All Forum Posts by: Clayton Mobley

@Rodney Phillips wow, you have gotten some great, reasoned repsonses here from professionals and investors alike. A few points I would like to second:

• $190k for a duplex seems high, not sure what market you're looking at.
• BRRRR is a big time committment but if you do it right it can result in higher overall returns due to forced appreciation.
• You are more likley to be successful at BRRRR if you have construction skills or know people who do. BRRRR is all about networks in your market, but if you are looking to invest outside of your home market it gets a lot harder because you have to manage things from afar. With turnkey, you should be doing the same amount of vetting regardless of the team's location.
• Not all turnkey is created equal - 'avoiding the cowboys' is crucial, so make sure you do your due diligence. When it comes to turnkey, your team is more important than your market. If there's a successful reputable team in the market, then the market is doing well for rental investments, otherwise the company would fall apart. However, there can be great markets with less-than-stellar turnkey providers, so focus on people first.
• Turnkey can be a great way to start your portfolio as you gain knowledge, experience, and a nice cash flow buffer before jumping into higher risk options like BRRRR.

I literally just weighed in on this same question on another thread if you want to check out the info there: https://www.biggerpockets.com/forums/12/topics/698692-first-property-brrrr-or-turnkey?page=1#p4127412

One thing you noted in your last post warrants a comment as well. You said they are local to you but invest in other markets? That my friend is not a full-service turnkey company, that's almost definitely a marketer (a company that advertises turnkey properties owned by other companies in other markets and collects a referral fee for sending qualified buyers). While there are some reputable marketers out there, it does mean that you need to do one more level of vetting - vetting the marketer (the people you buy through) AND vetting the turnkey company (the people you actually buy from and work with long-term).

Generally speaking (and yes I am biased here) I recommend working with the turnkey provider directly if at all possible. It means there's one company to vet, one company to build a relationship with, one team responsible to you. It also means that you're working with people who really know the market they are selling because they live there. Marketers typically sell in many different markets and often don't have staff in any of them, so you are taking third-hand info about the market you're investing in - again it's just another step of separation between you and your investment.

I'd say you should do some more research here on BP about what constitutes a true full-service turnkey company (everything done by one company) and how to vet different providers and markets. Don't pull the trigger on something without really digging into the research.

Good luck!

@Richard Phan You've gotten some great responses on how to choose a turnkey company. I'll add just a couple things to look for/ask about:

• Ask for data (like statistical data) on everything from vacancy and maintenance costs to average length of stay, average move out costs, eviction rates etc.
• As someone else mentioned, run your own numbers! Every turnkey compnay will give you a ROI rundown, but if you look closely you'll see these are not all created equally. When reviewing numbers, make sure they've included vacancy and maintenace, taxes, insurance, etc. Again, get data backed info for the assumptions they make in the ROI sheets. Make sure you understand how the math works and everything that's included in the bottom line. If they can't or won't walk through this with you or take the time to answer your questions, move on.
• If you start thinking about investing OOS seriously, make sure to do some of your own due diligence on the area. Get info and descriptions from the company, but then do some research to verify. I have seen some companies advertise properties in Birmingham as B+ or A- when they are CLEARLY C+ at best. Use google earth to take a virtual walk around the neighborhood to get a pretty decent idea of the type of area you're looking at. If they're marketing it as a B/B+ area but there are lots of cars on cinder blocks, people hanging around during the day, or unkempt houses/lawns, then they're inflating the property class so they can charge more.
• Absolutely make the trip out to meet the team before pulling the trigger! Any company worth your time will be able to accommodate a tour (or have monthly tours already set up), show you the area, view some props, and look you in the eye. Again if this just 'can't' be accommodated, walk away.
• Get your own appraisals. They should provide one, but should also be ok with you getting your own. If they balk at this, that's a massive red flag
• They should also be fine with you using financing of your choosing, as long as they have time to vet the provider. We have preferred providers we work with regularly, of course, but if a client has a relationship with another bank and they're on the up and up, great. Some so-called turnkey companies will require that you use their 'in house' financing, non-recourse loans on your IRA funds, or other sketchy things. You should be able to pay for the property with a regular mortgage, or in cash.
• Make sure that the PM is IN HOUSE. That means no contracts with some other third-party company that you didn't have a chance to vet. An in-house PM is crucial to a turnkey investment because it's what ties your success to theirs - they only make money if you make money. If a company hands you off to some other PM, their long-term incentive to get you the best prop possible is gone - now they're basically an agent, they just need to get you to close and then move on to the next.

Both strategies can be hugely powerful, but one or the other may not align with your goals and needs right now. Many folks start with turnkey because of the reduced risk and hands-off appeal (although there's still a lot of homework to do up front when vetting), and then diversify into BRRRR when they have more capital, have other cash flow available to help offset vacancy risk during rehab, and have more experience in REI in general.

It's like choosing between building your own stock portfolio from scratch and investing in a mutual fund or ETF (professionally managed). You don't have to pick one strategy for life, but it is crucial that you be really clear with yourself about how much time, energy, and money you are willing and able to invest right now, and how much risk you can reasonably take on vs how much return you're willing to sacrifice for a lower-risk investment.  

