Investment company trust or not?

Question

So I’m thinking about investing with a company that says if you invest 150k on 10 properties (turkeys) that you will make around 5,000 a month and this all can happen in a year. Between 13k and 15k for a down payment.    They didn’t promise anything, they said this is possible.  They want you to buy at your leisure time and no rush.  The markets that they are offering: Buffalo NY, Memphis TN, Cleveland Oh, Detroit MI, Pittsburgh PA,  San Antonio TX, and Orlando FL.  The company has all the people in place, (their) people in place and supposedly are trust worthy, that will manage the property and make sure you receive a good cash flow.  He also said that you can’t only get these deals that he has personally vetted. 95% of his investors do not even go and take a look at the properties they’re going to buy. My questions are: does this seem like a good company to invest with? How can I vett a person like this? Should I purchase 1 and see how it goes?

James Wise · Answer

My thoughts on this have to do with the amount of markets this company is involved in.

• Memphis
• Cleveland
• Detroit
• Pittsburgh
• San Antonio
• Orlando

That is a lot of markets. It takes an insane amount of infrastructure to handle sales, contracting, marketing, IT, Property Management & Construction in 1 market, let alone 6 spread out across America. I know that it's cost me millions of dollars in infrastructure to get my Cleveland business to where it's at today with all of our office support, trucks, tools, signs, employees & marketing funnels. To do that across 6 states the company must have many many years of experience. If they aren't a very well funded long term business I would be hesitant to work with them.

I have seen many fly by night companies build up some online marketing & claim to have a presence in multiple markets. In reality they were just reaching out to actual locals whom they didn't really have actual ties with in hopes of getting referral fees. When you get caught up working with a middleman of this nature you're paying more for everything & they have no more ties or experience in the market than you do. Hell there was a company called Andesite that used this model. They tried breaking into 3rd party property management in Cleveland & they weren't even licensed. I promptly turned them into the Ohio Division of Real Estate & they were subsequently served a cease & desist letter a month later.

Jay Hinrichs · Answer

@Clayton Mobley  sounds like a Morris invest pitch and their markets..  any way this is far to agressive to start off when you have never done rentals.  buy one figure it out then scale dont buy 10 and then realize you made a boo boo.. and keep in mind your signing on a ton of debt for what I am sure are C and D class assets which on their face carry some risk that is never really talked about through sales channels

Clayton Mobley · Answer

@William Orrock I second the advice you've already recevied regarding references. Any good turnkey outfit will be able to provide you with contact info for longer-term clients that will vouch for them.

My primary concern here isn't the claim that scaling quickly by leveraging 10 props right off the bat can bring in sizeable monthly income (although $5k is a bit high for 10 props), but rather what the figures they are providing say about the properties they sell.

If $150k gets you 10 down payments, and dp's for rentals are 25%, then you're looking at an average value of $60k per property. For true turnkey properties (as in not just cosmetic rehab - new roof, floors, HVAC, etc) $60k just doesn't leave enough meat on the bone for them to have bought in solid B-class areas, done great rehab work, AND made a cut on the sale price to you (how turnkey companies make money). We know they're not giving up that last thing, because what would it all be for? That means either the rehab work is lacking or, more likely, these properties are C/D class.

As a new investor looking out of state, I STRONGLY advise you to stay away from this asset class. The cash flow looks AMAZING on paper because values are so low, but the tenant pool is inherently unstable. Why? Because the lower down the asset class ladder you go, the more you are relying on tenants who wouldn't rent your place if they had any other choice. People don't rent in C class and below areas when they can afford something better. That means lower-income, unstable employment. These folks are one sick kid or one flat tire away from losing a job and missing rent. And while they absolutely deserve safe, stable housing, from an investment perspective the risks are simply higher. Buying 10 of these properties sight-unseen across the country sounds like a recipe for disaster.

