My turkey disaster

Seattle, WA · Member since 2013 · 70 posts · 33 votes

I bought two turnkey rental duplex units in Indianapolis last year that came with a one year rent guarantee. The rent protection was thru AON and was paid for by the advertiser that markets turn key homes.

Out of the four units I own, I’ve had to use the rent protection policy on three of the units; yes 3 out of 4 in less than a year. Two of the claims were processed pretty smooth. The third claim was denied due to the turn key/sellers placing a tenant that was a felon. This voided the policy for that tenant and I’m out quite a large sum of money; no rent since August and court date is not till the end of this month.

The AON policy is great, just make sure your tenants meet all of the criteria. I’m pretty sure that AON will not insure me when the policy expires. I can thank the turn key seller/property managers for this.

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Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes

12y

Wow, I just found this thread and feel compelled to comment. I also invest in Indy and have done through @Mike D'Arrigo and Pinnacle investing. I have 6 homes so far and have had one really bad experience. So let me tell you the difference between Will's story and mine. I bought a package of 4 already rented homes through Mike. It was a sale from another investor who also managed those properties through his PM company. The first thing Mike ever told me when I started was 1. No Duplexes, 2. Nothing in Center Township. That kept me away from the D class properties.

In this property set of 4 there were 2 excellent properties and two average properties based on the numbers. I examined the rent rolls and saw that one tenant on the average properties was often late. I asked the current PM about it and they said she always caught up. I was skeptical but thought the worst I would have to do is replace the tenant. Well this tenant didnt pay and when I put an eviction notice she left but totally trashed the place in the meantime. My lesson was learned. But the PM company I used was quick and efficient in the eviction process which was good to know. Of course I told Mike about the issue. Now in no way can I say he was responsible for that particular tenant. It was not him that selected the PM that placed her. But he totally took the problem to heart. He spent countless hours screening contractors and finally found me one that would do it at almost half the price of the other bids. He supervised the contractor, coordinated with the PM company and stayed totally engaged until the property was fixed and a new tenant was in place. That was my definition of good turnkey service.

Yes it cost me several thousands in repair and lost rent. But still over the year I made money on my portfolio. I learned some important lessons in due diligence and I tested the mettle of people I am doing business with. Not a pleasant experience but actually going through it gave me confidence to scale up the investments because I have seen what is most likely the worst case scenario already. And I saw first hand the value of diversification. As a result I will probably add some B class higher end properties to my portfolio to balance the risk. I have implemented a stringent screening criteria for tenants and my due diligence list grows stronger after every purchase. Its a process and some learning is to be expected. It did not turn me off from the business model and in many ways made me more comfortable as an investor.

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Jerry W.Pro Member
Moderator
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
12y
@Will Spruill I find this very intriguing. Would you mind saying who you bought your turnkey properties from and how much you paid? I am very curious about providers and if they live up to their claims of how much properties will rent for. Did the guarantee come from the seller or did you buy it yourself?
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
I bought the units thru Norada real estate for $70k and $72k. The rent charged is what was advertised on their site; the rent we're getting is much less. Norada paid for the rent protection policy. Our second purchase had horrible tenant screening and placed a felon in one which voided the rent protection policy. We're still dealing with this issue and don't have it resolved. The tenants that were placed stopped paying rent their first month (August) and second month (September) at the property. We don't even have a court date till the end of this month. I've had a negative cash flow with the properties from day one (May 2013) and will be facing two units turns in the next couple months.
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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
12y
@Will Spruill I'm sorry to hear that they've been a disaster for you but not surprised. As you and I have talked before, you have to be very very careful of duplexes and as you know, I don't recommend them to someone unless they have considerable investor experience for the very reason you're seeing. Duplex look great on paper but often times the numbers don't pan out. You get a much lower caliber of tenant than single family and consequently have higher turn overs and tyoically expensive turn overs. I know one of the duplexes you bought and it's not in an area that I would recommend. I hope this doesn't sour you on Indianapolis because Indy is a great cash flow market but you will do much better with single family in better areas, Let me know if there's anything I can do to help or if you want to bounce anything off me.

Mike
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y

The main problem had, was initial screening of tenants and poor property management. I will say that the first property purchased is now producing rent, but still can’t dig me out from the no rent and unit turns that I’ll be facing with the other. The new property manager has done a much better process of screening tenants and collecting rent.

What I seen was a quick turn over of the unit and taking anyone with a pulse and down payment as a tenant. This was done in a hurry to get the unit sold. I’m confident it will get better but it’s going to be awhile before cash is flowing; still not the experience that was expected or advertised.

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Sam B.
Rental Property Investor · Houston, TX · Member since 2013 · 476 posts · 294 votes
12y
Thanks for the update Will, I know you and I have corresponded a bit on this issue. I think it's good that your situation is documented for others - very helpful.

