All Forum Posts by: Chris Clothier

@Deepika Tandon - I do not know the company you are asking about, but did do a little bit of quick research on them.  Hopefully, you and other readers take this as advice on what to look for and how those things proved security.

The biggest read flags for me is that they have no real online presence at all.  None.  No videos, no articles, no comments on forums...nothing.  They have a 5-8 page website that tells you absolutely nothing about the owners, the company, their process.  It simply has some cut and paste verbiage that you will find on any generic turnkey website.  You have to register for anything and everything which tells me it is more of a data gathering landing site, than a true company.

It tells me they are either brand new or not a real turnkey company and simply using that word as a way to market.  As an investor, you have multiple options in the Michigan, Ohio area and those companies are established with actual clients, histories and reviews.  Those companies have very active ownership that gets involved with videos, tutorials, articles and comments on forums.  They are actively trying to engage.  Those are all positives.

My advice would be to reach out to the providers with histories in that area and spend some time getting to know them and their companies.  

thanks for sharing that for everyone to read @Kristopher Hanks ~

@Ryan - First off, Frank Gallinelli is super smart and gives an excellent Cap-Ex breakdown.  I think the fallacy in looking at it the way you are, is that much of cap-ex and how much should you save and when will it be spent can be addressed on the front end.

Addressing issues such as a new roof, new siding, upgraded paint, type of flooring, new appliances, etc...  All of these are items that can be and should be addressed on the front end of a renovation.  The main benefit is that they extend the life expectancy of your property.  A secondary benefit that may be even more important is that they allow you to have an opportunity to ask for a higher rent rate.  If you can get an extra $25 to $50 each month on rent because you addressed these on the front end, then you can account for future capex expenses with that additional rent.

For me, I would keep an account with a minimum of one year net income on each property as a reserve fund.  As for funding it monthly, my personal belief is that I put that money toward principle debt reduction so I can pay the lowest total interest possible over the life of the property and own it outright at the earliest possible date.  If I use my reserve fund, then I refund that account and once I am back fully funded I go back to paying off the property.

I think you are on a great track with a solid plan for investing in properties there in Irving and I think you are in a solid price point.  I would simply take a look at your capex list above on a per property basis and try to defer as few costs as possible.  I am a big believer in addressing capex items during renovation.

Best to you - 

I guess like @Ben Leybovich, this forum gives me a chance to rant again (sorry, it will be a little long)...

So many are using the word Turnkey like it's a noun - a Turnkey house - with actual meaning.  It is not.  It is a marketing term applied to buying houses many years ago and one that exploded back in the late 2000s.  I think the industry really improved over the years, but is really sliding backwards right now with a lot of opportunists who are intelligent marketers.  Unfortunately, the word Turnkey has no real meaning and is way over-used today to attract eyeballs. Especially the eye balls of new investors without a ton of experience or knowledge.  At the same time, to believe that the only investor buying Turnkey properties are brand new investors is not only wrong, but extremely insulting.

Unfortunately Ben, when you go on your rants, you fail to recognize that companies and opportunities only exist because there is demand for them.  That demand is not always built on the back of stupidity or the naivety of new real estate investors.  I love our online back and forth that we have had over the years and look forward to those conversation in person in the future.  They are always respectful.  That same respect needs to be extended to investors who are interested in buying properties from Turnkey companies.  Passive investors far outnumber active investors and this is a legitimate and viable option for many investors here on the site. 

My concern is a lack of clarity in understanding that the marketplace is shifting and investors need to shift with it.  With that shift needs to come an understanding in how the conversation is shaped here on BP.  A majority of the conversation in the BP threads from TK companies is meant to win market share.  Most is directed toward investors with the intent of selling properties. Often overtly, but sometimes direct selling like offering to help or let me review something for you or even listing actual properties.  Brand new, first-time investors with no knowledge of real estate are the most impressionable investors out there.  Many over-whelmingly approach this type of purchase with the idea of cash-flow so that is what is marketed heavily to them.  Long-term security, investing in high-risk (that is a relative term because history may say it is not) investments like negative cash-flow appreciating properties and just basic, bland investing like buying the best assets possible and letting a resident reduce principle over time are rarely if ever mentioned as a reason to buy a passive, turnkey property.  Yet, I would argue that security is the most important thing an investor should consider today when buying a passive investment - Not cash flow.  

