how does all-cash affect turnkey process/exit strategy?
Mission Viejo, CA · Member since 2016 · 13 posts · 4 votes
how does all-cash affect turnkey process/exit strategy?
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Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votesI have to disagree with Brent on one comment. Not all turnkey companies sell for the highest price possible. We base our sales price in direct relation to the type of rent that we can get. In some cases this has put us at almost 100% market value while is others it has proven to be $10-$15k lower then other comps in the area. While there certainly companies that sell at or above full market value, there are still a few that provide a slightly better price value.
Curt Davis - KAIZEN Realty538 Reviews
31 Replies
- Monterey Park, CA · Member since 2014 · 157 posts · 80 votes10y
Hi Kristin,
I'm not sure if paying all cash would affect how you pick neighborhoods or your exit strategy. I think you should start with your goal, then work on market, location, price point, ROI, property class, PM, etc.
Part of reason why people investing in RE is that you have your tenants paying your mortgage. Most people try to minimize the down payment so they can acquire as many properties as possible, and let the cash flow from all the properties to pay off their mortgages. If you buy the rental without any mortgage, you are virtually buying an interest paying account with cash flow (rent). If the market doesn't appreciate when you sell, you will be paying the 6% agent's fee. With depreciation recapture and adjusted cost basis, I'm not sure how much $ you will be making after the tax bill and fees and make ready. I'm getting ready to sell my 1st property so once I get everything done I can share more info.
Good luck.
Henry
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
If paying all cash doesn't get you a (genuine) discount, then you really should do your analysis based on say 70% leverage (so you can buy THREE for every cash-only ONE). If your analysis shows that it doesn't still cash flow positively, you should look elsewhere!
Don't forget, with turnkey you are paying retail (ie. the highest market price the Seller can find). Therefore, almost by definition, YOU won't be able to sell it for the same price anytime soon (let alone try to make a profit on it). Please, try not to WASTE your cash! Cheers...
- Mission Viejo, CA · Member since 2016 · 13 posts · 4 votes10y
@Brent Coombs That's really good advice- plugging in the numbers as if I'm putting 30% down. Will do that from now on!
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
Hi @Kristin Brancaleone and welcome to BP! I'm glad to hear you're interested in turnkey - you'll find a lot of very strong opinions about it here, but if you work with someone you trust and make sure to do very thorough due diligence when finding that provider (which means a lot of research and a lot of questions) then it can absolutely be one of the best ways to generate passive income - like the Blue Chip dividend stocks of REI ;)
Regarding your question about cash purchases, it really comes down to what your priorities are. If you pay cash, your cash flow $ will be higher but your ROI % is going to be lower, simply by virtue of the the much higher initial investment. That being said, you also own the property free and clear and don't have to worry about turnover making you miss a mortgage payment or anything like that. If you finance, your ROI% will be higher - despite you actual net cash flow $ being lower due to mortgage payments - because your tenants will be paying off your mortgage, which increases your total returns (including equity) each year. If you don't need the rental income now, financing multiple properties (say at 20-30% down) and then letting tenants pay down your loans will result in a solid portfolio of free-and-clear properties later (say, when you retire) that do nothing but flow. It's all about how much you can invest now and when you're going to need substantial rental income to fund your day-to-day life. Other than that, the way you pay for your investment should not really impact the properties you select. Regardless of whether you pay cash or finance, you should be looking for a property (and provider) with a solid tenant history, minimal turnover, low maintenance costs and top-notch management. The only difference is that, if you finance, you can buy more than one and start building a nice portfolio!
