What are your Out-of-state turnkey investing mistakes?

Question

Hey all, thanks in advance for your generous contributions to my knowledge by answering my questions.

I am a looking to make my first out-of-state turnkey rental property investment and I'd like to hear about your warnings/bad experiences with these types of investments. The more detailed you can get the better, as I've already done quite a bit of research.

Thanks again!

Greg

Ali Boone · Answer

The biggest warning I'll give, which translates into the biggest risk I've seen with turnkeys, is people taking the concept of them being hands-off way too literally, and they don't even conduct due diligence on the properties they're buying. Proper due diligence is key to ensuring everything goes as expected/planned/projected. As much as it'd be great for all turnkey providers to be perfect, nothing involving humans is perfect all the time.

That goes also into owning the property once you buy it-- people continue with this totally hands-off mentality, because it's what's advertised with turnkeys, and they don't oversee the property manager and the going ons with the property properly. They just stay totally submissive and get steam rolled.

Not sure if that's helpful, as it's not a technical answer at all, but that really is my biggest warning! Yes you'll most likely be very hands-off, but don't let that cause you to not do proper due diligence.

James Wise · Answer

Greg the following punch list should help you mitigate your risks as much as possible.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Google Clayton Morris scam and/or Morris Invest scam for a cautionary tale of what not to do when buying turnkey real estate
• Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

Caroline C. · Answer

@Greg Yunov

2 things:

1) make sure you visit the market, visit the streets where the properties are located, and meet the people on the team of the company you will use. There is no substitute for seeing the streets and neighborhoods first-hand before you invest. Also you need to get a face-to-face comfortableness with the people you will partner with. They are sales-people, so over the phone and email, things will seem great.

2) property management is where you make or break your investment, so make sure you talk to the pm in detail about how they operate. Get references. Also, don't lock yourself into a full year contract, so that if you are not happy, you can make a move with 30 days notice. PMs seem great until you have a tenant that falls behind, or a costly turnover, or a big repair, and by then it is too late, so look for warning signs of poor management, and keep in touch with them.

Good luck!

Scott Kaczmarek · Answer

@Greg Yunov - I don’t have any horror stories but that’s because I listened to people with experience when I was starting out.  The keys for me were: 1. Go and meet the provider.  If you’re willing to put $30k-$40k into a down payment and closing costs, spend $1k on a flight/car/hotel and meet them face to face.  Meet the team, ask a ton of questions and tour the area and see the before/during/after on the product they’re selling you.  2. Do your own due diligence and run your own numbers.  Don’t take anything for face value.  3. Ask a ton of questions on all areas: property acquisition, renovation, property management and investor communication. 4. Buy from someone who does it all in-house.  You have one throat to choke so to speak and there’s no finger pointing because it’s one company. 5. Buy the nicer stuff.  My average house is $120k renting for $1100/mo.  There are operators in my markets offering $75-$90k but I’ve found success, overall, going toward to higher end.  I don’t cash flow amazing money, but my cash flow is predicable and real. 6. Have reserves always.  Those who don’t make it are normally caught short of liquid funds.  My 2 cents.  Good luck!

Account Closed · Answer

@Greg Yunov

Ive done both out of state, turnkey and fixer upper/BRRR.

My advice is to pick your team like your building a dream team NFL team. Your team will make you or break you. The key players are a Realtor, Property Manager, Inspector, Contractor and Bank.

Your realtor will have an in depth understanding of the market and can tell you more about home values, history and appreciation.

Your property management team will know rent prices, rent turn over, average time to get a tenant in the door, deal with background checks and monthly payments, ensure the house is maintained by the tennant and deal with any other surface level issues that may arise.

(Appartments.com is one of my favorite resources when developing a basic understanding of the rent market of where Im trying to invest.)

Private Inspections are a cheap investment and are another great resource on understanding if what you're buying is "lipstick on a pig" or a built to last investment.

Contractors are also vital to your operation. Having a trusted licensed contractor on call to take care of any maintenance/major repairs is key to the functionality of your property.

Different banks have different lending criteria and different processes to go through in order to secure a loan. Thats an in depth topic with lots of information on BP to help you determine what best fits your goals.

If you're open to investment ideas, BRRRR would be another great way to go. My first property was a turnkey and cashflows like a dream, but I do wish I went with the BRRRR method instead it would've taken my capital much further.

Ramon Flores · Answer

@Greg Yunov I have invested out of state and here are a few suggestions.

- Get to know several real estate agents in the area, if they have their own investment properties then it is even better. Make sure they understand what you are looking for in the investment and they will guide you. They will help you find a good property management company.They will also have a list of lenders they work with if you don't have any.

- Understand that turnkey doesn't necessarily mean that you will never have any issues. A tenant can leave and/or stop paying rent. So be prepared and have cash reserves ready in case anything happens.

- If you want a deal then use BRRRR method. That way you can get several properties instead of one. Your capital will go further that way.

David Barnett · Answer

The first thing that I should mention is that I don't invest turnkey out of state.  However, I do invest out of state, and wanted to mention a few things that I've found helpful to avoid biggish mistakes.

(1) Always look at the numbers.  Even after a purchase, you should be getting statements on a monthly (ideally) not less than quarterly basis.  Review the reports when they come out, and question anything that looks out of place.

(2) I like to be more hands-on in bigger capital projects.  I've flown into the market that I invest in to be actively involved in the bidding process for capital projects.  Otherwise, you might not get the best deal, or the best contractor for the job.  On one job in particular, I met the contractors and handled the bidding process directly.  It also made quite an impression with the tenants, as they knew that I was out of state and made a trip in specifically to deal with the major issue.

(3) Ask for pictures of repairs being done, especially early on in the relationship.  It provides a level of accountability, and provides a bit of security to ensure you're paying for repairs that were done.  Otherwise, tenants might think you aren't addressing any maintenance issues and can lead to higher turnover.

Jhon Restrepo · Answer

If you are going to buy out of state, get a lawyer, and double , triple chec before signing anything, cause you can loose your hard earned money.

Greg Yunov · Answer

@Scott Kaczmarek

Understood. Thank you for your sharing your two cents. This is very informative!

Chris Eidson · Answer

@Greg Yunov

I would agree with many of the comments above.  Understanding the market is more important than anything as well as knowing all of the potential pitfalls that may be glazed over or underestimated from a cost perspective.

What are your Out-of-state turnkey investing mistakes?

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