All Forum Posts by: Chris Clothier

Welcome to the site @Joe Kaslowski!

Steve,  anytime you can get 30+ responses, you know you have a pretty good forum going.  Once you take out the cut & paste responses from the usual Turnkey responders, you still have some great dialogue here.  Here is my take after being in this niche for the past 15 years.  

1.  Turnkey is just a marketing term and it is bastardized to the point where even the promoters are calling themselves Turnkey companies even though they never buy, renovate or sell anything.  When that starts happening, it is impossible for an investor new to the passive space to make sense of what it really means to buy a property Turnkey.

2.  You ask what are the two parties gaining in the transaction.  Well, the investor gets to take advantage of different markets.  They can earn active income and passive income in real estate at the same time.  When you consider the fact that they can leverage their money as well, then the opportunity to have someone/company manage the heavy lifting of passive investing becomes very appealing to some investors.  

The investment company, if they are attracting their ideal clients and their value proposition fits, then they can build a duplicatable model where they have demand well into the future.  Repeat clients and growth through word of mouth fro satisfied clients are the holy grail for any service business and that is exactly what a good turnkey company is.

So, the company provides an opportunity to leverage passively into outside markets and the investor gives the company a chance to earn repeat and positive referral business.

3.  If a company is trafficking in $25 - $50k houses Turnkey, someone is going to lose a lot of money and that is usually the buyer.  There is plenty of money to be made by investors at this price point, just not passively and certainly not Turnkey.  The economics do not work in an investors favor.  You simply cannot purchase the house, do the proper amount of work, pull all permits, and make an adequate profit when selling houses this cheap.  Something has to be cut.  What gets cut is usually renovations and permits.  That hurts the investor big time!

So understand that the word Turnkey should never be used with $25k and $50k properties.

4.  Why would a company not keep every property if the deals are so good.  I understand the question and the skepticism.  There is no "answer" to the question.  The truth is, there are lots of reasons - some are more valid than others and you can absolutely figure out the strength of a company based on a few questions you can ask.

First, just understand that the bigger companies that have been in business longer, are managing millions of dollars in investments for investors and they are adding yearly.  

Memphis Invest is managing over $625M in assets for investors through our management company and are poised to add close to $100M more in 2018.  We are only a couple of years away from managing over $1 Billion in assets for investors with zero desire to slow down.  We will have personally purchased each of those assets, then renovated and sold the to an investor.  So, we are having a blast and loving every challenge that comes with seeing how big can we actually grow without losing sight of our mission.

If that gives you any indication, there is no way we would be interested in owning and borrowing against each of those assets.  Yes, we could keeps millions, but at the size we are today, we are certainly not hurting to make a profit, so this is purely a business decision.  We have demand for what we do and we are going to fill that demand.  

That is the same thing you will hear from many of the higher quality companies.  Hell, you may even hear that from the low-quality companies, which is why these next questions are so important.

As for how you can judge the strength and financial stability of a company.  Simply ask for them to negotiate their prices down.

If a company is listing a property for $100,000 and you offer $90,000 as an investor, if they accept your offer, then they are most likely under-funded.  A quality company sets their price based on the service they provide and they know the value they bring.  There are plenty of companies out there willing to race to the bottom and will negotiate down on anything to get a sale.  They are the ones that are in the business to sell everything and you should absolute wonder how good the renovations are, how good the management is and if you are getting a quality investment or not.

A list of better questions to ask as a passive investor are:

- Are you profitable as a company? 

- How many properties do you (owners) currently own and manage?

- What is the value you bring to me as an in investor?

- How are you able to reduce maintenance costs, capital expenditures and move-out costs?

- Will you negotiate your pricing with me?

Look for strong, positive and detailed answers. As I said, a good, high-quality company will be firm in their mission statement and will know exactly what value they bring and why they are in business. You will find a bunch of people just using the word Turnkey and even companies that are not all that committed to an investors success. They are showing up each day to make a buck without thinking about long-term growth and quality. Many, many companies disappeared when FNMA made the borrowing environment difficult for investors. More disappeared when the Hedge Funds moved into the SFR business. Now, more are disappearing as prices for housing, materials and labor continue to move up, and at a faster pace in some locations.

What you have today is an environment where it is much easier to separate the quality companies from the low quality companies, in my opinion.  Both are going to be selling what they can get.  The high quality companies sell because they have high demand for the quality they deliver.  The low quality companies are going to sell because, for now, it is how they make money.

