The turnkey discussion

35 Replies

Looking for some advice...I am fairly new and wanting to create steady passive income the best way I can via rentals and I thought turnkey...

When doing the turnkey thing its very hard to find a company that provides built in appreciation when they sell to you.  They mainly sell you the cash flow.  A lot of people buy for cash flow. I think this is great. But I am looking for cash flow yes, but also built in appreciation as well.  And hopefully some basic appreciation over time in the Midwest.  Then if the market takes a turn for the worse, I should still have my cash flow correct? ... And still be able to sell if  i would  for some reason need  to even though the market depreciates the value of the house.  I would have some padding in there because I bought it correctly?   This is all based on buying these houses for cash.   Would this scenario change if these were leveraged.  I guess what I am asking is how do we protect ourselves as investors and our passive income if the market takes a downturn. What is the best strategy and is buying for just cash flow a good idea and will it sustain a bad market?

@Jami Morton , all very good questions. In short, if you are buying from a Company that specializes in Turnkey (complete with add-on services such as 1 year guaranteed Rent), then there will NEVER be any built-in equity, because it is ALWAYS removed by THEIR profit! 

They might SAY that you are getting discount for cash, but their cash price will still be full market value. In fact I suggest that you would be paying ABOVE normal market value, supposedly justified by their very temporary and limited "guarantee".

There are many BP threads, blogs, webinars and podcasts devoted to helping us find deals that DO have built-in equity (and cash flow). And there are probably just as many devoted to sharing advice about paying all cash, some cash or next to no cash. This thread might become another one of them! Cheers...

You should not have an issue getting cash flow from any home especially in the Midwest from other TK providers.  If you also want to get appreciation potential then you need to make sure you are looking at homes on average in the $100k + range.   I cant speak for other TK providers markets but I also cant imagine them to be too much different.  Homes for the most part under $70k ish will have little to no appreciation.  Homes from $80k - $100k might have just a little more but to get consistent yearly appreciation you have to look at the over $100k mark, even in the $120k+ range.  

Also understand that buying from a TK provider, you are buying close to retail pricing but you are paying for the convenience and the long term relationship.  

If you buy from a TK provider and then have to sell within a short amount of time, it is possible you will have a difficult time selling.  This does not mean that the TK provider ripped you off or did anything wrong.  

If you are purchasing cash you then might consider using a Realtor to buy, find a contractor and then find a management company.  You will save money but how much are you actually saving and can/do you want to manage a project like this long distance. 

Good luck

@Jami Morton - It is going to be very market specific.  Some markets will appreciate very little, and some markets will never cash flow, and some are in between.  I would start with the market and then seek out a TK provider.  Charlotte comes to mind as that type of market, but I am in no way an expert on markets outside my own, so I am sure there are plenty more

Hi @Jami Morton Turnkey providers are typically in markets that have higher cash flow, lower appreciation. "Working class" neighborhoods seem to be the bread and butter for their model. You will have to vet the market, and the neighborhood, to see if it fits your strategy should you choose to go turnkey. If you want to get built in equity you will need to manage the process (or pieces of the process) yourself: Find the deals, run the crews, etc. That is how you save money and build in that equity. When you buy turnkey, you are paying someone else for having done that service for you and they will not happily accept less for the work they are doing. Imagine asking a real estate agent to only accept a 1% commission because you'd like to pay less and have more equity in the house ;) Both turnkey and traditional methods are great, but for different reasons. You have to choose how passive you want to be, what your skills lend themselves to, what time you have, and many more things. Those are what will point the right direction for you.

The way you protect yourself from a market downturn is to vet the market to make sure it is resistant (i.e. not single industry as Detroit was), vet the neighborhood (improving? getting worse?), avoid heavy leverage (this removes an exit strategy if the market goes down) OR do not plan to sell (long enough to wait out a dip), ensure your rent rates are good enough that if they dip you can still cover your payments / expenses, get great managers or manage well to ensure solid tenants, and have enough money in reserve to operate in a bad scenario.

There are a million ways to do everything in real estate. What are you after? What is your personal risk tolerance? What lets you sleep better at night? You will have to choose what fits your own personal view of the world.

Originally posted by @Brent Coombs :

@Jami Morton , all very good questions. In short, if you are buying from a Company that specializes in Turnkey (complete with add-on services such as 1 year guaranteed Rent), then there will NEVER be any built-in equity, because it is ALWAYS removed by THEIR profit! 

They might SAY that you are getting discount for cash, but their cash price will still be full market value. In fact I suggest that you would be paying ABOVE normal market value, supposedly justified by their very temporary and limited "guarantee".