In today's market environment, unlike back at the turn of the economy, everything cost more.  The properties cost more, materials and labor cost more and services cost more.  All of that goes into the way investors should approach a passive investment today, in my opinion.  Here is my advice to Tim and really to anyone looking to make passive investments in the very near future.

@Tim Greenfield - First, to answer your question, the 50% rule is a good rule of thumb to use to run your numbers.  Like was said before, do not double deduct certain expenses.  Use the 50% rule on expenses and go from there.  As you will read through the rest of my answer, based on the risk profile of the company and property, you may need to run those numbers off a higher percentage, yet only rarely would you be able to run it off of lower and even then I would say 44% to 45%.  That is all going to be based on the company and the product and service they put out.

More specifically, the advice I would give to you is to reflect on your investment goals and your reasoning for purchasing property.  If you are in need of cash flow, then there are certainly other ways to invest your money.  If you are simply looking to deploy capital and build a portfolio that puts your money to work and provides a return, then here is my advice.  Both as an investor and a business owner providing these types of passive investments, my advice is your #1 goal when buying needs to be RETURN OF CAPITAL.  The higher the risk profile of both the property and the company, the lower the likelihood of a return of capital.

RETURN ON CAPITAL is secondary in this market and every passive investor should start their investment decisions by reviewing the risk profile.  IMO, every passive investor should always have a return of their capital as their biggest concern and then look to maximize their return once they know they have reduced the chances of losing their money to the lowest level possible.  Especially in the current market conditions.  This market will change and the housing market will crash again in many cities and price points around the country.  At that time, there will be lots and lots of opportunities that will both feel and actually be less risky and they will provide higher returns.  That is not the environment we are in right now.

Passive investors need to focus right now on acquiring the absolute best assets they can and make sure their money is secure in that investment.  If they can earn an average to above average, modest return on that investment, then they are way, way, way ahead in the game.

Lastly, there is a ton of risk right now if you are investing in "Turnkey" properties.  The word itself has already raised the risk for investors.  I have said for years that the city, the company, the processes and management team you do business with is more important than the widget itself you are buying. Everyone is using the word Turnkey even though there is little continuity in what it means and it is easier than ever for investors to make huge assumptions.  Anything can cash flow on paper and any investment can be made to look really good or really bad with a few black and white statements.  I think I have my finger pretty well on the pulse of this particular niche and the reality is, this statement from Ben is not true:

It is NEVER a good idea to buy above market (what the **** is market, anyhow?) It's never a good idea to buy without equity. It's never a good idea to buy without cash flow. You need all of the above to survive in this game!

The premise is good and on the face it is correct. I am not going to argue with the advice and while I may disagree with it, for all investors, the most important things you must have to survive in this game is a reliably steady income, earmarked money that they can risk in an investment (cash, SDIRA, HELOC - whatever you use as your capital) and a high level assurance that you will get a return of your capital before you buy.

I am a seasoned investor who has lost money on stupid investing.  Today, I buy plenty of properties where I don't give a damn what someone else says is market value.  As Ben says, what the **** is market value anyway?  I don't care if it has equity and I don't care about the cashflow.  But I have a solid income.  I have money set aside that I have earmarked particularly to invest with and I am comfortable if I lose it and have learned enough about real estate investing that I am making well-informed investment decisions.   I know with the highest certainty that I will get 100% return of my capital.  When all is said and done I will make a pretty damn good return too for the low amount of risk I am taking.  This is what investors need to understand about buying passive investments today and the word Turnkey.  Success depends entirely on who you are dealing with and their ability to reduce your risk as an investor.