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By the way, I got started as a real estate investor in Denver.  I used to flip houses there and owned a couple of rentals in the early 2000's when I lived in Highlands Ranch.

Best of luck to you and keep posting great questions here on BP.  It is a fantastic way to learn about topics and make great connections. 

@Gordon Starr - 

What you quoted from Brian's post is exactly the advice I give every investor when doing due diligence on a company.  It is easy for a company to give referrals that give cupcakes and rainbows stories.  If you really want to know how a company handles the real issues of unmet expectations, an investor should always ask to speak with an investor who hasn't had a perfect experience.  Investors have to know how a company handles negatives.

If a business owner feels those questions are working him over, how are they going to react to an owner who is upset about a real issue?  It's a great indication of their demeanor and whether or not an investor wants to be in a long-term business relationship.  

@Catherine Coy & @Elena Merchand -

Just wanted to put my response back onto the forum.  Kent is my older brother and some of the systems he has developed come from automating the manual processes that Memphis Invest was using.  That has since grown into REWW where those systems are included along with other trainings.

I do not own any part of REWW, but Memphis Invest still uses the same systems for our direct mail and for training our buying team members.  

Memphis Invest purchased 82 properties in five cities in February, so we are actually on pace to buy closer to 1,000 properties this year.  We use the Find Vacant Homes software to create our lists and use the system and mail company to create our letters and postcards.  We direct mail on a very consistent basis and today direct mail makes up a good percentage of our buying.  

What is interesting, we purchase a lot of homes from wholesalers in each city.  Several of the top wholesalers who sell us properties use the same software to build their lists.  We are literally buying properties from individuals who use Kent's systems to produce their list and marketing materials.

As has been noted on here several times, you cannot be successful by buying the system alone.  You need to have the ability and the wherewithal to take action by sending mail pieces and answering the calls.  Not every property address is correct and not every property is vacant at the time of mailing.  It is a data aggregating system and data changes.  

But it is a good data source and it does work.  You do not need to buy a system like this or even buy a list from a company like list source.  You can manually do all of this.  The point of spending your money on something like this is to significantly shorten the amount of time it takes you to build your list and mail to it.  It is not a magic pill nor an easy button.

We are proof that simply mailing, answering the phones and setting appointments to look at homes will lead to a system like this paying for itself quickly.  If you are not ready to take those actions, then there is no reason to buy Kent's systems.  He would tell you the same thing.  Without spending your money to direct mail and then putting your time toward answering the phones and setting up house visits, it will be hard to justify buying this system.

Hope that helps a bit.  You don't have to be a big company like Memphis Invest for this to work, you just have to be consistent.  Best of luck ~

Brian, I could not agree more with this statement.  A potential customer in any business will always make a buying decision based on two things - do they like you and do they trust you.  Whether it's a decision about a car, law services, housing or mowing their lawn.  People do business with who they like and trust - period!  That is why the long-term aspect of the Turnkey business is so crucial.  Likability is established quickly.  Initially, trust is built block by block over time.  Trust can be solidified quickly through earned performance.  Here is where most stumble.  Trust is lost in an instant when you fail to live up the expectations you helped establish.  Once trust is lost, you are no longer liked either.  So trust and relationship are the foundations of any successful business!  

You have a great forum post here Brian, kudos to you.  I wanted to post quick opposing thoughts to two things @Jay Hinrichs wrote (this is one of the reasons I think Jay and I respect each other so much and get along - we can agree and disagree or post opposing views and it leads to really good discussion).  

1.  Any good turnkey company will spend as much time as you need with them on the phone.  A FAQ is good, but it is a basic.  Any good company should have one available, either by pdf, email format or even video.  They are basic.  

But any company that says they only have so much time to devote to client relationships and developing rapport with a potential investor, is too small to bother working with.  If they don't have time before you buy, they will have even less time after you're closed.  

There is always that tipping point where a person is asking the same question over and over again or exhibiting signs that they are not really ready to move forward with a passive investment - especially far from home.  A good company will recognize this and encourage the investor to do some more preparation and then return to the conversation later.  But, a good, qualified investor asking important questions to learn about your business, the structure, the process and expectations, should be given as much time as they need.  It will never be more than a good operator can give.

2.  As far as why turnkey providers are so successful, I am working on an article now for the BP blog.  They are successful because they have learned what business they are truly in.  In my opinion, they are in the business of selling qualified buyers to Turnkey companies.  