Of course, the number one most important aspect of successful turnkey investing is finding a provider you trust and who is completely transparent. Which leads me to a respectful rebuttal of the above comment about wasting money. While it certainly is true that there are more than a few unscrupulous turnkey providers out there, it is not true that all are trying to scam you out of your money. We can and do provide appraisals on all our properties that show they are worth what our investors pay or more, so the idea that we will charge the maximum sales price, thereby making it impossible for you to benefit from any kind of appreciation, is incorrect. Of course, since turnkey is your new obsession, I'm guessing you aren't too worried about that anyway ;) But it bears noting for the sake of the thread that turnkey is a buy-and-hold strategy. It is not going to be in your best interest to invest in a turnkey property just because you think you can turn around and sell it for more next year, that is called flipping. No one can predict appreciation, which is why you'll see the more successful TK investors and providers refer to it as 'icing on the cake' and not the primary reason for any prudent investment. We invest only in solid B neighborhoods, in well-built properties that attract quality tenants, so the chance of appreciation is good, but cannot be guaranteed. That being said, we are not (and neither are many other turnkey outfits you'll find here on BP) in the business of gouging our clients for a quick buck. Long term relationships with happy clients are much more profitable for both parties.
If you have any other questions about turnkey or how your returns are determined, feel free to drop me a line!
All the best in your new adventure!
Clayton
- 10yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
I have to disagree with Brent on one comment. Not all turnkey companies sell for the highest price possible. We base our sales price in direct relation to the type of rent that we can get. In some cases this has put us at almost 100% market value while is others it has proven to be $10-$15k lower then other comps in the area. While there certainly companies that sell at or above full market value, there are still a few that provide a slightly better price value.
Curt Davis - KAIZEN Realty538 Reviews - Specialist · Piscataway, NJ · Member since 2016 · 65 posts · 25 votes10y
HI Kristin - I am at the same place you are looking at turnkeys and plan to purchase by the end of the year.
Mark
- Mission Viejo, CA · Member since 2016 · 13 posts · 4 votes10y
@Curt Davis and @Clayton Mobley- thanks for your insight! i will be contacting you soon to talk to you about my goals and strategy. cheers!
- Investor · Gilroy, CA · Member since 2016 · 255 posts · 195 votes10y
@Kristin Brancaleone Just as an FYI, if you finance your purchases, your lender would likely not lend you more than 80% LTV. In that case the only way you could pay more than it is worth for the property is if you shelled out more from your own pocket. The appraisal is your leverage.
I just purchased my first turnkey earlier this year. The appraisal came in lower than what the provider thought and they immediately sent me an amendment to the contract and lowered the asking price to the appraisal price.
I would say ask around about your TK provider and their owners. Find out if the company is reputable and the people pulling the strings are as well. Also take a look at their property management companies. Some have own the companies under a different name, so make sure to check out each arm of the operation.
Good luck! If you have an general questions about what the process may entail for you please feel free to reach out. I am not an expert, but have recent experience which may be helpful.
- Member since 2016 · 13k+ posts · 12k+ votes10y
Paying cash does not increase cash flow, once you account for a return on the equity lying dead in the property your cash flow is closer to it being 100% financed.
Paying cash is not a wise investment strategy as all you are saving is the mortgage interest rate which in todays market is practically free. Money is waste lying dead in a rental property.
- Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes10y
Originally posted by @Kristin Brancaleone:
Hi all! I'm having so much fun listening to BP podcasts and Turnkey-review podcasts. I'd have to say this is my new obsession. I'm hoping to purchase my first few turnkey properties this year.
When doing the numbers, picking neighborhoods, and planning for an exit someday, how does the fact that I'm paying all cash affect things? If you were paying all cash for your TK properties, would this change your decisions at all?
Thanks for your advice!
Kristin
Kristin, hi, I understand, BP can quickly become an obsession, I too have enjoyed learning and listening to various schools of thought on a broad range of topics at this point, I can certainly appreciate the enthusiasm.
Turnkey in my opinion is the ultimate solution for passive investing, especially for out of state. The most important factors associated with Turnkey really boil down to accountability, working with someone who is a full A to Z operation, no middle men, no 3rd party construction, no outside management (partner), lastly something that is cash flowing and renovated from day 1.
In my opinion and experience, irrelevant if paying cash or financing, you are still seeking a return that is going to fit your specific strategy. The only factor involved in this case, is how many homes you can garner using cash versus financing and this will determine the function of your risk.
Leveraging is risky, but you gain the scale up element of # of units.
Cash is more risk adverse, limits your scaling capacity to your immediate accessible liquid cash (possible one may have a strong capital arsenal).
