SFH with $1100 tenant.
As mentioned above, I also think one of the characteristics of return that is often overlooked is length of tenancy as even when you have god tenants if you had tenants leaving each year, you then constantly have rent ready costs, vacancy, tenant placement costs. If you had a property that had 2 year occupancy on average compared to a property with 4 years on average the return would be more substantially different over the long haul that I think we often realize.
The issues with multi-families when bought wrong is that people don't realize it is more transient types of tenants that see the places as more of an apartment than a home and so you have greater turnover. You need to ensure that your return isn't just higher than a comparative SFH but also included additional return to offset the higher turnover rates as well as the different tenant quality. Now obviously, I am generalizing and if you really understand multi-families and do your analysis right there are good opportunities (duplexes or multis in better areas are much different to me than multis at the same purchase price as a comparable SFH), but what I like about SFH (when you are not slot constrained) is that bought right you have multiple exit options, longer tenancy on average, less transient and more families. That said, only if purchased right like you mentioned.
I like duplexes in Chicago since duplexes are almost like SFH there as the city was built less on SFHs as standard configuration and more on multi-family so families are used to renting and staying in a duplex for the long haul.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
agree on Chicago... I have a fairly sizable investment there... when I say duplex four plex I am using a West coast duplex or four flex... or specifically here in Portlandia.. were we do not have SFR's generally as rentals.. they exisit but not nearly to the extent they do in other markets.. prior to the crash less than 6% of standing SFR's in the entire 2 mil Portland metro market were rentals.. that number has grown to about 10%... So in our market and this is the same in much of the west coast if your a renter your in a Apartment of some kind. Be it a shabby low end duplex or four plex or a very nicely placed one in my city of Lake Oswego...or a downtown condo project that got converted to apartments.
We have a 1% vacancy factor in PDX... so its really more like Manhatton or New York city as it is in Palo A lot or San Jose or SF... the mid west is just another beast.. and I agree with you on duplex four plex in mid west areas that are super cheap..
The Chicago multis are in a much different category and price point as the rents per side are 1200 and up...
OK I have to go make some money so I can afford to be a builder and a land lord.
Have a great day.
- Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes11y
@Jay Hinrichs who is the "top flight turnkey provider" in Memphis you reference??
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
its one who is not on BP to my knowledge but one of the largest there
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