They are not selling houses.  They are not selling advice.  They are qualifying buyers.  Then that qualified buyer is introduced to a Turnkey company who in turn pays the provider $5,000, $6,000 or up to $10,000 per house sold.  Sometimes it's a percentage such as 6% in a normal real estate transaction.

So, what business are they actually in?  What is their actual product?  They are in the business of selling qualified buyers.  The investor is the commodity and the Turnkey company is the buyer.  The provider is simply aggregating them in one spot and funneling them to the highest payer.  

That doesn't mean they are not qualified companies, but after having been in the industry now for 15 years and been approached by every provider big and small, I can state without a doubt that companies that have no business being in the Turnkey space are being promoted and propped up for fees by Turnkey provider companies.

I received an email this AM from an investor in Northern Cal who just attended a meeting with a provider where multiple Turnkey companies from all over the country made their pitches and then went straight into contract meetings.  He is now doing his own due diligence into other companies because he found it offensive that their was such a disparity in the professionalism and level of the companies.  The provider lost his trust.

That may be controversial to some people, but without a doubt, that is the business model and the successful companies are experts at their model.  I say all of that Brian because, to your point, the buyer has to be the one doing the due diligence. They are solely responsible for determining if a company is quality and a good fit for them.  You cannot outsource due diligence.  You should not abdicate your responsibility to some provider to tell you who is good and who is bad.  Take their advice if you feel you need it, but understand you are the commodity and as such, you have to hold yourself responsible for doing your own due diligence.

HI @Jennifer Krupp!  I would have responded earlier, but was out of pocket for a few days.  

First, if you are able to invest in your own market and make a respectable return AND have the possibility to own appreciating assets, my advice would always be to follow that path.  There is no need to invest halfway across the country just because the story being told sounds better than investing close to home.

Passively investing is just that.  It is boring and you will have little control.  The story is not exciting.  For many investors, that is exactly what they want.  A boring, passive investment that simply delivers consistently.  Without knowing all of the details, my initial suggestion would be to invest there close to home and here is why.

You ask two things.  One - you want recommendations about reputable Turnkey companies.  Two - you are looking for more cash flow.

Reputations are earned over time and have to be constantly fought for.  Too often, recommendations are made after relatively short periods of time.  Short being less than owning for 3 years and often less than 5.  It is precisely after this time when an investment really starts to show you how it is going to perform and a Turnkey company has to earn its' reputation.  Almost any investment can look good or a couple of years, but what happens later is what matters most.  

Unfortunately, investors purchase based on the glitz of an investment and are often attracted to good sales pitches, high returns, guarantees and the sales pitch, the returns and the guarantee are all too often gone when they are needed most.  Unexpected cash calls, short occupancy periods, higher and higher turnover costs are very common when investing out of state - especially when the buyer is looking for higher cash flow.

Cash flow is a calculation. It comes from a group of numbers. How much are you putting down? What is your interest rate? What is the monthly rent? What is the yearly cost of insurance? Is there an HOA? Before you get into anything else, these number effect your cash flow most. Simply moving these numbers around a bit can seriously effect what your cash flow looks like. Then the hidden numbers that crush an investment after year 3 are the deferred maintenance costs and the repercussions of that deferment.

A common practice is to defer maintenance on a property to hold down entry costs for the buyer.  The property is priced below market, but has hidden costs that will have to be paid.  By deferring maintenance, an investor gets a property that has not been maintained and therefore residents leave quickly.  This leads to frequent move-outs and escalating costs of ownership.  5% for maintenance and 5% for vacancy do not even come close to covering these costs.

When companies are competing to see who can race to the bottom first (lowering prices and selling property cheaper and cheaper) they have to cut somewhere in order to make a profit.  The first thing to be cut will be renovations.  

I recently commented on another forum that everything is more expensive today.  The cost of housing is up.  The cost of labor is up.  The cost of goods from lumber, to paint, to nails, to singles...all are up.  If the steel tariffs actually go into effect, expect the costs of aluminum windows, siding, appliances, water heaters, AC units...everything in a house to go up further.  On the other side of the ledger, what are showing strains and an inability to keep escalating at the same pace, are rents.

So, in order to find more cash flow, something has to give.  You can take more risks by buying cheaper properties or in some cases, put an emphasis on buying close to home.  Something has to give though if you want a higher return.  A safe, consistent return does exist, but it is simply not as strong as it was 3-5 years ago.