The ultimate goal here is that the provider you define fits your strategy, culture, is sophisticated well established operation with a proven track record.
Lastly, I have seen some comments pertaining to retail and cost of turnkey; TRUE turnkey will be premium free! TK is an operational business that is a cash flow machine, not one riddled with maintenance and high turnover. Its about length of tenant stay and mitigating maintenance as well as cap ex. Quality TK providers can share scientific data, your asset should perform time and time again, not just the first time.
Here is a little article for you to get acquainted with as you navigate out of state TK:
Much Luck... keep it simple stupid "kiss method" and you will have success!
- Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes10y
Originally posted by @Mark Senecal:
HI Kristin - I am at the same place you are looking at turnkeys and plan to purchase by the end of the year.
Mark
Mark-
Welcome, I recommend checking out the reply I just posted, also reading:
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Clayton Mobley:
Of course, the number one most important aspect of successful turnkey investing is finding a provider you trust and who is completely transparent. No one can predict appreciation, which is why you'll see the more successful TK investors and providers refer to it as 'icing on the cake' and not the primary reason for any prudent investment.
All the best in your new adventure!
Clayton
Clayton, MOST people that get RIPPED OFF trusted the scammer and thought they were transparent.
By not financing you lose the protection of a third party looking at the deal. And while we're talking transparency why do you provide a make up real estate term in you advertising?
From your website, " The "Spartan Return" is an estimate for what your rate of return would be AFTER you paid off your mortgage or financing on the property. This return assumes you put 25% down on the Purchase Price and you financed the remainder for 15 years."
I have no problem with the Turnkey model but I'd say there is only a couple that actually know what they are doing. Look at the providers that post here that use FAKE cap rates to entice newbies into unprofitable properties. Why invest in their snake oil pitches. If you have to make up numbers to sell your product how can a novice protect themselves?
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Account Closed
Firstly, I agree that financing is the better way to go. But not everyone likes the idea of taking on debt, it is a personal question of risk tolerance and everyone is different.
Secondly, I agree that there are many many providers who massage numbers to make things look better than they are. It's one of my major pet peeves, actually, because for some reason the industry standard seems to be to present ROI calcs that don't include things like vacancy and maintenance expenses - which, as we all know, are HUGE factors. The result of this standard, however, is that any provider that puts only fully comprehensive numbers out there looks much less profitable, and likely doesn't get the change to explain why as people just see the lower ROI and move on.
To combat this, we actually provide multi-sheet interactive property jackets that show multiple return calculations. The front page shows this 'standardized' return for cash and standard financing, as well as the Spartan return you reference. On the second and third pages, however, we include all expenses and show the complete ROI calculation for cash, 15 and 30 year notes, including amortization tables to show how paying down your loan impacts your equity each year. We make a clear note of the fact that the returns shown on these pages are different than the front page because they include these additional factors.
We used to just show our complete ROI numbers upfront, but found that people glossed over any details and just assumed we weren't competitive. We've found that, with this more comprehensive approach, we appeal to people that are interested in Tk and know that understanding the math is crucial to being successful. So, showing something they can compare to other companies' 'standardized' figures, as well as the actual full-expense numbers, helps them see what they are dealing with more clearly.
If you've seen any of my past posts, you'll see that I actually harp on this point a lot. No matter what market an investor considers, they should be asking a TON of questions of any provider upfront, long before money changes hands. Any provider that cannot back up their figures with actual, historical data, or who cannot or will not provide clear, thorough answers in a timely manner (like, right away) is not worth anyone's time. This is why we always offer our multi-sheet calculations to potential investors upfront, so they can look at how the numbers work on some representative properties, ask any and all questions, and feel comfortable with the mechanics of the math before they even consider looking at specific properties for investment. If you, or anyone else, would like to see some of these sheets, feel free to drop me a line any time!
All the best,
Clayton
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Clayton Mobley:
@Account Closed
Firstly, I agree that financing is the better way to go. But not everyone likes the idea of taking on debt, it is a personal question of risk tolerance and everyone is different.