@Abdul Azeez - 

You've got some great feedback and advice on here so far.  I had our management company pull some records real quick as we are managing six properties on that street.  Most are close  to the cross section of Clarke rd but we also have one within a few houses of Hickory Hill and one that is just west of Mendenhall.  

Either way, three of the six are rented at $1065.  One is rented at $950 and two are rented at $895.  

As others have already said, $1295 is probably too much of a stretch.  As @Alex Craig noted, when the renovation is done at the highest level and with an intent to try and address maintenance that is usually deferred, rents are still going to be capped in this area and held below the $1100 ceiling.

Best of luck as you keep working toward getting going.

Chris

Abdul,

I would suggest starting with Crye-Leike and follow Jay's advice. Ask for their REO listing specialist and make sure you mention that you are looking for a listing Realtor who represents distressed properties AND that you want them to represent you as the buyer. That will move you to the front of the list because you are allowing them to make both sides on a deal. You can then give them your criteria about location, size and rent range and see what they bring you.

As for management, they are the largest retail real estate company by far in the southern part of the US and have a robust management company.  I can't say how good they are at management, but they will be perfectly capable and experienced.  They are a large listing company so they will have properties and depending on the area you want to buy they would be a good company to start talking to.

Other companies like Enterprise, Renshaw, Revid, MPM and even Crestcore all manage property for investors, they are all quality companies and all are licensed and able to show you listings as well.  I would add them to your list to interview.  You will get a feel for what you like and what you don't like by speaking with them.  

They are all perfectly capable, but again, I can't speak to their services and how good they are.  I think conversations with each of them would be a great start.  I have published on here a few times a list of good questions to ask and I'd be happy to shoot those to you if you would like.  

Premier Property Management of Memphis is our company, but unfortunately, in this case, we only manage properties that we purchase and renovate.

I think you are absolutely taking the right approach.  Review all of your options.  Educate yourself so you can make the best decision.  Buying Turnkey will come with a higher up-front cost.  How much higher will often be dictated by the level of service you are going to receive from that company on an on-going basis.  However, just because a company or property is higher priced does not mean they are better.  Make sure you make good notes and when you like something, make sure you ask other companies about their service or how they handle similar situations that you like and compare those answers.  There is a difference and before you pay more for a turnkey property, make sure you are getting the level of service you expect as an absentee owner and passive investor.

When you buy the properties yourself and hire out each piece of the process, you will pay less on the front-end, but most seasoned investors and even those offering their services piecemeal will tell you that over a relatively short period of time, the savings are lost.  Lost in time, lost in the inability to negotiate low enough prices and inability to hold each individual company providing service accountable.  

To be clear, it can be done.  And it can be done where you can find savings over buying TK.  You may be able to squeeze out a higher return on the same TK house by doing it yourself, but that will take some time and a lot of effort on your part.  And you have described yourself as an investor that wants to be more hands-on and more involved so the DIY process may be the best fit for you.  Just make sure you really refine your process for building your team if you go that route. 

Best of luck and reach out if I can help you.

 Chris,

Just wanted to highlight that I thought this was excellent advice and a breakdown for new investors that "value" comes in many shapes and sizes and can be measured in many ways. Loved both points that certainly better renovations can help attract better tenants willing to pay higher rents and while the ROI on the additional rent can be calculated easily, the ROI on a better tenant is hard to calculate and may be way higher!

Great post ~

 Nick,

As a new investor, be patient.  Lots of investors got burned with this model and lost a lot of money.  I'm actually surprised to hear people are still doing it, although who knows if you are dealing with a company or just individuals.  Basically, you are taking 100% of the risk if you are buying the house before it is renovated.

They need you to take them out of the hard money and they make their initial profit on that deal.  You buy it from them and they make their spread.  Then you fund the renovation and they oversee it - most likely making a profit here too.  Then you are locked into a 1-year management contract with a company that you have heard good things about - but still, locked in either way.