I hate that this post is so long, but lastly, be aware what you are buying right now.  The property you are paying $80,000 for today in the midwest, was a $50,000 property a few years ago and sometimes located in areas you wouldn't have wanted to buy.  Remember, everything costs more today.  There are fewer properties available so many properties on the market are carrying higher risks for less reward.

If you decide to invest out of state, make sure you spend a lot of time discussing renovations, management philosophy and housing location.  You can still do very well in the housing market today and far from home passively.  If you choose to buy Turnkey, there a few quality companies that are trying to do business the right way, but there are few with long histories to build reputations.  You are going to have to really dig in and pay attention to the answers you get.  

Add to all of that the confusion of BP'ers writing recommendations for companies they work for or commentators who are actually getting paid referrals and it can be confusing.

Feel free to message me - I would be happy to share with you companies we have masterminded with for best practices in this space and whom you may want to check out.

I would however recommend buying in NV based on what you've shared, but if you go out of state, just be patient.  There is no need to rush right now.  Depending on exactly how much risk you are willing to take and what you are willing to be happy with as a return expectation, you can find what you are looking for.   Just be patient.  Best of luck ~

 Mariusz,

Lower priced properties, it depends on the area for how that is defined, but $30,000 to $70,000 properties are not good turnkey investments.  The economics simply do not work for a company to make a profit and do a proper renovation for you as a long-term buy & hold investor.  Local investors and active investors building in deficiencies elsewhere can make these work, but in cases of a true Turnkey property, I think these are bad investments.

As for buying a property before renovation or even during renovation is a very bad decision.  Do not do that.  Putting a property under contract is one thing, but actually closing and buying a property without it being renovated and calling it Turnkey really sets you up for a bad experience.  IMO, that is not what a true Turnkey experience should be.

Best of luck to you as you move forward.

 Good points - fair enough!  I don't subscribe to that theory but don't manage in northern markets either.

@Account Closed up in Ohio.  I think they do a stand-up job and offer good, detailed practical advice. You don't find him just cut and pasting comments across the forums - he really tries to give good advice.  But,... :)

Saying that the holidays are going to be slow and you should expect a longer vacancy and saying that rental rates are expected to be lower during the holidays is stinking thinking.  Our words have power.  The old way of managing property has to go out the door when you are trying to reach a level of excellence (and all of us as service providers should be trying to reach perfection).  If we as business owners and service providers set the expectations low, then our companies will hit those expectations.  If we voice that it is ok and acceptable to have slow months and to miss our investors expectations that WE SET FOR THEM...then what is the point of trying to be a great company.  We all might as well be average.

The mindset of every management company should be that the old rules are out the window.  Why should an investor expect a longer vacancy at the holidays?  Why should an investor expect to receive a lower rent on a property that rents at the holiday?  They shouldn't!  That should be unacceptable.

This isn't about me so there's no need to post number or stats or any of that BS, but we are an example of simply changing what is acceptable as business owners and therefore changing the expectations of investors.  There are no slow periods anymore.  

You cannot miss a rental rate by $175 without making up the difference.  You cannot have a $900 water heater bill and simply explain it away as we had to get it taken care of immediately without using the warranty.  That may be the case, but somebody owes Ryan that money.  That bill should not be on him.  

Ryan, simply saying that Turnkey costs you more in the end is not true.  That is not always the case, but it will be the case if you don't take a few steps to correct it. I hate that you are having this experience.  You need to get the management situation cleared up quickly and I would hound the (insert word!) out of the company I bought this from for a return of my losses.  

They set your expectations and failed miserably to hit them.  I also think you have to let the general public know who you dealt with.  It will hold them accountable and give them an opportunity to make it right.  Even if it takes them dealing with a little bad press, if they do the right thing, you are made whole and can move forward in a different direction.

I will be the first to tell you, that based on what your specific desires and needs are, buying Turnkey right now may not be the best alternative.  I don't know without the specifics, but there are other ways to earn passive income.    I want you to get really good advice even if that advice is that this option is not the best option.  

You have not mentioned this word, so by no means am I saying you would do this, but it is very important that investors never "settle" for an investment.  That is what I mean by defining value.  If you have money that you would like to put to work and you want to do it passively, I am a big proponent of acquiring assets that produce income and have the opportunity to increase in value.  At the same time, I want assets that have some demand behind them as well.  Right now, those three things mean a higher price.  That is not the case everywhere and that does not mean you cannot find good companies providing good values at lower price points.  

It just means you have to be patient and honest with yourself about exactly what you are getting for the price you are paying and the likelihood of your getting it consistently.  Hopefully that made sense.