Turnkey - Why Flip to Investors?
Logistician · Member since 2012 · 58 posts · 17 votes
At a recent investor club meeting, a group of investors raised the question - why do Turnkey Companies "flip" their properties primarily to investors as opposed to owner occupants? One person responded, "because the majority of Turnkey companies operate in markets/neighborhoods with low job growth and limited capital appreciation... therefore little interest from owner occupant buyers." Another investor said, 'because some companies buy in neighborhoods/cities with incredible cash flow (2% rule of higher), but the problem is, very few prospective owner occupants want to live in those areas. Yet another investor thought that many turnkey operators want to help investors realize higher returns.
Clearly, there are Turnkey companies that operate in excellent growth markets such as Austin, but I thought I will turn the discussion into a forum to get a few different perspectives. Happy investing!
Phil,
As an investor for cash-flow, equity and a flipper, I can tell you that there's no right or wrong answer. So far, the biggest pay-off has been equity return. The equity can be tapped tax-free while I have to pay all kinds of taxes on my flips. Cash-flow will help with paying the bills, but in no way, shape or form it builds wealth. You have to own a lot before they're building wealth.
At 8%-10% cash on cash returns, you're looking at making $200-$250/door on a $25k investment on a $100k property. You will need to own 40-50 properties to give you $10k/month. That means you need to invest $1.2MM - $1.5MM of your own money to get to $10k/month. Owing 4-5 properties will not cut it.
With appreciation play, it comes with rent growth. We have experienced 50% rent growth in the last 3 years. Properties, that were making $100-$200/door, are now making $600 to $1k/door. For every $500/month in rent growth, you can tap $100k of equity in your property tax-free/deferred.
When it comes time to liquidate, I sell the least desirable properties and trade up to better asset classes. I would think other investors tend to do the same. All in all, a combination of all three has been the best approach for me although the equity return has been the BEST.
Just food for thought.
@Account Closed
It also highly depends if you are playing as someone who has OPM or not. Guys with OPM will always be more willing to play that game than others. Not saying normal people can't win big with that game too its just most good investors I know that play that game either only buy when they have a perception most others do not or when the time is really good like a few years ago.
Most OPM type investors have to keep playing no matter what.
I just woke up here in Seoul, South-Korea and would just like to thank EVERYONE for taking the time to share their views, I really appreciate it. To be honest, some of the info went way over my head so I am going to have to read ALL the posts again...after I've had some coffee...haha.
I hope everyone has an amazing weekend and I am excited to share your thoughts with my friends at the investor club!
I really like what you said about analyzing the sustainability of the TK as well as understanding the economics behind the operation. Perhaps prospective TK investors should analyze the sustainability of the cash flow of their investment, much like one would when buying a dividend paying stock, something like Johnson and Johnson (JNJ) for example. This of course would be very difficult without having a comprehensive understanding of the market you will be investing in.
It does seem like multiple income streams is the name of the game!
Thanks for sharing your views, it has provided me with much food for thought. Oh, handing your bib to a stranger so they can sprint across the finish line and kiss your wife at the end - hilarious!!
Are you saying there won't be CF due to higher vacancy/turnover rates, payment issues and the like? I think I once heard you say that you have to look beyond the numbers or something like that...
Very interesting comments, thanks very much for sharing! I enjoyed what you said about the new class of citizen and just about everything else :)
I always enjoy your articles so it was great to read your comments. I know that your reputation is absolutely top notch and I follow your company with great interest!
I have also only heard good things about your company and thanks for informing us about your reasons for flipping properties to investors - I have never considered the idea of lower commissions...
@Account Closed
Much food for thought indeed, and thanks so much for alluding us to the benefits of the combination approach OR what am going to call the "tri-vesting approach" from now on :)
@Account Closed:
You may be interested in the fourth episode of my Podcast where I explain turnkey real estate investing. ("Passive Real Estate Investing")
The fact is, there is no industry definition of what a "turnkey" investment property is. It means different things to different people and to different companies.
Understand though, that a turnkey provider is in the business of acquiring, renovating, and reselling ("flipping") properties as their business model.
They may or may not keep some of those properties for their own personal portfolio, but that's not the purpose of their core business.
Realize that there are quality turnkey property providers in many markets around the United States and their existence lends itself to the fact that there is a need for their product and service because investors with limited TIME and RESOURCES need and want it.
I can say this with absolute clarity because we've been providing investors with turnkey properties for almost 12 years and our typical client is someone who needs guidance in a new market to build their portfolio of income properties.
Regardless of how an investor chooses to build their portfolio, they must conduct their due diligence at every level. A company like ours can provide them up to about 70% of that due diligence, but the responsibility still lives on their shoulders to trust but verify.
Last but not least, I agree with Chris and that the "2% rule" is nothing but fantasyland. I'm acquiring and rehabbing properties with a very attractive cost basis from an investment perspective, and the best I can do is about 1.5%. (2% might be achievable in some markets if you do all the work yourself from acquisition through renovation.)
Continued success!
Thanks so much for taking the time to respond, I really enjoyed your comments. In your experience, how difficult/easy is it for a TK investor to offload properties to another investor when wanting out for one reason or another? AND how would an out of state investor go about selling the property? I am assuming most TK companies would provide this "after service?"
I am definitely going to listen to your podcast, thanks!
Hi @Account Closed,
I assume by your first question that you're referring to an investor who has already purchased the property from a turnkey provider and then later wants to resell that property for whatever reason... I can't speak for other companies but I have to imagine that it is VERY rare.
Having said that, in the past 11.5 years we've helped about only three clients sell the properties they purchased from us for various reasons (usually partner related). The reason it was only three is because it is a very rare event. Real estate investors who build portfolios for the long-term don't want to sell their properties. And when they do it's for a 1031 exchange into more properties.
We will help clients sell their properties if they are still in very good to excellent condition and there are no material changes from when they bought it.
Of course one could always sell their property privately and/or through the local MLS.
Your clients must very satisfied with your "product" which is awesome. I wish your company every success in the future!
You may ask the same question about our conventional brokerage business. Why do we prefer investor clients to retail?
Selling retail flips is not an easy business and an art in itself. I'm also under the impression that turnkey properties, by and large, are mostly sold at market. Why would I want to spend all that time and energy selling one-offs on the 5-7 year owner occupant cycle? We are doing as much business as a conventional real estate agency with 1/5 (or less) the number of clients.
I would think the same thing applies to turnkey.