All Forum Posts by: Chris Clothier

@Adam Widdicombe, we had client in this scenario right here on BP a couple of years ago.  It happens so I would approach it like this.  In such a short period of time, the TK company you worked with should be willing to work with you and help you move your property.  Whether it is back into their portfolio or to another investor.  I would suggest like @Ali Boone that you go to them first and see how they can help you.  Hopefully, it is performing as you expected and therefore should have the same value for another investor that it had for you.  

Best - 

@J. Martin - Looks like you knocked it out of the park!!!!

Great job.  I will definitely coordinate with you for next Fall.  I hated missing this event!

Quick question ~ Did you have any sessions on scaling a business?  Did you have a session on marketing?  On Wholesaling? On lead generation?

I would love to hear who you brought in for these topics and see how they went.

Lastly, are you going to list or create a page to raise any funding for the orphanage in Vietnam from the BP group not at the event?  Would love to support you.

All the best to you and plan on seeing you next year!

Best,

Chris 

So, I appreciate the shout-out to come on the forum, but I generally try and not come into a topic asking questions about our company unless it goes off the rails or, in a case like this, I have reached out and spoken to the client first.  I talked to Ms. Hung a short while ago.

First, this is about double the cost of a move-out YTD in Memphis.  The average move-out is roughly $1,900 with average deposit of $1,100 and with that level of cost, a majority of the time the full deposit is surrendered to cover costs.  It was in this case.

The move-out costs were $3,900, which is high for several reasons.  The biggest being the carpet and the fact that the previous residents were particularly rough on the property.

As for the $1,200 interior costs, that did include painting the interior of the house as well.  There were a few walls that needed cleaning only, but the walls were rough and for some reason, the residents removed the carpet from the home.  The clean-up, painting and flooring really drove up the cost on this property.

As for Mrs. Hungs' costs, the first thing we did was recognize that this was her first move-out experience and the resident broke their lease.  8 out of 10 leases go full-term and 77% renew with a lease-extension and most are for an additional 2-years.  So, Mrs. Hung is dealing with a shorter than average occupancy and a higher than normal move-out cost.

We waived the mark-up on the maintenance bill as one way to reduce her costs.  We are also taking the opportunity to price out flooring for her to come back with a faux wood tile that we are using today in our renovations.  Hers was one of the last properties we renovated with carpet rather than tile.  When we get that pricing, we told Ms. Hung that we will work with her to upgrade the flooring to hold down these costs in the future.

Lastly, I let her know that we would not charge her a lease-up fee on the next lease.  There is no policy that states we need to do any of this.  It is however, within our ability to help our clients where we can to make sure they have a good experience.  Not charging a lease-up fee allows her to recoup a month of income.

If the averages play out on this property the way they should, she should have a longer period of occupancy with the next lease and when they do move out, she should experience a lower move-out cost.

There are a lot of questions about property management in the thread.  I will echo that is neither a fun business nor a particularly profitable one given the amount of team, time and effort it takes. However, it is an absolute necessity if you are working with passive investors.  

We are as close to an owner as it gets in these scenarios.  We purchased the property; renovated the property and are responsible for the performance of that property while it is in our management.  To that end, it is easy to make decisions that are in the best interest of the owner.  The more you do, the more that owner wants to build their passive portfolio or tell others about their experiences.  

I want to take a quick moment to point out two statistics that are not well known, but are definitely germane to the conversation.

First, PPMG (the management companies for Memphis Invest) have had 678 move-outs year-to-date. That is 15% of our global portfolio in 9 months (we are currently managing 4,512 properties). We are on pace to have right at 20% of our portfolio experience a vacancy this year. That is astronomically low for the SFR management industry.

We have extended, through lease renewal, 1,025 expiring leases this year and many at no charge to the owner.  Where there is a charge, it can be between $100 and $250.  If we had allowed those properties to go vacant rather than extend the lease, we would have had the opportunity to re-lease them for the owner and charge the owner a full-months' lease up fee.  We charge the first months' rent and us that to pay commissions to the rental agent.  Our average lease amount is just under $1,200.  

If you do the math, that is over $1.2 million in revenue given up by PPMG.  That is what we like to call alignment.  We may give up that revenue, which flows directly to the owner of the property, but we also are able to manage more efficiently.  We have a lower payroll by not having as many turnovers.  We are able to laser focus on issues and efficiencies by not wasting time with vacancies and maintenance.  We have lower rent loss for the owner through vacancy and maintenance.  It is a very symbiotic cycle where each decision makes the next one easier and more cost effective.  

For anyone wanting to start a management company, scale is the key.  Smaller companies simply cannot operate this way.  They need the revenue to survive.  

@Jerry Puckett - read above!

@Micah Mcarthur, 

Unfortunately, today the word Turnkey is used like it is a noun with real meaning behind it.  