The result of this standard, however, is that any provider that puts only fully comprehensive numbers out there looks much less profitable, and likely doesn't get the change to explain why as people just see the lower ROI and move on.
Clayton
You are the second turnkey provider that has told me they have to use FAKE numbers to compete with the crooks. Yet I have seen some of the more successful ones not resort to this deception. Seems that you should emulate them instead of jumping on the deceptive advertising bandwagon. What you are doing is just a reverse bait and switch.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Account Closed
While I think it would be clear that presenting comprehensive calculations - with the clear indication that one figure is designed to be an apples-to-apples comparison to the numerous other numbers floating around in the market, while highlighting that the others are complete calculations including expenses that other companies don't even mention - is not the same as a bait and switch, you seem committed to your opinion and your use of the capslock key, so I'm not sure I could convince you otherwise no matter what I said.
For the sake of the thread I will leave it at this: A bait and switch is when you promise that an investor will get a certain return (using false or incomplete numbers) with the intent of tricking them into investing in an inferior product and then, when the actual returns fall short, back-peddling to redirect the conversation and avoid culpability. Yes, there are many 'providers' that try to do this, which is why we are so vocal about the necessity of all investors doing thorough due diligence when choosing a partner. Since we are upfront about our actual numbers (based on historical data, not pro-forma estimates of expenses etc) with any and all potential clients - and actually go out of our way to ensure they understand not just the ROI calculation, but exactly how each component figure is determined - I would say we are actually doing a better job than most at educating our clients. Since we continue to grow at a rapid pace and nearly 75% of our business is from referrals, I'd say our clients agree.
Our (actual) returns are amazing and our service is second to none, but if you are not interested in our product I wish you all the very best in all your endeavors elsewhere. I think I'll leave this conversation at that, as I doubt the OP intended for her thread to be derailed into such off-topic territory.
Best of luck to all in whatever RE investment you choose!
Clayton
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes10y
Hey Kristin! Where are you looking at turnkeys...any particular markets? I'm just north of you, up in LA/Venice, and I've always bought turnkeys as well. I love them.
As far as paying all cash, nope, I can't really think that it would change my strategy in buying them. The only thing related to financing is if you are financing, then that could play into what market you buy into just because you'd want to make sure you find something appraisal-friendly. But for all cash, it shouldn't really matter. Of course that's with the contingency I'd put on all turnkey purchases- at least make sure you are buying in a growth market at least. There are turnkeys in markets I'd definitely not consider to be growth markets.
More than paying cash or not, it's really a matter of what kinds of properties you want. Suburban SFRs, urban MFRs, what price point, what returns do you want, etc.
If I can help at all as you shop around, don't hesitate to reach out! I love talking turnkey. :)
- Investor · Garner, NC · Member since 2016 · 13 posts · 5 votes10y
Hey @Kristin Brancaleone, thanks for the Podcast recommendation! Congrats on your upcoming investments and keep us posted on your success.
- Investor · Cypress, TX · Member since 2016 · 170 posts · 139 votes10y
We are working with a healthy mix of both financed and all cash buyers here in the Houston area. Again I agree and really like Clayton's advice and the importance of the team on the ground that is going to be managing your investment day to day.
So it really depends on your investment goals and trying to find a market you are comfortable/confident with. I love that Harris County TX has the fastest growing population in the US despite the price of oil being 1/2 of what it was 2 years ago. Diversification & resilience.
- Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes10y
have to agree with others. While cash is less risky unless you know what you are doing you are walking around with a target on your back. Without a lender and a loan process you may be more susceptible to people doing things they should not like selling you overpriced property or worse.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes10y
Originally posted by @Charles Worth:
have to agree with others. While cash is less risky unless you know what you are doing you are walking around with a target on your back. Without a lender and a loan process you may be more susceptible to people doing things they should not like selling you overpriced property or worse.