If returns are being discussed at all it could be considered a security which means they would be violating Texas state security laws by tying an investment and return to the property management (management of the investment).  It is tricky depending on how they word things, but the simple fact that in order to do business you must use the management company for one year, means it would most likely be considered a security.

Bottom-line, as an investor, you take 100% of the risk.  Your money is at risk the whole way and you are locked into a management contract.  So any delays or issues, most importantly your ability to refinance or rent the property, fall 100% on you financially.  To be fair, you would be doing this anyway if you found the house and hired the crews to renovate your property.  In this scenario, someone else has done both of those things for you and that is the difference.  They are promoting the opportunity to investors and getting paid for you to take the risk.

It may be completely legit, but your risk definitely comes into play in this set-up and your reward needs to be big.    

I'm not sure what the actual definition of a seasoned investor is, but I think most of us reading through his thread would agree that, in this case, it means someone who is not making their first foray into a real estate investment.  I would also characterize a seasoned investor as someone with some life experience in business and investment, perhaps with some road beneath their feet in life.  Nothing against young, first-time investors, just for the sake of the conversation it appears the OP wants to know if the purpose of Turnkey is to provide service or provide a slick way to capitalize on inexperience.

Unfortunately, it can be both.

Like @Jay Hinrichs  pointed out, I write on the forums weekly how the word Turnkey means nothing today and is only a marketing term meant to attract eyeballs.  It has no definition and is definitely used to take advantage of unsuspecting investors on a daily basis.

As for @William Hochstedler follow up, classifying an investor as "seasoned" is not a metric that we track, but I discussed with our portfolio team today and the responses were interesting.  

I cannot speak for any other companies, but I know we have pivoted our focus these last few years away from any investor who only has enough funds to purchase one property and lacks a clear plan to build a portfolio.  I truly, truly believe that buying out of state for one, single investment property may feel like a start, but it in most cases can turn into a defeating experience.  

Passive investors must be committed to building a portfolio.  Until they can, there are so many ways to passively invest.  

So my team, who deal directly with our investors, felt comfortable with these types of numbers.

9 of 10 investors are going to be seasoned investors - not necessarily in real estate, but investment savvy and possibly in real estate.

So 1 in 10 is a first-time real estate investor and they have the ability and plan to build a portfolio.  Often, they purchase between 1 and 3 on their first interaction.

3-3.5 out of 10 are seasoned real estate investors who are active right now or have been in the past in real estate either wholesaling, retailing or land-lording/passively owning.  

I would be willing to bet from my frequent talks with other passive investment companies in this space, that those companies really putting money into the quality of the product and service, the numbers will be similar.  The entry prices will be higher and returns on paper will be lower.  The only investor who is going to be attracted to this type of investment is the one who values a return OF investment first and a return ON investment second.  

Companies who are competing strictly on price point and bottom-line paper returns are probably attracting a lot more new investors and one-house investors.  Investors who are much more interested in the get-rich-quick aspect of real estate and want to maximize return first without knowing the risk they take.

So I think seasoned means more than just how many houses has an investor bought and can be characterized as do they have the knowledge and wherewithal to invest passively, do good due diligence and not fall for some of the nonsense that is actually very rampant right now?  The use of the word Turnkey is crazy and unfortunately, even sites like BP unintentionally give credibility to much of the nonsense that hurts that word.

As for being a seasoned investor myself, I buy both passively and actively.  I actively work on my higher end buy and hold properties that have a lot of capital risk to them, but tremendous upside.  As for the typical investment property that my company sells, I buy the same way.  Sight unseen and fully trusting the passive process.  Not that those comments will count for much, but even when I have purchased in other cities I have used traditional turnkey companies.

Nothing wrong with that question @Marcus Martinez .  It is standard for well-capitalized buyers to provide it early on in a relationship or include it quickly with a first-time offer.  You have to set your own standards and not wanting to waste your time is about as minimum a standard I can think of.  Once you have an established relationship, it's no longer necessary.  Yet, for a first time offer from a new buyer, you should absolutely require it and not think twice about a buyer who is offended by the request.

Best to you -