Secondly, the number of markets they represent tells me this is a marketer, not an actual turnkey provider. Meaning they get a fee from providers in these markets to send them qualified buyers. They don't own the properties they sell, and they don't manage them. They've 'vetted' the providers they work with (so they are 'their people' in some respect), but you won't actually know who you're dealing with until after your money is already gone. The biggest turnkey company of repute only works in two or three markets. I have never heard of a reputable turnkey company that has actual staff and management teams of their own in this many markets. Many Turnkey Marketing companies conveniently drop that last word, because they technically do sell turnkey investments, but they don't own them, they dont have skin in the game long-term, and they are being paid to deliver you, the qualified investor to whoever is willing to pay the most in each market.

**Now, I have no idea what company you are referring to, so if this is actually a reputable turnkey company (not a marketer) that I simply have not heard of (despite being a turnkey provider myself and an active member of BP), then I apologize for any offense caused. If this company is, by any chance, Morris Invest, I recommend you search for the many threads regarding that company before you cut any checks.**

Ernest Fernandez · Answer

@William Orrock I’d say not. Most of us have some skin in the game, we’ve done our research and have been through the struggles in one way or another. This sounds like a “get rich quick” scheme.

Outside of online searches, you’d have to find investors who have had success and even then how can you be sure that they’re not tryin to recruit you for their own benefit. $150k is a lot of money to lose, especially if someone else loses it for you.

Clayton Mobley · Answer

My advice would be this:

If you have $150k in cash that you would like to leverage into out of state turnkey investments, that can be a truly lucrative strategy, one many many of our clients employ (most of our clients aren't from AL). However, you should set your sights a little higher, on properties that are more likely to have stable tenants, in areas where there is some appreciation potential, and where you may, eventually, be able to sell to an owner occupant instead of another investor.

Investing in B/B+ class properties will put you in neighborhoods where nurses, teachers, skilled laborers, and other stable middle-class folks live. Places with good schools and easy access to job centers, places where people who can't afford (or just don't want) to own yet are still willing to settle down for a bit until they can. These people have more stable income, don't need government assistance to pay rent (Section 8 vouchers seem like free government money to investors but there are pleeenty of strings attached), and are more likely to stay longer if you keep your property maintained (or have a good PM). Your monthly cash flow may be lower than the paper figures for lower class props, but your vacancy, maintenance, and turnover costs will also be lower, not to mention fewer evictions. Consistent, reliable, moderate income is better than volatility in rental investments, especially if you're going to finance your purchases.

So how far can your cash go? Using Birmingham figures as an examples (since that's what I know), B/B+ turnkey props go for $85-125k. Let's take our average price of $100k. 25% for down payments is $25k. So $150k could cover 6 downpayments on MUCH more stable investments. Average cashflow is $250-350 (let's go with $300), so $1800 per month after all expenses and PITI. Keep it as income or plow back into paying down your loans faster (it's all tenant-paid anyway) to save on interest.

The point is, you have better options with $150k than properties that are almost definitely in C-class areas or below and are 'managed' by people you will never have a chance to vet. While it's not always necessary to go see every single property you buy, it IS HIGHLY RECOMMENDED that you go visit any provider you consider working with before your first investment. Tour the city, see their properties, meet team. After that, if your first property is a success, building your portfolio with that provider in that market is easy. BUT since these investments are all over the map, that puts you in a slightly more difficult position, vetting-wise.

Plus, it sounds a bit like they are encouraging you to purchase without viewing. I'd say you should ask about flying out to visit (even if you don't intend to) and see what the reaction is. Say you want to see properties before buying, or at least just see SOME properties of theirs to view the workmanship and neighborhoods, and see if the response is 'come on out!' or ' well we don't do tours' or, always a classic, they just stop responding.

Anthony Bellesbach · Answer

I would talk to others that got a turnkey house from them or get a address and check a couple out.  Or look at bbb and see whats up or any law suits and things. Mostly they talk it up and you dont get that or have a contract or something to help you but i would not invest that much for sure or at all but thats just my take on it.

