You’ve worked hard for years in your own business or worked your way up the ladder and are making great money. You finally have the family going or that job that finally makes a great income. Maybe you simply have found a way to sock the dollars into your bank account to be able to start investing in real estate.
So you look around and ask yourself, where can I find some cash flow properties to park some dollars? You call up the local real estate “investor” agent, and they chat you up, send you some properties to view, and ask if you would like to go view some properties together. You say, “Of course, sounds great” and begin doing feverish due diligence on the properties, plugging them into your newly built spreadsheet (or your BP calculator) and look to find some rental comparables for the property.
Hmmm. It looks like with capex, maintenance, and the monthly management fees, the deal doesn’t make much, if any, cash flow.
If this sounds familiar, I hear it all the time from our clients.
You’ve waited all the time to invest, finally have some dollars, are ready to begin the experience, and now are finding that deals that make financial sense have all but vanished in your market — and now you turn to turnkey providers out of state.
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So You’ve Chosen Turnkey — Now What?
I’ve heard so many stories — some good, mostly not so good. There are so many different types of companies, providing so many different kinds of properties, in different areas of the country, with different types of ownership, management, philosophy of renovation, and desire of types of tenants and properties that will live in that rental house.
So, just to reiterate, you’ve worked so hard for your dollars, you’ve decided to invest in real estate, and here you are, with somewhere around a million providers for turnkey real estate all over the place.
Now what!? I’ve broken it into three things I think are really, really important.
3 Crucial Areas to Vet When Choosing an Out-of-State Turnkey Provider
The longer I am in this business, the more I realize this. There are a ton of people who can do a good rehab (construction, plumber, painter, etc.). It’s just not that hard to do renovation on a property if you know what you are doing, you have a system in place, and you have a philosophy centered around things that are important to you. Then, this philosophy has been adopted by your construction guys, trade guys, contractors, general contractors — whoever you are using.
The philosophy has to be communicated to everyone who you are working with, from the contractors, clients, and team. They have to understand the mission, and they have to have bought into it. There is a tremendous number of people who go into a real estate sale — contractors, title companies, insurance, banks or lenders, the management folks, the people selling the property, and buyers. Maybe a real estate agent or an entire office. They all have to be on board with what is happening and also understand their role in that process.
For instance, for us as property management, we tell all our owners, our tenants, our staff, and our investors that we have safe, functional, healthy housing. We don’t want extremely low cost houses to renovate or to be in our portfolio that we own or that we manage for others. There are lots of the super-cheap kinds of properties in less desirable areas, and lots of people make great money on this type of investment. We just don’t. And that’s OK. For me personally, our philosophy is to have great houses and great tenants, in great areas.
We don’t want to be the cheapest or even just adequate; we want to be the best.
There are properties and providers for every type of investor. It’s important for you, the investor, to know what exactly you are looking for and to learn that based on areas, schools, location, city, rent rates, overall cash flow, equity, size of property, type of layout, etc. Just know your criteria, and be able to communicate that.
When we started selling properties, we wanted our investor clients to FEEL how fired up about real estate we were, that our renovations were better than our competition, and that we offered tenants in place and a warranty on our product. We also didn’t negotiate on our prices. We sold them at or just below market price, and they have a tenant in them when they are purchased.
We routinely have folks come to us who have shopped other competitors who buy with us, and we have some who shop with us and buy from others. That’s OK! There are so many options — it’s most important first to understand the provider’s and the investor’s philosophy of how they do business; it’s so much easier to partner with someone once you understand you are coming at something (investing, management, rehab, etc.) from the same place.
There is a wildly varying degree of “turnkey” ready properties — from the type of renovation, to the location, to understanding the area, inside and outside of the property. Pictures help, but they don’t always solve the problems of understanding what kind of rehab has been done. It’s great to ask WHAT the scope of work was and what their philosophy of the renovation is.
As in, do they replace things up front like the electrical and mechanical, or do they expect it to be something you will need to deal with down the line later?
What kind of finishing are in the property? Are there hardwoods or tile, new cabinets or old? What are the countertops and paint style? What about the landscaping — who cares for the yard once the tenant is in the property?
Personally, we like to take the upfront approach — if it isn’t right, we want it fixed before you are owning it and dealing with potential problems down the line. Sometimes investors don’t want to pay for those kinds of things up front (and in our case, built into our sales price of the TK properties) but rather have it be something they know or can expect to replace in one year or three years.
Also, understand if there is an issue with the work that happens whether there is any sort of warranty on that work, who is paying for it initially, and during what period of time that warranty is for.
The third critical piece is the management of the property. Some turnkey providers sell their properties and place them with another third party management, some sell the properties with no management and let the buyer choose, and some have management in-house.
You will definitely want to understand the management, how they operate, and what the ongoing monthly payments, communication, and maintenance practices look like. When do you receive payments? How do you receive information from the management company? Who is your point of contact when you need something, when there is a problem, or when you want to add another property to your portfolio.
I know for me, I wanted to have management in-house. It was too important for me to be able to seamlessly hand off the property from the sales/acquisitions side of the business. Our clients receive an on-boarding call with what they can expect, how we operate, who to ask questions, how they access their information online, when they get their rental income, etc.
In some cases, it might make sense to begin with areas that help you get the expected rate of return or an area you travel to for business or where you have family already. It might make sense to begin with the provider about which you received a personal referral from a client. Or it might be better to start with a company and provider who shares your vision, philosophy for investing, and product that matches what you are looking for in your investments.
There are so many great providers, it’s important to be really happy with the people you will work with, above and beyond even the product. If they are genuine and trustworthy in their business, even when problems and issues arise, they will be the first people to address them, fix them, and build that much more trust in that investor/manager relationship. In the end, the goal is to have a passive investment, making money, building wealth, and growing your passive income like you were going for in the first place. Have fun, find people and products you like, and go for it.
Investors: What aspects do you scrutinize when you’re looking for turnkey properties to invest in?
Let me know with a comment!