Turnkey or Notes

[Mark Senecal]

Hello BiggerPockets - I am rolling over an IRA into an SDIRA to use for Real Estate investing. I have a demanding corporate job that leaves me very little time or energy at the end of the day. So I need something passive.

I am considering turnkey properties or notes.  Eventually I would like to do both but since I am just starting out I don't want to dilute my efforts.  I would be very curious to get feedback on the pros and cons of each strategy.  Let me know what you think.

Mark Senecal

[Clayton Mobley]

Hey @Mark Senecal I'd like to second what @Matthew Fritz says about the due diligence necessary in selecting a turnkey provider. I'm the CEO of a full-service TK outfit in Birmingham, AL and if you look at my past posts, I spend a ton of time here on BP reminding new investors to ASK QUESTIONS about every little thing when considering getting into the TK space. Turnkey is an amazing RE niche and definitely is the easiest way to generate reliable passive income, but if you don't work with a provider that you can trust to be upfront and transparent, then you're starting out with a severe handicap. 

I wrote this this list for a prospective client the other day, but I think it could be useful to you as well. These are just a few of the most important questions you should be asking of any TK provider you consider, along with the answers as they apply to Spartan. Even if you are not looking at Birmingham these figures are good benchmark to use for comparison. Any provider should be able to provide these numbers off-hand. And the speed and detail with which a provider answers these questions will tell you a lot about how they do business.

1. What are your short, mid, and long-term occupancy rates? Don't accept vague answers like "Oh it's great, like 100%" etc. A good provider will KNOW this number off-hand.

We have a 52-week rolling occupancy rate of 97.2%. Our mid and short-term rates are even better, up around 98% +/- .2% depending on the look-back period. We track this obsessively and update it daily.

2. What is your annual maintenance rate? Do you defer maintenance?

We have a 52-week rolling maintenance rate of 2.6%. This is far below the industry standard of 6-8% and is primarily due to the our extensive rehabs and the fact that we don't defer maintenance. We install like-wood high-quality vinyl flooring, new HVAC systems, new tin roofs, granite counter tops, etc. All to ensure that the number of maintenance or replacement issues we encounter down the line is minimized. Our high quality refurbs also attract higher-quality tenants, which reduces turnover.

3. Does that include move-out costs?

The above rate includes our net move out costs. Tenants must put down a one month deposit to cover damages. Our average rent is $950, and the average gross move out is $1152, so the net average expense is only $202. However, you usually have either a 0$ move out because a good tenant wants the deposit back or, occasionally, a bad move out that costs a lot more. Our worst move out ever was only $3k.

4. What is your minimum lease term? What is your average lease length?

One reason our move-out costs are so low is that we invest in areas and properties that people want to call home. Our minimum lease term is 2 years, but our average is 34 months, meaning many people stay much longer. Because these houses are seen as homes, not stop overs, they are treated as such - keeping repair costs down.

5. What is your property management fee?

Often, shady providers shy away from concrete numbers with regard to fees, so asking for the figure outright is a good way to weed out scammers. Our property management fee is 9%, which is 1% lower than that of Memphis Invest (another high quality outfit and an industry leader).

6. What is your leasing fee?

Our leasing fee is equal to one month's rent. However, due to our low tenant turnover this fee is only incurred, on average, once every three years or so.

7. What is your average time to first lease on a new property? What is the average time between tenants?

Our average wait times are 38 and 28 days, respectively. This means properties are often filled much more quickly, but a few longer waits push the average up. We also expect our turnover time to go down considerably in the coming years because we are now installing high-quality vinyl flooring rather than just replacing carpet on new properties, which will cut down both on move-out costs and rehab time.

8. Can I see an appraisal for the property I am considering?

One great way to weed out scammers is to ask to see an appraisal. If they say anything along the lines of "blah blah red tape", it's time to run. We provide a current appraisal on all our properties that will show they are worth what you pay or more, so there is no worry about us tacking on a huge markup just to make a margin.

9. How is your ROI calculated and what does it include?

For some unknown reason, the industry standard in turnkey is to provide front-page ROI calcs (like what you see on websites to entice you) that don't include important expenses like maintenance and vacancy. The result is that, when a good company tries to post honest numbers, they end up looking less profitable. To combat this, we provide interactive multi-sheet property jackets to help educate investors about how we calculate ROI and how the different components impact the bottom line. The cover sheet follows the industry standard, of course, but the second and third sheets include all annual expenses and amortization tables to show the increase in equity that accrues as you pay down a 15 or 30-year note. It also includes returns for cash purchases. We provide example sheets simply for edification purposes, long before a potential client is in the property selection phase, just so they can see for themselves how our calcs work. Of course, we are always happy to answer any questions at any time to ensure you know what each figure means and how it is determined.

10. What is my recourse if I am not satisfied with my investment or the service I receive?

We back up everything we do with a 100% money back guarantee. That means that if, in the first year, you don't like your investment, your returns, my team, my face - anything - we will buy back your property for exactly what you paid. No other TK provider can say the same. We've never had anyone take us up on this offer, but with nearly 75% our business coming from referrals, we're not super worried about having to back it up.

11. What type of service can I expect once I've made an investment?

When it comes down to it, our returns are fantastic but our service is second to none and that is the number one reason that our clients send us so much referral business (nearly 75% of our business is from referrals). Each client has a designated person who calls each month to go over the numbers, and has access to his or her own account of on our PropertyWare platform so they can always access all their info - rent payments, maintenance costs, leases, agreements - as well as the cell phone number of their designated Spartan investment manager. Not a generic office line, a cell phone. We have found that the best and most mutually beneficial business relationships are formed with educated investors that know to ask questions and expect to get transparent answers. Once the trust is built on that first property, our clients know that their investment is in good hands.

Sorry for the wall of text, but I've seen a lot of people who are really intrigued by the TK market, but feel like they can't or shouldn't be pestering providers for info (or like they don't want to ask too many 'stupid' questions). The truly quality outfits won't even make you ask and, if you have follow up questions, they will be happy to talk with you in a timely manner.

Another quick note about using your SDIRA is to ensure that you have enough capital in your account for any and all capex expenses you might incur down the line. It's always a good idea to have some reserve for every property you own, but because you cannot co-mingle IRA and personal funds, its important to have more than you think you'll need when investing in a retirement account.

If you have any questions about any of the info I posted here, about Tk in general, or about what we do at Spartan, feel free to shoot me a message any time.

Best of luck!

Clayton