All Forum Posts by: Chris Clothier

 Like I said earlier, I think it is more a case of not knowing their data or not being in business long enough to be able to make proper assumptions so they are overly optimistic.  It does not mean they are trying to use sleight of hand although I would be the naive one to say that no companies intentionally use bad data.

So again, on the 33% number, that says that 1 in 3 will experience a vacancy.  For us, our average length of stay is right at 4 years and I only turned 18% of a portfolio in one year. Average loss, including a lease up fee is 2 months rent every 4 years.  So I can tell all of my clients, based on real statistical data on our portfolio, that they can account 4% vacancy yearly and I would be accurate.  

As for maintenance, I can show where last year, 3.84% of every rent dollar collected went to maintenance across our entire portfolio including a maintenance fee that our management company charges on most, but not all, jobs.  So again, I have the data to show exactly how much should be calculated.

The reality is that most companies do not have the team, the systems or really the business savvy to track these things and then know how to improve them.  They certainly cannot market an actual number to use.  Neither can we really since these are just averages, but they are excellent data points to back up the numbers we may use.  We are lucky that Kent Clothier, Sr. is a smart man who just celebrated his 50th year in the workforce and his 33rd as an entrepreneur.  That was just a quick little tribute to my father who has always ground the details and the data into our routines.  

I don't know what to say about rents.  I hear this often on here, but it is usually a line repeated by posters that are extremely sour on turnkey with little actual evidence.  I am sure it happens, maybe even intentionally, but how shortsighted is that of a company?  I just cannot imagine a company does this on purpose and I cannot imagine they could do it for long.  

At some point the things Turnkey say and the way they market has to match up with performance.  If you cannot perform, then how can you expect to stay in business or build your business.

I think as an investor, the best thing you can do is use numbers you are comfortable with and if your calculations look a little thin, tell that to the TK company.  Challenge them on their numbers.  We get challenged all the time.  Sometimes an investor understands and likes what they hear and other times they say they are going to go in a different direction.  I think that is great and have no problem with it.  Everyone wins when investors challenge themselves and anyone they do business with to justify a purchase.  

That is my advice.  Forget about if you think the numbers are right or wrong.  Challenge them if you think they are wrong and if you don't like the answers, move on and do not buy.   

 I like this line and we send out a letter from our family at the end of the year to our clients.  I think I will borrow this from you in the next year, because it just makes good business sense to prepare your clients for exactly what they can expect in the next year based on statistical data that we have been collecting and analyzing for years. I've shared this data before, but I like the way you put it. 

 No - 67% DID NOT experience a vacancy in the 12 month period.  That is 67% of investors and 82% of the actual properties DID NOT experience a vacancy.  Just to be clear...

@Charles Worth

 and @K. Marie P. Just to clarify the statement you guys are asking about:

Lastly, only 18% of our portfolio turned over last year and 67% of our investors did not experience a vacancy.

So, I calculate this number kind of crudely, but I look at the number of properties under management when the year begins and how many actual vacancies occur during a 12 month period.  That was 18% - so in theory, the average length of stay would be 5 years since it should take 5 years for an entire portfolio to turn over at 18% per year.  For us, that is roughly 400 properties that went vacant during a 12 month period of just over 2,000.  That is a good thing. 

Of those 400 properties that went vacant during the year, they were owned by roughly 330 investors.  Again, these are rounded numbers since I am not sitting at my office with the exact numbers on Saturday night (-: , but they are very close to actual numbers.

So 330 investors, out of close to 1,000 to start the year experienced a move-out.  If you follow the numbers, that means that some experienced more than one move out during the 12 month period.  On the flip side, over 600 investors and over 1600 properties did not experience a vacancy during that same time period.

So we use that data to determine the likelihood that a one-property owner will experience a vacancy and then we prepare to respond to over-perform when that happens.  Most of our vacancies last year, by a wide margin were owned by investors with more than one property.  So back to my earlier point, they are not freaking out with a vacancy because they have additional rental income.  For a PM company, they are an ideal client because they have spread their risk over multiple properties.

Two more stats I think you guys will find interesting.  We only offer a two year lease or longer and our recorded average length of stay is 4 years.  We will see if that holds true through this year.  Of every lease signed, 77% complete the full term.  Of those 77%, just under 75% sign a new extended lease.  So we can track and use this data to work with investors to build their portfolio in that first 18-24 months, get past one property before they experience a vacancy so when they do, they are not shocked by the experience.

Bottom line, I think we are pretty damn good at what we do, but the numbers show you that we can always do better.  And Charles Worth, you just gave me a string of data that I want to check on.  I am going to pull a report of every property, by client, who has never experienced a vacancy and see the length of ownership for each of them.  That will be a telling piece of data.

