The TK- Cycle - a different kind of turnkey investing

[Axel Meierhoefer]

I have been blessed by a lot of people on BP contacting me about Turnley investing and my portfolio. In some cases, those who contacted me and asked what they could do if they were to use a substantial amount of money to invest. Substantial to me would be $50-$100K at a time.

Naturally, my first reaction has been to suggest: you can buy 2 or 3 or 5 properties at about $20K each in down payments and purchase prices between $90k and $130K. That's what I always used to do.

A friend introduced me a little while ago to another approach that could be perfect or at least an alternative to the traditional turnkey approach. I have now started deeper research and am working on my first deal using this approach. Maybe it can be considered for more mature investors as it involves a little more risk and more up-front investments. On the other hand, the slightly higher risk is rewarded by slightly better returns.

I am not sure if there is a name for it already. I know Brandon Turner coined the term: BRRR. I suggest calling this advanced type of turnkey investing the "Cycle-Turnkey".

Here is how it basically works. Please be aware that this can only be done in specific areas of the country:

• 1. A Cycle-TK provider, just like the TK-providers I recommend, finds a property in a good residential area but in a location that is underserved economically or inherently weaker than comparative areas in wealthier parts of the country. The residential area qualifies for Section 8 tenants.
• 2. The property is offered to an investor with two main components: 1. The scope of work including the cost of renovation. 2. The sales price after completion of renovation (same as in a traditional TK deal) 
• 3. The investor pays the sales price for the property in cash, even though the renovation hasn't started or is about to start. The investor receives the title of the property.
• 4. The TK provider conducts the renovation, announces the completion, allows the investor to conduct an inspection, and then the TK provider places a Section 8 tenant into the freshly renovated property.
• 5. The investor has the property financed in such a way that the mortgage loan equals the initial cash payment of the purchase (or as close to that amount as possible)
• The cycle is complete

The investor has completed the cycle. A new cycle starts by using the funds from the mortgage loan to purchase the next property from the TK provider, possibly adding a small amount of cash if the mortgage loan did not fully cover the original cash payment.

The rent income typically equated to 1.3% - 1.5% of the purchase price but the investors have almost no money left in the deal after the completion of the cycle and can keep moving forward to a new TK-cycle.

This approach can lead to a fast-growing portfolio with very little long term committed cash.

The main issue for the TK-cycle approach is the initial cash investment that might exceed what most people can commit. In addition, there is an additional risk because the scope of work could be miscalculated requiring additional funds that might not be returned at the point of financing. Still, it's an interesting alternative. I am in the process of getting into my first TK-Cycle and will report about it.

What do you then about this idea?

[Chris Clothier]

@Axel Meierhoefer

It sounds simplistic, but I think it actually opens investors up to much, much more risk.  The biggest risk is that the areas you describe are usually the most challenged areas of cities.  Challenged for jobs, services, transportation, schooling, etc...

And Section 8 is run on a location by location basis.  It is certainly not a uniform program from city to city, so investors are investing in a challenged area with a program that may not be efficient or robust for their area.  I am sure you are checking this out for the areas you are looking, but Section 8 and other subsidized programs are not always the most efficiently and well-run.  

The last big thing is a reminder that this is exactly how a TV celebrity described his program where unfortunately hundreds of investors lost life-changing sums of money buying properties where renovations were never performed and the properties were never truly managed.  There are so many areas where a program like this can go wrong.

My last point is to remind investors that loss aversion is a very real phenomenon.  Our aversion to losing money can make us feel better about risking less of it.  Yet, when we risk less of it by investing in more challenged areas and in possibly more challenging ways, we actually raise our risk of losing!  Quite often the best way to prevent losing on an investment is to reduce risk as best as you can without considering price.  Take price to of the equation and vet each piece of a deal and how it reduces risk.  Good post and maybe this post will become as sticky as the last one!