You have to wrap your mind around the fact that there is no definition of turnkey.  It is widely used today by everyone on both sides of the argument as if there is one standard definition that explains what a turnkey investment is or how turnkey companies operate.  Most of the comments I read on both sides I would judge as inaccurate at best and an outright lie at worst.

Substitute the word passive for turnkey and you should start to get a better grip on what does it mean.  It means you are not doing the work for the investment.  You are not doing the property search, the property due diligence, the buying, hiring, firing, renovation decision making, budget analysis, budget adjustments, rental analysis, property marketing, resident evaluation, resident approval or property management.  Nor are you having to repeat any of those steps in the future.

The decision making for each of those steps is left up to someone else.  Your job is to figure out if that someone else is a reputable and trustworthy person and/or company.  That is the hard part in this equation.

As to why someone would sell a property for $20,000 under value.  You have to ask yourself what the real value is?  What is the real value of the property, of the service and company and do they even value what they provide to you.  I agree with a point that @David Song made earlier although I think some of his statements are bit too heavy.  (You cannot paint all turnkey companies in the same colors.  Neither good nor bad.)  But he made a point that basic economic theory suggests that no one would leave that kind of money on the table without reason.  Truth is, no high quality company would leave that kind of money on the table.  If they were providing a truly valuable service then they would value that service and maximize their income as a company.  If they do not provide a valuable service, then they need another compelling reason for a buyer to buy.  Hence, the discount.

That is why you will find many companies that use the word "turnkey" as a marketing tool, are not offering any real value.  I define value as far as turnkey is concerned as limiting risk.  That is why a lot of investors are going to lose money in the next few years buying turnkey.  They are buying the word "turnkey" and not the value that it is supposed to provide.  

If you buy the value, then you are paying at or near a retail value.  You are buying a property that has been substantially upgraded to at or near retail levels and you are buying a property with no underlying deferred maintenance.  You should expect a company that utilizes technology and people to provide a stable investment with reliable and predictable returns and great communication.  This is not cheap.  This is not going to be found in economically challenged areas of cities.  This is not going to be found in companies with stay small keep it all mentalities and you are sure not going to find it in companies that want you to pay for the property, then pay for the renovation.  

There is price compression across the boards right now with prices going up for everything from acquisition (the price a company pays) to materials and labor.  If a company wants to make a profit - and why in the world would an investor want to engage in a long-term relationship with a company that does not know how to make a profit - then that is going to push the pricing even higher.

I think an investor who wants to invest passively - using a turnkey company or not - should expect an all in cost of near retail value and a straight COC return of 5.5% to 7.0%. Every bit of discount and every bit of return higher comes with some increased form of risk. Riskier neighborhood. Riskier renovation. Riskier property management. Or all of the above.

IMO, an investor looking to buy turnkey investments today should be looking for a safe place to put capital and utilize a bit of leveraging.  You should be as confident as you can be that you can get a return of your capital first and a return on your capital second.  That may mean you have to pay more and get a smaller return, but you will sleep better at night.

Lastly, not all turnkey companies or offerings are created equally.  To say only out of state investors buy turnkey is not true.  To paint all turnkey investors as lazy is not true.  To say all turnkey investors are newbies or that the turnkey model is to attract newbie investors is not true.  Are those statements true in some cases, absolutely.  We have all seen it happen and it has been happening for as long as I have been around.  It is not something new.  Just don't get hung up on there being one definition for the word or for what it means and certainly don't believe that every company operates from the same playbook meant to take advantage of others.  That is simply not true.

Investigate with patience.  Spend time on the phone with companies you trust and understand what value they bring to the table for the return you get on your investment.  You will find out if the trade-off you in time, money and risk are worth the return you expect to get.   And if they are not, then look for other ways to passively invest.  There are literally hundreds.  Just be patient whatever you do.  

 Chris, that was actually pretty funny!

 You can always ask whatever questions you think are most relevant and in whatever order you want.  For me, I try and work backwards and I suggest investors do the same.  If you know what type of return you are looking for from a turnkey investment, then you craft your questions to see if you are going to be happy with them before you even get to a return question.

To put it differently, if you go in asking what a companies' returns are and they give you a ridiculously good sounding number like many are going to do, you are automatically interested.  Whereas, if they give you a number that is more in line with reality and what a passive investor should expect for such little risk, then you might be inclined to tell yourself you can do better.

In neither case were you able to dig in and find out how they operate and what makes them special or what makes them ordinary.  You've already made your decision - or started to anyway - on the return number they told you.

We all want a higher return.  That is a given.  What sets a smart investor apart from the masses is their willingness to wait on focusing on the return.  Go straight for what differentiates a quality provider and then weigh that against the return you get.  You will often find that the more quality controls they have, the more time they spend on becoming a great company offering a great service, the more an average sounding return looks really good and the more a really good sounding return looks really risky.

That has been my experience anyway with the industry over the last 14 or so years.  There will always be time to find out what their returns are and if they are in line with the services they provide. 

