All Forum Posts by: Michael Gansberg

I have a question for this thread, and please forgive my ignorance, as I've never invested in a property labeled "turnkey," though I've invested in "properties" for 13+ years. Can someone enlighten me about the difference between "turnkey" and "other" kinds of real estate? So far, the only difference I can see between turnkey and "normal" investing is that when "fraudulent" charges are levied by the "turnkey" provider, the investor must uncover that activity on his own. Oooh, a treasure hunt!

Are there any other upsides to "turnkey" investing besides these sporadic treasure hunts?

Thanks in advance! 

MG

@Bill McCartney, interesting property. I've had experiences in properties somewhat similar to this- a problematic ten unit brick building in my primary stomping ground of Troy, NY, comes to mind. The tenants were extremely challenging when I acquired it, and after several years, we managed to increase the quality of the tenant base somewhat, but not as much as we'd hoped- the building's reputation preceded us, unfortunately.

Then things changed quite suddenly and I think this story is relevant to your potential acquisition. So for that and for amusement's sake, I'll give a snippet- I was on vacation, and got a text at 11 PM from management. I knew that good news wouldn't follow. Turned out one of our tenants had burned their apartment down- total loss of property, was fortunate in that it was largely contained to one apartment(cigarette in the kitchen garbage can, then out to dinner, those fools.) My manager said to me, "It's so strange, they were 2 months behind on rent, and they just paid their renter's insurance this morning!" I replied, "Odd isn't the right word, let's go with "suspicious."" 

So we decided(or really, it was decided for us) that we'd completely rehab the apartment. And we went with excellent finishes- I thought, why not update this baby? And when we did, we also raised the rent by 15%, and got the best tenant we'd ever had in that building. So a eureka moment followed- why not do the same upgrades to the remaining 9 units as they turned over? Over the next year, we modernized(re-did kitchens and baths, essentially) about 7 apartments, raised the rents on those apartments by 15%, and the tenant base changed almost immediately. The building became a desirable place to live, occupancy(which had been 80% at best) zoomed to almost 100%, with very short turnover times in between move-outs. Problem tenants? Nope, no more. (side note- after rehabbing the apartment completely, the tenant texted us and asked if they could have their apartment back- not that they tried to become current on their back rent or anything like that. Oh, the humanity.)

You have a thornier situation, I think, as 36 units is more challenging than 10, and rehabbing a substantial fraction of those units will be expensive. What leapt out at me was the electric heating- my guess is that exerts substantial downward pressure on the rents there. Residents know how expensive that can be, and insulation requirements in the 70s were much lower than they are today- throw in the single pane windows, and oofah! That place has gotta be expensive to heat. I'd look into the possibility of installing heat pumps with electric heating elements for very cold days(one per unit, hopefully, in the units which currently have electric heat) these can be installed in the window much like typical air conditioners and they will function as air conditioners in the summer- some can be installed through the wall. This might be your most inexpensive path to lower heating bills for residents. As a contractor, you probably know more about this stuff than I do. Maybe look into some better insulation. And upgrade the units aggressively and en masse- if you can manage to change the building's reputation rapidly, you'll be able to raise rents sharply and quickly. 

I think under-rented situations offer the most promise for stellar returns, especially when those low rents are a direct result of poor management, inefficient building systems, and poorly finished apartments, as those problems are generally fixable. 

MG

@Joe Kim, very glad to hear that you're analyzing this properly. It would appear that your "turnkey" property isn't so much, and your provider might have his interests 1st, 2nd, and 3rd, and...who is that Joe Kim guy?

Send a signal that he doesn't have a monopoly on rental turnovers. Get a few competitive quotes from other service providers- I'd try another management company, or if you're lucky, you'll find a 1-man management company who is hungry for business. And fire that "turnkey" guy who took  you for a ride when the property was sold to you above retail, and is continuing that ride in the form of (likely) inflated expenses.

@Steve Vaughan, I agree with most of your ideas(and employ some of them, especially the LED bulbs and some different water-saving ideas.) 

But I'd never heard of a hot water recirculation pump, and as a science guy, an environmentalist, and an aggressive cost-cutter on my multifams, I had to check into it. A quick google search yielded great info- it appears that they are not good investments. Take a look at the link below, I think you may remove this item from your checklist.

Hot Water Recirculation pump

@Jerry Johnson, 

I'm in agreement with @Ben Biggs. I started investing in '03, then got my broker's license in '14(I hopped over being an agent due to my experience as an investor.) Today I consider myself an investor first, second, and third, and a broker fourth. 

In getting my broker's license, I thought I'd reduce the average cost of my acquisitions by approximately 2.5% to 3%, by removing the buyer's agent commission(and placing it in my pocket.) However, I soon learned the hard way that this would not work. When realtors saw that I wanted to act as a broker for a property I was buying, it created such venom that those realtors wouldn't even talk to me. I quickly realized that I'd lose deals if I tried to do it that way, so let's just say "FAIL" on that effort.

 On the other hand, getting my license has enabled me to act as broker for deals that I find unsuitable for personal investment, and I've done a bunch of those in my area of expertise(the Capital District of NY State.) So as Ben said- probably better to focus on one or the other, but after you're an ace at either investing or brokering, it certainly could be fun to try the other, as I've done.