 Reed, you asked a great question and one extremely relevant especially here on BP.  There are very subtle nuances that are violated by some of the companies who have entered the niche recently and some that are marketing here on BP.  They could - and I have to say could because I am not an expert but did correspond with the SEC on this - they could be violating SEC and FCC laws by:

- using the words guarantee. even simply guaranteeing happiness and satisfaction.
- limiting clients or excluding some investors, thus creating a "group" who benefit from being a part of the group.
- charging money for investors to join your group or get in line for properties.
- tying the performance to your property management company
- using one contract for all services (textbook definition of security)

These are just a few of the ways it can be a violation and all are examples of things that are actively done.  As long as a person or company sells a property and offers PM as an added benefit they should be ok.  As long as the property will perform whether or not an investor uses their service, they should be ok.  A TK company should never limit or close their company to a certain number of individuals, charge money to wait in line to get a property or charge money just to see properties and they should always separate their services into separate companies with separate contracts.  Most importantly, they should make sure that any property sold will perform exactly as advertised whether or not an investor chooses their PM company.  If they follow those rules, they should be able to avoid any compliance issues with the SEC or FCC.    

 Ive been in business way to long to bs myself or anyone else.  The PM business is neither fun nor especially rewarding, but done properly it can be profitable and I think we do it right.  Let me just share a couple of other numbers - again turnkey or not - PM is extremely important but it still boils down to statistics and data like most businesses.  Here is the data we use to manage those one house investors.

First, once they reach beyond 24 months they most likely are not going to buy another property - at least not through our company.  That is absolute failure on our part.  Usually it means we failed to make sure they wanted to build a portfolio from the beginning.    Secondly, we know that 60%+ of our monthly sales for over three years running go to an existing investor building their portfolio.  The average investor takes just under 18 months to purchase their second property with our company.  So we can reliably predict when each investor will purchase another property and almost guarantee the existence and growth of our company provided we can continue to find good investments.  Lastly, only 18% of our portfolio turned over last year and 67% of our investors did not experience a vacancy.  So....

If we mange the data and the experience, there will be some investors with one property who experience a vacancy and we have to manage their experience and work hard to insure their trust was not misplaced.  We do not always accomplish that.  But that should be kept to a minimum and if we provide good service to them, then most will purchase that next property.  We have the luxury that most strictly PM companies do not have.  We are adding properties every month and can pick and chose our clients.  We can try to limit our clients to just those investors who aspire to build portfolios and show the werewithal and knowledge to do it.  Again, we are not always successful.

K. Marie, I chuckled at your earlier comment about "lots" of investors because lots is such a relative word.  I know some investors with 30+ properties and some are turnkey investors including a few in my family.  But, i don't think turnkey is an anomoly in statistics.  I would bet that the percentage of turnkey investors with 30+ properties closely mirrors investors with 30+ properties who did not buy turnkey.  I would also bet that California and New York have more 30+ property investors just like they have more turnkey investors when compared to other states.  I am fascinated by things that many may think are unique but are really explained by data and statistics.

The rest of what you said I agree with wholeheartedly.  The poor reputation was earned by many turnkey providers for the whole niche and whether the reputation was good or not, caution should always be used.

Kyle, you asked a few questions and this forum has taken on a life of its own, but since my name has been brought up a couple of times and I couldn't find where anyone had really answered a couple of questions, I thought I would chime in.

First off, there is nothing special about turnkey. It is a marketing term created to describe the simple process of buying a single-family home (now it is even being used for multis and commercial) that has been or will be renovated, tenanted and managed. Nothing more and nothing less. It seems to have taken on a life of its own as some savior for some investors when in fact it has existed for a very long time, just as an extremely niche product and mostly for more savvy and in-the-know investors. Not really sure how to put that last sentence any other way - new investors simply were not aware until the last 6-8 years that something like this existed unless they were introduced in a REIA or something.

So after saying all of that and understanding that it is nothing more than a "way" to buy a single-family investment house,in my opinion, there is no reason to expect that very many investors are going to own more than one or maybe two turnkey properties.  Josh Dorkin and I undertook an investor study three years ago and then I ran the study again the next year and it pretty much showed that the average number of properties an investor owns was close to two.  I suspect a vast majority own only one and a small but significant number own way more and that brings up the averages.

@Matt Rosas I will update my numbers tomorrow once I pull them from our property management company, but they will show that the average investor with our company owns three properties.  However, that is skewed because a majority of those investors only own one property.  Roughly 15% of our investors own 5 or more while close to 40% own only one.  Again, I could be off a little, but we are now at roughly 3,050 properties under management and I will update tomorrow AM the breakdown of investor owned properties for our company across all three cities.

As for property managers, turnkey or not, an investor with one property is an unsettling prospect.  They are either going to be happy or sad all the time - no inbetween.  Their property is either occupied or it is vacant.  Happy or sad, which stinks for the investor and it stinks for the PM company.  You are either the hero or the goat.  I can't speak for other companies, but we work hard to help investors get to that second or third property.  It makes a big difference in their ability to actually hit a consistent return number.  It helps tremendously to have a bucket for your buy & holds and not simply one rent income.

As for Turnkey numbers, I can tell you that @K. marie poe is right (at least I think she is the one who pointed out) that many TK companies are young companies.  They have popped up - many in the last couple of years and in some cases with little real life business experience.  They are may be off with numbers, they may put too much emphasis on their own ability and they may view this as nothing more than a business transaction. Meaning that the numbers are what they are and it is up to the investor to do their due diligence.  I have heard more than once that the investor is responsible for their buying decision and if they miss something then shame on them.