Overall, would you by the AON protection on your own for future rentals?
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
I will continue to keep the AON rent protection policy, if they keep me. I can only imagine the premiums after this term expires. This is for my out of state rentals. I have a local rental that I manage and don't have much worries about getting rent, so no rent protection policy.
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
12y
@Will Spruill

You said you paid $70k and $72k for two duplexes. What were the rents you're getting for these? I'm not familiar with the Indy market. I'm much more a fan of SFH homes versus duplexes; I think this is why I only have two duplexes. One duplex I have was $59k (including rehab cost) and getting $1250 in rent. I'm guessing you have maybe higher rents there?
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
12y
Originally posted by @Will Spruill:
I will continue to keep the AON rent protection policy, if they keep me. I can only imagine the premiums after this term expires. This is for my out of state rentals. I have a local rental that I manage and don't have much worries about getting rent, so no rent protection policy.

Do you feel that this experience will sour you on out of state rentals, or only sour you on this particular company?
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
Originally posted by @Dawn Anastasi:

Originally posted by @Will Spruill:
I will continue to keep the AON rent protection policy, if they keep me. I can only imagine the premiums after this term expires. This is for my out of state rentals. I have a local rental that I manage and don't have much worries about getting rent, so no rent protection policy.

Do you feel that this experience will sour you on out of state rentals, or only sour you on this particular company?

I think its a lesson learned for sure. I like the idea of expanding my investment areas outside of expensive Seattle. AON has been great to deal with and is only sticking to their terms by not paying my claim due to the acceptance of a felon tenant. We'll see how the rest of the story unfolds.
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Bryan L.
Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
12y
@Mike D'Arrigo said it well. My first foray into multi-family properties has been a disaster. Wish I had never bought them. And to make matters worse, multis sell based on their performance. So they are difficult to get out of if you make a mistake.
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
Originally posted by @Dawn Anastasi:
@Will Spruill

You said you paid $70k and $72k for two duplexes. What were the rents you're getting for these? I'm not familiar with the Indy market. I'm much more a fan of SFH homes versus duplexes; I think this is why I only have two duplexes. One duplex I have was $59k (including rehab cost) and getting $1250 in rent. I'm guessing you have maybe higher rents there?

The rents are $1300 for the ($70k) and $1400 for the ($72k). The higher purchase price was due to being a turn key package. Yes, SFH are a much better overall product. The Indy market is flooded with possibilities. SFH's can be bought from $35k on up.
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Jeff Pollack
Real Estate Investor · Redwood City, CA · Member since 2012 · 272 posts · 399 votes
12y
Hey Will,

Sorry to hear about that terrible experience you had with your out of state turn key properties. Mike hit the nail on the head as far as duplexes go. I'd not recommend them when just starting out. The cash flow can be eye popping on paper compared to SFH, but they are risky and should only be added as part of a portfolio of safer properties in my opinion. You definitely need to account for higher vacancy and higher maintenance in your numbers.

The Aon rent protection policy is great, so definitely keep using them if you can. Out of state turn key properties are also great and can be an easy route if you live in a cost prohibitive market. I live in the SF Bay Area and my own first properties were out of state. If you buy out of state just make sure you heavily vet your vendor and especially the property management company they are using.

Happy hunting!
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
12y
@Will Spruill , sounds like you wanted a passive investment and found out ownership of small investment real estate is not really passive. Also sounds like you wanted a guaranteed return, which real estate does not provide.

The way to participate in real estate as a true passive investor is through REITs. Anything else requires some degree of involvement.
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
Originally posted by @Don Konipol:
@Will Spruill , sounds like you wanted a passive investment and found out ownership of small investment real estate is not really passive. Also sounds like you wanted a guaranteed return, which real estate does not provide.

The way to participate in real estate as a true passive investor is through REITs. Anything else requires some degree of involvement.

No, I didn't want a completely passive investment. I do expect a return though and I do understand that the first year will be the toughest to get a good return with expenses. Three evictions and unit turns in less than a year is a bit much though.