@Adrian Beltran You've gotten some great responses here already and I agree with all of them regarding the necessity of identifying your goals first. Turnkey is not a short-term investment - you need to be able and willing to leave your capital in the property for at least 10 years. You don't sell a turnkey prop after just a few years without likely taking a loss after closing fees etc. 

The one thing I wanted to elaborate on a bit, however, was the WHY of these answers. The questions of turnkey vs BRRRR is, like most things, a matter of the time/money trade off. If you primary goal is to sell the property in the next few years for more than you bought it for, turnkey isn't the answer. BRRRR/househacking is a better bet BUT the tradeoff for that potentially higher return is that all the risk is on you from start to finish.

That's not just the risk of vacancy, that's the risk of not knowing how to find and vet a property (not all distressed props are created equal and its crucial to know what to look for in terms of 'good bones'); it also includes the risk during rehab - if something unexpected comes up or you need to take time away for any reason and work needs to pause, that's additional time that you're paying the mortgage with no income. If done well, the result of all this risk can be that you have a rehabbed property worth more than you paid (incl rehab costs). You can either sell for a profit or hold as a rental - either way you've traded time and risk for the potential return of forced appreciation.

Turnkey works the other way. You trade some money for less risk and a lot less time. You don't (or shouldn't) close on a property until the rehab is finished, inspections passed etc. That means that all the down time with no tenants isn't your propblem. If you buy from a reputable provider who lives and works in the market they sell (crucial) and has a good track record, you're also reducing the risk that the property you buy is a dud - turnkey companies have honed processes for finding and securing the best properties in the best rental areas (being able to buy in cash helps us get the best deals, faster than individual investors would be able to). The risk of shoddy rehab is also reduced with a reputable provider (read: not all turnkey providers are created equal, do your research!) since they have in-house teams and streamlined processes to ensure high-quality rehabs and the same results in every property. 

What you've traded for all that reduced risk (and time) is the chance to force appreciation the way you do in BRRRR - because the turnkey company has already done that, that's how we make money. You get a solid cash flow property at market price with new (or nearly new) capex items (roof, flooring, HVAC etc), but you can't just turn around and flip it for a profit.

@Jeff Schechter thanks for the shout out!

@James Wise lol yeah that Morris fellow seems like he runs a tight ship up there in Indy. That guy is giving Claytons a bad name (no pun intended)

@Randy Bloch excellent point

@Larry Spradling I'm really sorry to hear about this - and yes knowing that you came to these folks through Morris, I guess there was almost no way you'd escape unscathed. I'm sure it's no consolation that other folks are in the same boat, as none of you should be. 

I want to be clear that while I do always preach the importance of due diligence, I don't believe the onus for this mess is on the investors. Criminals are always the ones responsible for crimes, not their victims - I realize in this case the word 'crime' might be debatable, since a lot of skeezy business practices are actually perfectly legal, but the point remains. I hope my post about not investing via your IRA didn't come off as accusatory - you shouldn't have been lead down that path to begin with, and no worthy businessperson would have talked you into gambling your retirement like that. The very reason these types of 'companies' target folks like you is exactly that - not on BP, new to investing, feel like it's time to take control and aren't sure what steps to take. It's a specific and targeted scam on the REI industry's most vulnerable demographic, which makes it all the more infuriating.

I know you've likely learned a ton from this experience, which is I guess the silver lining. Hopefully you will come out on the other side stronger and better equipped. 

For now, it sounds like your best bet is to get the property cash flowing as best you can until you have more in the IRA and/or it actually appreciates. I would follow the advice of others here saying to see what updates or repairs you can make to force some equity with relatively low costs, replacing light fixtures or window treatments etc. Sometimes just a new coat of paint goes a long way for curb appeal. Getting an outside appraisal and self-managing (to the extent you can) will help as well.

I'm happy to hear you're on our waitlist, but I agree that sorting this out needs to be your top priority, even if the financials don't overlap (this vs a non-ira investment) - just for peace of mind. That being said, you know where to find me if you have any questions.

Best of luck, we're rooting for you.

@Steve Vaughan Exactly! There are ways and reasons to invest within a retirement fund - but having no other capital is THE WRONG REASON. If your retirement fund is your only safety net, for the love of god, stick to something more stable than a C-class rental you've never seen. It happens a lot that folks learn about REI, get rightly jazzed about the prospects, and then perform all kinds of financial gymnastics to be able to start investing ASAP because they feel like everyone else is making money and they're missing out. But the reality is, and some folks may not like to hear this - people that already have capital will always be able to turn that capital into more capital a LOT more quickly than someone with none will be able to even get started. 

As a new investor on BP, it's really easy to see all the success stories and the whole 'wealth is a mentality' stuff and think that if you just force your way forward you'll be rich. But as a new investor with no liquid assets, comparing yourself to the folks snowballing big portfolios is doing yourself a disservice, and using your one safety net (retirement funds) to try to play with the big kids right away is a dangerous idea. I'm the president of a turnkey company, so it's not like I ever want to talk folks out of REI - but even we don't recommend that people pour all their retirement savings into getting started or take out hard money loans they can't afford. REI is great, but it's better to get started later with more capital than to get started now with risky bets on your entire financial future.