Obviously, that is a ridiculously poor way to do business and there are many, many good companies around the country who do not operate that way.  That being said, anyone can make mistakes with numbers or be too optimistic with their numbers.  Doesn't mean they do it on purpose or with malice - sometimes they do not know better - they haven't experienced enough to know yet.  

For your statement about investors using turnkey as a spring board.  I would say you are right and that may happen in a few instances, but that has not been my experience.  The last time we surveyed our clients, roughly 10% were also active investors while closer to 30% had other passive investments in real estate such as notes or lending.  I just don't think there are a lot of investors who buy turnkey thinking it will lead them to active investing.  Maybe the other way around a little but not turnkey first in my experience.

Last reminder on turnkey companies, people make mistakes. I would be the first to tell you that my company is not perfect. HOWEVER....so do real estate agents, contractors and rental agents and property management companies. If a buyer feels they are working with a company deliberately trying to take advantage of buyers - they should walk. If not, then remember that people and companies make mistakes - the real gauge should be if they correct those mistakes.

I wouldn't expect to hear too much from Turnkey investors.  They are no different from other buy & hold investors.  I believe most have one maybe two and a minority own a lot more, but they are still passive investors.  This site is fantastic but it is filled with active investors and users in some form of real estate business.  

I liken it to stock forums.  I am a passive investor in the market with a good portfolio and yet, while I read on those forums, I do not post.  Half the time I have no idea what they are talking about and the rest of the time I couldn't care less to get involved.  They often make fun of investors who do what I do by turning over my money to someone smarter than I am about the market and whose job it is to make me money.  I can imagine that is the case here at Biggerpockets.  There was a time when a Turnkey investor would speak up about their experience - good or bad - and most likely get badgered by other users for not their stupidity for not being a "real" real estate investor.  That does not happen anymore, but instead has been replaced by people like me posting on behalf of turnkey investors.  

Maybe, as time goes by, more and more actual turnkey investors will post more about their experiences.  When, damn that was long.  If you made it down to this point you are a committed reader!!  Best of luck to you....

 John, I look forward to your answer.  I too look to exceed 20-25% with my lending bucket each year.

 Unfortunately, an $80k house would cost a good bit more than $16,000 down.  That would get him his 20% down, but assuming that he using a loan backed by a GSE, there will be a penalty for the right to put 20% down.  That will run between 2 and 4 points.  Then there is closing cost which may be as high as 5 points on a low dollar loan.  Then there is the fact that it is a low dollar loan and could possibly be an additional point or two.  All said, Trevor would have an additional chunk out of pocket that I would estimate at $5,000.  So total out of pocket to purchase an $80k property would be closer to 25-28%.

As @Anish Tolia pointed out, there will be instances of a cash call.  And it may not happen, but that is an enormous risk when you are relying on this investment to be the beginning of you climb up.  I have worked with so many investors and counseled them time and time again to treat their money like the very precious asset that it is.  Use it to build, but do not risk it all until you know exactly how you are going to get it back.  

If Trevor - or any other investors or business person for that matter - learns their craft and learns how to earn 15% or 20% on their money as a lender or partner and learns how to make a 50% return on his money by fixing and retailing a property and learns how to take a portion of his dollars and turn that into a passive income stream of 8%, 10%, 12% before he levers it - then that investor will know how to make their money back should they lose it all on the wrong gamble.

Until then, until someone has no fear of building that nest egg again, I would keep building it and hold off on acquiring assets.

So what kind of reserves would an investor need?  I would have 12 months of payments, plus two full rents to cover major expenses on hand and untouchable before I would make my first investment.  If at any point you feel that you will be looking for the rent check and sweating its arrival in order to pay bills, then you are definitely not ready to invest.  You have to be certain that you will be ok during the lean times.  Again, that is just my opinion.

 You need a business plan for lack of a better way to put it.  You have to plan exactly how you are going to provide a little extra for your family and build your finances at the same time.  That plan could include wholesaling.  It could be collecting finders fees or providing capital with a partner to fix and retail a property.

I think the idea of you providing your graphic design services is a good one as long as you are not providing the capital to market only to find that your partner cannot close a deal and you never get a return.  You simply have to be careful with your resources because they are not large enough at this time for you to take on too much risk.

Whatever you do right now, my advice was to use your capital to earn a return and definitely put some of that money towards your goals of providing ease at home for you and your wife.  You must celebrate ALL wins no matter how small they are!  Those celebrations (think a special dinner or a night on the town) are what keep you motivated to strive for more.  The rest you put back towards your reserves so they build.  When the time is right (you will know this based on your plan) you are able to move into owning assets and earning the returns on those assets by leveraging the money you were using to earn your returns.  That is a slow and measured way to build your net worth and eventually wealth.

But it takes you holding very precious the resources that you have and it takes a plan.  A specific set of steps that you are going to take so that you do not risk everything for one shot.