There are many BP threads, blogs, webinars and podcasts devoted to helping us find deals that DO have built-in equity (and cash flow). And there are probably just as many devoted to sharing advice about paying all cash, some cash or next to no cash. This thread might become another one of them! Cheers...

I could not agree more with Brent.  Turnkey companies are not in business to make you money.  They are in business to make them money.  That is not an insult.

If you are just starting out, buy in an area you know.

Also there are some markets in the US where homes that were $30,000 - $40,000 three years ago are now over $100,000.  Appreciation will be predicted best by a local expert.  It cannot be predicted by a regional professional.

@Jami Morton  buy a vacation condo in Hawaii !!! put it in the rental pool.. use it occasionally to get out of the gloomy gus weather we enjoy in the winter in the NW.. like this winter  LOL.

there is no exit from cash flow as Curt alludes to in the short to medium term that will not cost you money out of pocket.. Even with higher end properties as he alludes to there is little to no appreciation in the mid west markets unless your talking Chicago or much better areas were you would be even cash flow or negative JUST like what we face on the west coast.. At least as it relates to buying SFR's as cash flow vehicles.. you may want to think about small Multi because those will generally always sell for a cap rate if rents increase your value goes up... but you will hold value better in the mid west markets

Brie may want to speak to that I think that is what she buys in small multi's  cash flow is better generally and values hold and sell at cash flow numbers. 

With higher end properties in say a mid west market were Curt is remember you can buy BRAND new construction for 140 to 160k a door this is what buyers will compare to your 20 YO house thats been a rental.. to get retail value you would need a major renovation.

I have been doing some renovation deals in the mid west last 3 years and you have to totally dial them in to get anywhere close to an appraised ARV or what you think is retail.. and I mean totally ... buyers in these markets have an over abundance of choices.. you may find that TINY pocket that is hot but other than that I think my statement is pretty accurate based on my personal experience in the mid west marekt place since 2002.

Jami,

  Curt is spot on, if your main goal is appreciation then look for jobs and population growth.  You want to buy a house that you can sell at some point (even the next generation) which often means newer and better neighborhoods.  So like Curt mentioned the 120k-180k ballpark in the midwest.  Honestly, as an out of state investor it is nearly impossible to achieve both good cashflow and good appreciation.  You kind of have to lean towards one or the other.  

Going back to appreciation, look at where the jobs are going and what kinds of jobs are being created.  Also look at the key industries, is it  diversified, and are they stable?  Universities and government services create stability, which do shield the community somewhat during a downturn.  So where are these places that are in somewhat affordable markets?  I'm sure there are others, but North Carolina and Texas seem to be creating jobs and growing in population.  

If you haven't already, I'd recommend writing down your RE investing goals, making them specific enough to take action, and then go for it!

@Jami Morton I'm just starting out but I found out that your goals will pretty much paint the picture. I think for me, I was chasing after everything (flips, multi units, SFRs)which got me to never really getting anywhere except circles and just overwhelming myself with a bunch of information which led me to confusion (confused people do nothing lol). I listened to Episode 151 Podcast feat Clayton Morris and it was an epiphany for me and really set me up to focus on one thing that one thing only. Great luck to you!! Real estate is definitely awesome!

Originally posted by @Jami Morton :

I guess what I am asking is how do we protect ourselves as investors and our passive income if the market takes a downturn. What is the best strategy and is buying for just cash flow a good idea and will it sustain a bad market?

Your passive income (i.e. cash flow) shouldn't be affected if the market takes a downturn unless the rental market around your properties also takes a downturn & you're forced to reduce rents to compete with others.  As evidence by the last downturn there was a higher need for rentals.  Purchasing for cash flow now could actually be considered a hedge.  

With that said you appear to be more concerned about protection from the value of your property going down.  Not sure this is the "best" strategy but if you purchase a distressed property @ the right price (Not turn key), stabilize the property & hold it, you could potentially be protected.  The $ you'll have in the stabilized property should be less than the current market values which gives you some room if the market then takes a downturn.  

Only other way to protect yourself- Buy some REIT put options.

I just listened to podcast #153 Linda Mckissack. She is a very successful long term real estate investor who co-wrote the book, HOLD. Her formula requires that any property she buys is 70% LTV or less and at least 10% under market when bought. That way she doesn't become overleveraged and thus struggle when the next housing crisis hits.

That is actually less conservative than I am in the houses I'm currently buying.  I'm typically buying properties for $80k including repairs with values of about $100k or more.  They are out there but you have to find them.  I'm usually getting a 75% LTC loan on these properties so about 60K.   