Hi @Brandon Singer, 

I have a mixed-use building that isn't too far off from what you're describing- three floors, pizza restaurant/bar on the first, apartments on the top two floors. One of the challenges with the building is the bar on the first floor playing loud music late into the night. It bothers the residents, so the rental rates are lower than you'd expect for the area.

If you do end up closing on this property, you might evaluate the possibility of making the upper floor into commercial space(s.) For businesses that are out by 5 or 6 PM, they may not be bothered by the loud music which generally starts a bit later. If you do go with residential, go heavy on the soundproofing- it probably won't be perfect, but without it, you'll have a very rough time.

@Matt B., so glad you are thinking about Turnkey properties, I hope you read as much as you can before pulling the trigger. And if you're ready to pull the trigger, just keep reading until you change your mind. I just wrote a post on it in another forum, I think you'll find it informative. I don't know how to link a post, so I'll link the whole thread below, hope this helps:

Out of state investing- SCAM! False promise land of cash flow.

My post is at the bottom of the first page, but many posts there are quite informative, enjoy!

@Joe Kim, I'm so glad you wrote this post. As a seasoned investor, I first read about these turnkey(turkey?) companies from BP, and I smelled a scam. I reasoned this way- I've been doing this for 13 years, I currently own and operate a bunch of MF properties, I consider myself and my management damn good at what we do(though that may be my ego talking,) and I still put time into operations. 

So I thought- how do they do it? They've replaced me and my job, which is basically to interface with management, and they've also taken over management, and the owner is in theory at the top of the food chain, so the Turkey Companies have extra layers and still there's room for cash flow to the owner? Hmmm...my NYC Scam Alert was in high gear when I heard this. After all- if this was really "passive" investing, then I wanted a piece! 

So I did my research, and the scam was immediately evident. My research suggests that most Turkey companies buy some junky foreclosure for pennies in a B-(or worse) neighborhood, do a poor quality rehab project(because hey, after all, it only has to look good to the out-of-state buyer, who'll likely never know that the drywall is from China and is spewing fumes, along with the cheap laminate which offgases enough formaldehyde to start your own chemical factory...) and THEN the Turkey co. says, wow- all I have to do is price this over retail and promise easy returns, and some out of state buyer will fall for it. Hey, I can tell the buyer they're paying more than retail because they won't have to do any management! And then when those returns fail to materialize? Hah! I'll just point them toward the fine print, nobody is gonna sue for a shortfall of $4k or $5k per year...would they?

In this whole scenario, the Turkey co. is strongly incentivized to do poor quality work, as the less they spend on the house, the greater the profit when they sell. They are strongly incentivized to charge high management fees and have high tenant turnover, because hey...what recourse does the hapless buyer have, it's just mo' money in the pocket of the Turkey provider, after all(in other words- caveat emptor, mater frotteurs! No, don't even try to disentangle that.) Think about it- the tenant moves out...oh no, the rugs need to be replaced! $2k in labor, $20 in materials at the "Leftover Garbage" shed. That toilet is leaky! $150 in plumbing labor, $5 in materials for a stainless steel line.

And then, just when the buyer realizes that the pain is too much, and he'd probably be better off investing in almost any other way...the buyer finally realizes how much of a mistake it was to pay more than retail, solely for the pleasure of having a dishonest entity mismanage their assets. I mean- how much can the buyer really recover when they paid say- 20% or 30% more than a properly rehabbed house? Anyone who buys from them will likely do their due diligence, and will discover just how much lipstick has been shmeared all over that pig. And that pro forma? Oh my god, stop, I'm about to die laughing. 

I have to admit, I've come to a turning point in my life. The old me would have left it at the above, offering no solutions, but solely pointing out the egregiously flawed model that exists in the hopefully-soon-to-be-dead Turnkey space.  Are there any legit Turnkey providers? I'll never know, as I'd never enter into a business relationship where someone else's success was my downfall. If you're really interested in passive investing, and you want to own real estate directly, the closest one can get is triple net, single tenant properties. Period, end of sentence. If you have tons of experience, even multifamily can approach "passive" investing, but after thirteen years and a ton of experience, I'm not there yet.

MG

Hi @Steve Volk, I've done this before, it can be hit or miss- National Grid sent me a few years of usage on the house meter for a 10-unit, and recently when I took over utilities for a vacancy, the representative volunteered that the average bill was $55/month over the last year. 

So I don't think usage is private information, but the name of the account owner is probably private, and wouldn't be provided.

@Mateusz Prawdzik, I've always wanted to do a conversion like you're suggesting, and in my primary area(Collar City, aka Troy NY,) there are ample old structures with plenty of square footage that can be had on the cheap. But as @Adam Johnson mentioned, asbestos, and lead paint, and zoning restrictions(dealing with the zoning board? Arrgghhh...there should be an emoji for jumping off a cliff) have always kept me in my happy multifamily space. 

If you proceed with this, I'd love to hear about your experience, please post back if you move ahead or let us know what stopped you, thanks,

Michael