@Jeff Tropeano - Welcome to the site!  For quick background, I started as a real estate investor while living in Denver back in 2003.  I owned a few long-term buy & holds in Denver, did a few fix-n-flips and eventually began  acquiring passive properties in Memphis.  Just as you stated, I wanted to maximize cash-flow from my passive investments, but I had a major advantage.  My family lived in Memphis, owned an investment company and I had lived there for years.

So, with that in mind, let me tell you that the investment you are thinking of making in Memphis in particular is not a good one.  There are a few reasons, but hopefully I can help you view this from a different perspective and help you make good decisions.

A $45,000 TURNKEY investment is never going to be a good investment regardless of market.  As an out-of-state, passive investor, you are looking for ease of transaction and a low-headache investment that protects your investment and allows you to make money on it.  First and foremost - PROTECT YOUR INVESTMENT!  At $45,000 sale price - whomever is marketing that to you as a turnkey investment is looking for a buyer who is attracted to the word Turnkey - not someone interested in quality nor protecting their investment.  

There simply is not enough money at that sales price for a company to buy a quality property, do a high-quality renovation where ALL deferred maintenance has been addressed and allow for the company to make a profit.  Something has to be cut and you can be assured that no one is doing anything for free.  What is cut is the renovation.  So my advice is to avoid these price points.  I do speak from experience.  I have passively owned properties at this price point in my history as an investor and they NEVER pay off as you expect.  Not when buying them as a Turnkey, passive investment.

Now - your property in particular.  These are all my opinions.

 - Never buy a 2-bedroom property in an area where most properties are larger.  2 bedroom properties work well in college and university areas.  I can't imagine an area in 38128 where you would want to purchase a 2-bedroom property.

 - At $700 a month rent, you can expect to lose great than 50% of your rental revenue due to uncollected rent, vacancy and maintenance.  This price point attracts a resident that is most likely insecure.  Job insecure, food, medicine, transportation insecure ~ and the first thing they need to give up is rent in times of crisis.  They are simply more transient. A resident looking to qualify at this price point is going to be making between $22,000 and maybe $30,000 per year.  

To be fair, there are great residents at this price point.  But that is not the norm.  As you get into higher rental price points, you attract more stable residents.  Fewer are able to be as stable at lower rents simply by fact that they are not earning as much income.  If they were earning more, they would be looking for better housing.   Keep that in mind.

 - Why you should expect to lose greater than 50% of your rent is that these properties tend to go vacant more often.  With each vacancy you will have costs to get the property ready.  Accounting for only 8% vacancy yearly means 30 days lost rent.  Unfortunately, with a higher rate of transience at this price point, leases will be broken with uncollected rent, and once the property is vacant, it needs to undergo a make-ready and then has to be marketed.  You can expect 60 days lost rent when you include lease-up.  That is 24% vacancy in a year and you will find that these price points perform that way on a regular basis.  At a minimum, expect 16% vacancy on average.

- Lastly, your maintenance and Capex costs will most likely be higher than 10%, but I do like that you have this number higher. You have to expect that your property will not be renovated to a high level at $45k. There will be a lot of deferred maintenance that will be a constant draw against your rent. I would be prepared for 15% or higher for maintenance and Capex at this price point.

 - You noted that you would like to put 20% down.  Unfortunately, you will find it very difficult if not impossible to find a lender willing to lend such a low amount on a property - especially an investment property with an out-of-state investor.  

I've been working with out of state investors buying in Memphis for going on 14 years.  My family has been managing here actively for the last 12.  I can tell you that this price point in this city is not a good investment for out-of-state investors.  Especially not when it is being marketed as Turnkey.  I have no idea, nor does it matter who you are working with.  These are not good investments no matter who the company is you are working with.  These properties are better left to local investors who will own this type of property for considerably less than you will own it for and they will self-manage.  Their costs will be lower and their returns will be much higher than you are looking at because these are very, very risky investments. 

Be patient with your investment decisions.  Don't rush.  The opportunity still exists for you to make a great passive investment and you can find quality Turnkey investments.  You just have to remember to protect your capital investment first which means making the highest quality investment you can when buying Turnkey.  Then, look to maximize your return.

Best to you

You make a great point Kyle.  Unfortunately, the word Turnkey is often used to attract investors because it sounds easy and implies that everything is done for you.  But, a major flaw in the original question was that the buyer was going to have to buy the property and then supply the money for the renovation and then wait for a resident to be placed.  This is not a turnkey investment.  That is simply investing out of state and placing an unhealthy amount of faith and trust - especially at these price points.

I am fairly sure that the whomever is offering this investment opportunity does not own the properties, nor the renovation company nor the management company.  They are simply marketing for investors and then selling the opportunity.  Splitting profit with the actual providers of each service.  

Jeff Charlton - www.GCFrog.com

One of the best in the business and has clients all over the country.  He has been doing all of the printing, mailing and direct mail for Memphis Invest for the last 9-10 years.