If you can find a turnkey provider who can find you properties with 10% instant equity THAT YOU INDEPENDENTLY VERIFY, then and only then would I recommend considering it.  

You do not need a turnkey company - - I just don't understand why there's the gross assumption that a turnkey investment defacto means buying via a TK company.

In fact in 1997 when we picked up our mfu 6 units WE CREATED the turnkey investment - - how, by insisting we inherited the existing tenants :) We got the existing NOI and we were off to the races!

There's lots of absolute comments at BP to close with all tenants removed, but not only is that provably wrong, it shows a lack of due diligence IMO.  Offer with contingency of an approval of the rent roll and a restatement of the employment and income.

To be transparent, our prospective tenants were all m/m so it would have been easy to move any of them out with a 60day notice.

If you're going to manage units, you will need time to get "some seasoning" and starting off with some NOI is better than none - - again, the TK and don't be afraid to create one for yourself.

Hey Jami! I've always bought turnkeys for myself and have been working with people buying turnkeys for a few years now. Your questions are spot-on, and there's a lot there, but here's a short of it.

Turnkeys, no, typically don't come with built-in appreciation. However, if you are strategic in where/when you buy them, you can get appreciation. I bought in Atlanta when it was just starting out and I just refinanced one of the properties and pocketed $40k of appreciation...in only 3 years (actually less, technically). The trick is to buy at the infancy stage of a growth cycle. If you buy at the mature stage, like Atlanta or Memphis is in now, you won't get much for appreciation anytime soon. 

In full transparency, because of the general state of the real estate economy, there are no markets out there right now that will be an Atlanta in 3 years like I experienced with my properties. Markets just aren't that demolished right now to be able to build that strong to give that big of a boom. However, there are still markets that are much more infant than others and give way to more appreciation potential. So that's the first thing in terms of turnkeys and appreciation--buy in the right market at the right point in the growth cycle.

The other thing here that you bring up though is risk. You ask about how to help prevent a loss in a crash. The answer is--always buy in growing markets. Markets that show a lot of evidence towards continued growth. That is your best friend friend. Versus somewhere like Detroit or Cleveland, which are declining markets, which come with more risk. 

If you buy a turnkey property for cash, the thing that is most important to you is to have a continued good pool of tenants. The value of a house doesn't matter unless you are trying to sell, so even if a market crashes....as long as you can still have renters, you are good to go. This is where the 'growth market' comes into play--support always having a renter pool. 

Just a side thought...the Midwest isn't known for big bouts of appreciation. Kansas City right now I would say is at the most infant stage, and does lend way to some appreciation potential, but know that Midwest markets are considered to be more 'stable markets' than not. (which has perks in itself...)

@Ali Boone , would love to see the research that supports Cleveland metro is a declining market. Based on the latest analysis by Marcus and Millichap they would tend to disagree. I'd invite you to come visit and check it out first hand 

@Ali Boone the Downtown Cleveland market has a 99% occupancy rate. More young professionals are moving to the downtown area and PLENTY of projects are on the books
For example: http://www.cleveland.com/business/index.ssf/2015/1...

Cleveland is a market where there are plenty of gains to be made of course buy in the right area thou

@Ali Boone I agree with Matt & Federico on this one. Cleveland is definitely no longer a declining market. There aren't very many markets where you can consistently get a 15-20% ROI investment property. It's a great market for cash flow not appreciation. I always buy for cash flow, appreciation is just icing on the cake.

@Jami Morton , I'm going to summarize a lot of the comments already made and maybe add a few more of my own.