I'm confident with my new property manager things will get better; they only can at this point.
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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
12y
Sorry to hear about your rentals. Based on the title to this thread I was expecting to hear a story about Thanksgiving gone wrong. Glad to hear the turkey is okay. :)
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
I like the thread title - whether that was a deliberate typo or accidental :)

Because some of these turnkey properties end up being exposed as turkeys ...
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Gerald K.
Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
12y
This just underscores the fact that there is no easy route. Wouldn't it be great if you could just find a turn key company that is so great that you could just give them money and let them do everything for you? I'm afraid that just doesn't exist. If you're out of state, out of mind, you'll most likely end up a low priority and easier to pawn off bad deals to. Not saying every turn key company does that, but before you make any investment "especially" turn key where you are not there to watch it all the time, you need to do extra due diligence to make sure you know what you're buying, and that you can trust those with your investment and still have backups just in case. Anything I missed?
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Jeff Greenberg
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
12y
.@Don Konipol mentioned REIT's as an passive investment option, but I would also add syndicated investments. These deals are only as good as the sponsor and the investment itself. These sponsors and deals need to vetted and proper due dilligence done. On these deals you do have another interested party between the investor and the PM and property. I have seen many times, that the investors receive stronger returns than they would have received on their own, and with a lot less involvement.

Full disclosure: We acquire MF and self storage properties through syndications(Private Placements).
1 Reply
Brant Richardson
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
12y
This is just the kind of story that has scared me away from going the Turnkey route. What do you think about the neighborhood the duplexes are in? Is it living up to what you were led to believe?
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
Originally posted by @Brant Richardson:
This is just the kind of story that has scared me away from going the Turnkey route. What do you think about the neighborhood the duplexes are in? Is it living up to what you were led to believe?

My goal was to purchase 10 investment properties over the next 2 years. This has definitely put the brakes on that. The first property is in a C- neighborhood, pretty decent for an Indy duplex from what I've seen. The other property is in a D neighborhood at best, which seems typical for Indy duplexes.

They are not living up to what I was led to believe, but I'll give it another 6 months to year to form a final opinion.
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Michael Leffelholz
Lender · Westfield, NJ · Member since 2010 · 85 posts · 23 votes
12y
@Will Spruill I am sorry to hear about your problems. Would be interested to know what kind of due diligence you did prior to investing regarding the property manager and market? Was the management company Norada or a local company recommended by them? What kind of communication was there between you and the property manager when the problems started to arise? You indicated that these were C- and D neighborhoods. Is that what was represented by the turnkey seller. As you go "down market" in terms of neighborhood the expectation regarding the quality of the tenant would need to be adjusted. I guess the fact that you had the AON rent protection is a good thing but find it very disconcerting regarding the installation of a felon by the property manager which voided the coverage on one of the units. That would seem to be something that with minimal screening would have been learned. Any recourse to the manager for their negligence? Also not familiar with the process so I am going to ask a question (that I probably know answer to) but does the manager discuss with you potential tenant candidates prior to leasing?

In your opinion, what is the reason that the rents that you are now getting on turnover so much less than what was in place when you acquired the properties? Did you just rely on reps re rents made by turnkey seller or did you conduct your own investigation? If so, did it support the rents in place at closing.

Again, sorry for your difficulty but for anyone considering a turnkey investment we can learn from your experience.

Good luck going forward.

Michael
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Will Spruill:

"The AON policy is great, just make sure your tenants meet all of the criteria. I’m pretty sure that AON will not insure me when the policy expires."

Hi Will -- The AON policy covers the rental unit, not the policy holder. Therefore, they should cover your new tenants under your current policy, and will continue to cover you (i.e. your rental unit) with the purchase of a new policy, provided the new tenants meet their eligibility requirements. It's not like car insurance where they can choose not to cover you because of too many accidents.

I've left AON a message this weekend to verify and confirm the above, and I will post their reply here once they get back to me.
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Will Spruill:

"The main problem, was initial screening of tenants and poor property management. I will say that the first property purchased is now producing rent, but still can’t dig me out from the no rent and unit turn that I’ll be facing with the other. The new property manager has done a much better process of screening tenants and collecting rent.

What I seen was a quick turn over of the unit and taking anyone with a pulse and down payment as a tenant."

Hi Will -- You've hit the nail on the head regarding the "initial screening and poor management". Both principals of the property management company have told me over the phone, and on separate occasions, that their tenant qualification criteria and screening process was far too "soft", and their plans going forward (2014) were to make them much more stringent.

Their other problem/challenge was they were simply over their head with work and always behind the proverbial eight-ball. That's the reason they hired a new property manager and new office lady last year.

I've had this company on my "watch list" for the last four to six months, and although they've made progress in getting themselves better organized and improving their screening process, they still need time to get fully caught up. So, I remain cautiously optimistic.

CC: @Jerry W. @Mike D'Arrigo @Brant Richardson @Michael Leffelholz
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Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
12y
Hey @Will Spruill Sorry to hear about your problems! That's never fun, and that's definitely the downside of turnkey investing. Looks like you got a bad start, but I hope it all turns around for you! Let me know if there is any way we can help!
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Brant Richardson
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
12y
As is said in the pocasts repeatedly is "what sets apart those that succeed from those that fail...persistence". Don't give up on that goal to buy 10.
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