Like Charles says. Usually exits are tied to max profits and max IRR numbers regardless on how it was originally purchased. Unfortunely, many high retail priced turnkey options leave little wiggle room to exit in the more normal time frames most investors could expect. There are a host of reasons for this and mostly revolving around paying too much in the wrong location in the first place. The only actual real investor here sometimes is just the original turnkey seller. He/she finds, buys, rehabs and sells as TK for highest retail. There is not room left to repeat typically and it is pretty much a done deal for smart investors from that point. Honestly, cash buyers have the advantage with getting much better than just average TK deals. It would be a crying shame to blow hard earned cash on some piss poor investment not worthly of providing multiple exits available in many different time frames. Good luck with your search!
- Mission Viejo, CA · Member since 2016 · 13 posts · 4 votes10y
@Matt R. thanks for your 2 cents! If you were in my position- had a decent pool of cash, were a cash-only investor, but didn't have enough $ to buy locally in California. Would you just wait until Ca prices come down? Look for deals outside the state by teaming with an agent? I'm finding that no option but TK seems to make sense for me, but perhaps I need to think outside the box a little. Or maybe real estate isn't the best way to invest my money as an all-cash buyer? Thanks for your advice!
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes10y
Originally posted by @Kristin Brancaleone:
@Matt R. thanks for your 2 cents! If you were in my position- had a decent pool of cash, were a cash-only investor, but didn't have enough $ to buy locally in California. Would you just wait until Ca prices come down? Look for deals outside the state by teaming with an agent? I'm finding that no option but TK seems to make sense for me, but perhaps I need to think outside the box a little. Or maybe real estate isn't the best way to invest my money as an all-cash buyer? Thanks for your advice!
Great questions. This depends on your expectations probably. There many ways to make money in REI. Idk how much cash you are talking. Some options for you might be team up with private money types and simply loan that cash on SoCal stuff. Check Norris group for that. Another one I like is just a simple publicly traded reit like ohi and get about 10% overall historically in dividends and appreciation. Both of these examples are actually passsive vs TK and are more sophisticated investments in everyway.
The SoCal market is tops in nation for returns cash flow/equity historically. To bail on that location might not be wisest move vs some random midwest TK. You can rent one parking spot in SoCal and create more cash flow honestly. Almost anyone on BP talking turnkey is selling turnkey. Nice folks but conflict of interest if you want unbias takes.
Now SoCal and Cali is a big place, there are some areas that cash flow just fine day one...if you go out a couple hours outside of OC, Bakersfields, Deserts, etc...and or look into getting creative with vrbo, short term funished, think traveling nurses...you get the picture. Fix and flip lending or doing is great too here. The demand in SoCal and historical lack of supply is your best REI friend either way. Only someone selling you something far away would advise against that location. As it might be the worst investment move as compared a local could ever make. Good luck with your search!
- Mission Viejo, CA · Member since 2016 · 13 posts · 4 votes10y
@Matt R. cool, thanks for the insight! truly passive income is ideal for me in my situation. would you say lending through a company like Norris group carries more/less/same risk as buying turnkey? i'm a newbie as far as investing. trying to be a good steward of my cash.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes10y
Originally posted by @Kristin Brancaleone:
@Matt R. cool, thanks for the insight! truly passive income is ideal for me in my situation. would you say lending through a company like Norris group carries more/less/same risk as buying turnkey? i'm a newbie as far as investing. trying to be a good steward of my cash.
Right on. If I understand your exit concerns correctly Norris group is a good fit. They are very well respected in REI circles and recognized as one of the best in that arena. IMO less risky with better returns and easily better exits. For sure more passive than try being a landlord from 2000 miles away.
- Rental Property Investor · Huntington, NY · Member since 2016 · 102 posts · 74 votes10y
Hey Kristen, great thread you started here. I too am looking for an out of state TK investment. My purchase plan is to buy using a portfolio line of credit (essentially a cash buy for the property) and then once the property is cash flowing to refinance and take cash out to pay back the line of credit. My thought process is that the line of credit is fast and at a much better rate than I could get with traditional loans. I feel that the closing costs should be less and there might be a better shot for the cash discount. All in all, a faster, cheaper way to close and if I am able to refinance then the line of credit is ready for the next purchase. Good luck with your endeavors.
Gwyeth Smith
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