  • TK is designed for Cash Flow, not appreciation.  You should not be looking to buy from a TK company if appreciation is one of your top investment goals.
  • TK is not a bad thing.  It is simply a business model wherein the end buyer is paying a premium for a cash flowing property in exchanging for having to do little to no research or hands on activities.
  • Properties that appreciate are much more sensitive to location than properties that just cash flow. 
  • Cash flow properties are easy to break down into simple numbers with relatively high accuracy.  By this I mean you can figure out your cash flow based on rents, acquisition costs, and monthly expenses.  There is a little bit of estimation and guess work for figuring out vacancy rates and maintenance rates, but otherwise these numbers are pretty solid.
  • Appreciation properties are way more complicated to break down the numbers because there are so many unknowns that can affect the property's ability to appreciate.  Location, local economy, national economy, politics, weather, and so on.  It takes a lot more research to find good appreciating properties than it does to find good cash flowing properties.
  • There is a price point that you have to overcome before you can expect the property to appreciate.  This is different for every market.  In Kansas City, its not a hard number, but it is close to $100k.  Basically, you have to be buying in an area that is NOT predominately rentals if you want your property to appreciate.
  • If you want appreciation, get yourself a professional, local team.  Most county assessors are now available on line and most are free (at least in KC), but you will spend  a tremendous amount of time trying to manipulate the data into usable information that will help you find good deals.  Find a good, investor friendly real estate agent who will be able to provide you with endless amounts of usable data in easy to understand graphs, charts and spreadsheets.  For example, check out one of my blog pages at  http://arrowrealtynetwork.com/2015/11/kansas-city-... The chart, the video,  and the PDFs that I provide on this page have invaluable information about each area of Kansas City.  All of this info is provided to us agents from our local real estate board.  Any agent worth his/her weight can provide you with this information, so take advantage of it!
  • Appreciation spikes (both positive and negative) are much smaller in Kansas City and other Midwestern cities than say on the east or west coasts.  If pure appreciation is your investment goal, than Kansas City would not be a good market for you.  However, it sounds like you just want to have the piece of mind that if you need to sell your property, that you would be able to sell it and at least break even, if not make a little profit.  If this is the case, than KC is definitely a good fit for you.  

I hope this helps you with your decision.  

Originally posted by @Cal C. :

I just listened to podcast #153 Linda Mckissack. She is a very successful long term real estate investor who co-wrote the book, HOLD. Her formula requires that any property she buys is 70% LTV or less and at least 10% under market when bought. That way she doesn't become overleveraged and thus struggle when the next housing crisis hits.

That is actually less conservative than I am in the houses I'm currently buying.  I'm typically buying properties for $80k including repairs with values of about $100k or more.  They are out there but you have to find them.  I'm usually getting a 75% LTC loan on these properties so about 60K.   

If you can find a turnkey provider who can find you properties with 10% instant equity THAT YOU INDEPENDENTLY VERIFY, then and only then would I recommend considering it.  

 So how are you finding these?

10% instant equity is easy when the price point is low. Getting 10% equity on a $1MM purchase is hard. Getting a seller to cut $7k on a 70k purchase is easy. Just need to be in the right markets 

@Matt Motil and its too small to be of any benefit if you need to sell you will not capture that. The ARV's are usually based on retail sales not sales of rental properties.. that's why anyone buying a rental in any mid west rental market no matter what they pay for it basically will not realize phantom paper equity unless your a highly sophisticated marketing machine that can sell out of state

Originally posted by @Jay Hinrichs :

@Matt Motil and its too small to be of any benefit if you need to sell you will not capture that. The ARV's are usually based on retail sales not sales of rental properties.. that's why anyone buying a rental in any mid west rental market no matter what they pay for it basically will not realize phantom paper equity unless your a highly sophisticated marketing machine that can sell out of state

That's not the point. The podcast referenced stated they buy 10% below market and make sure they are no more than 70% LTV when they go in. Under those conditions they technically are 30-40% below market with their loan amount. They stated they were hedging themselves against market fluctuations and never wanted to be underwater. Even in a mid-west market with low price points you wouldn't run into this issue. While you aren't going to see monster gains in the midwest like you do on the coasts, you also don't see major crumbling here either. When everyone one the coasts saw 50-60% drops in home values (I saw up to 75% decreases in PHX) during the last crash, the midwest didn't suffer nearly as bad.

If you're buying to appreciation then you aren't investing, you're speculating; and you need an even bigger LTV spread if you're going to play that game.

@Matt Motil   respectfully disagree with you... mid west deep south saw big value decreases.. just look at Detroit  and virtually any asset in the C class those dropped the same amount..

I was doing loans in Detroit on houses that appraised for 120k I was doing 65% LTV did those in 04 05.. by 2009 they were 10 to 15k at best.

I did loans in Atlanta same time frame same numbers houses dropped into the 30k range  Same with Ft. Myers florida.  I did loans in Memphis same dynamics. I never did anything in Cleveland but I bet the same things happened there in the C class rental areas.

@Jami Morton

@Matt Motil

I have enjoyed the discussion on this thread. I invest in real estate for the big three and nothing less : appreciation, equity, and cash flow. If you take one of these off of the table then you are short changing yourself. You must calculate into you equation appreciation. 

Its like playing football but saying touch downs don't count. If you go for field goals and safety's all day you are not going to score as many points. You might still win the game with field goals but it is much easier if you use all aspects of scoring.

Jami I only buy properties that have equity built into them. If something goes sideways in my life I want to be able to sell for a profit the same day I bought the property.