Anthony Angotti · Answer

If you want to go down this path I'd fly out to a market that they have properties in that you like and then ask to see some of the projects and neighborhoods with one of their people. A legit turnkey provider should have no issue doing this with you.

Clayton Mobley · Answer

@Jay Hinrichs yeah OP said the guy already told him that he gets a referral fee, so it's definitely a marketer, but not one of the pros from the look of that email text lol

Clayton Mobley · Answer

@William Orrock For me, all you need to see to know to move away is '!!!!!'. Any time a sales pitch sounds like it could come from a used car salesman, walk away. Words like 'magical', lots of exclamation points, and (ironically), the phrase 'too good to be true' are all huge red flags here. Also, notice that they hedge by saying 'you might'. Not 'here's a 100% guaranteed way to do it' (even though that's the hard-hitting message of the rest of the text), just one clever little word to shirk responsibility for when this doesn't work for people.

Yes, it is possible to use leverage to turn a relatively small amount of capital into a lot of equity over time via tenant paydown. If you don't need the rental income right now, that process can be faster if you put all your cash flow towards your loans. HOWEVER, telling someone that they can retire next year if they just buy 10 homes scattered across the country (and we've all already addressed the fact that there's no way they actually work in that many markets, they get a referral fee from local providers) is reckless.

In addition, most lenders are going to want 25% on every rental property, not just after the first 4, because the risks are higher on rentals than on primaries. Secondly, at the price point these props must be at to get 10 for only $167k in down payments mean securing financing may be harder than they let on. Aside from the issues we've discussed regarding what neighborhoods these properties are likely in, most big lenders don't like lending small amounts (since they make their money on interest and the interest fees wrack up slower with lower balances), so if you're looking at an average of $16.7k per prop at the actual down payment of 25%, that means these props are worth $66,800 or so and your mortgage would only be worth $50k. Some big lenders will finance a loan that low, but many will not. To get 10 such loans you'll need a really good relationship with a lender.

I think it's been established that this is a marketer who gets referral fees, so there's no skin in the game for them. They just want you to close on as many properties as possible so they can get their cut and move on. If you are looking for out of state rental investments, I would recommend looking at working directly with a real full-service turnkey provider, someone that will be responsible to you long-term since they manage your property long after you cut a check. Go meet them and tour the town, see some properties, shake some hands. Start with one property. If it goes well, you can expand your portfolio at whatever rate you wish. But diving into 10 all over the country right off the bat is unnecessary.

Sorry for another long post!

William Orrock · Answer

Awesome everyone this is such a tremendous amount of help.  Even more I think about what you all said.  He told us up front he will get a referral fee for sending clients to their markets.  http://www.seewingyeeseminars.com/ I am not trying to get anyone in trouble, I just want to do this with out getting screwed over and regretting it later.  Of course I am a new guy and yes there are aspects as a new investor I am willing to do and others I will delegate.  Here is a little bit what has been said in the emails and this is what made me raise the red flag:

Newly updated monthly listings for January 2019:

Retire in 1 year with a $4,586.00 monthly net income, and annual passive income $55,032.00 by buying 10 houses with just $167K in cash.

How much in stocks or mutual funds do you need to trigger a $50K annual income?  Answer:  one (1) million dollars !  If you do not believe me, ask your financial planner!

In real estate, all you need is only $167K in cash!!!!!!

How is this possible?  Is this too good to be true?

Yes, these numbers are real; these numbers have been accomplished in this Buffalo market currently as we speak.

Our investors have achieved the desired results and we have numerous testimonials.

To accomplish this action plan within a year or less, you might:

1.  Buy several properties with mortgages at a time.

2.  By the end of 12 months, you will have your magical 10 rentals!

3.  On SFH's you may put only 15%-20% down payments on up to 4 mortgages.  After that it is 25% down or more

4.  For duplex or higher, 25% down is the minimum

5.  In addition to use your cash for down payments, you may also be able to tap into your Home Equity Lines of Credit  (HELOC)  to purchase.

Investment company trust or not?

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