Hi all, New investor, have spent a few mos doing my research. There's a few concerns regarding Turnkey Providers (+ any investing in the common markets) that I have. This might be slightly rambling and maybe i'm cynical, but tell me if i'm crazy:
1. With many investors investing in the same high cash flow markets (indy, memphis, dallas, jax, etc) if there is a downturn, there's super limited exit options without getting crushed. I mean how many memphis low-middle income houses are owned by this board alone? if you have a need to exit, could be tough
2. So many "average" people are investing in real estate and especially through TKP. Always concerned when an investment becomes so mainstream
3. If it's possible even earn consistently 7-10% on a TK house, why aren't the providers just keeping them? I realize they are making money on the mgmt fees, potentially marking up the house, but why not just own and continue to operate themselves and maximize their value?
4. Troubled by the salesman angle of every thing - i've listened to a bunch of podcasts and they're very informative, but I'm skeptical of an investment that's being mass marketed and sold to newbie/naive investors. Like the get rich by investing mindset and conferences, feels slightly snake oil salesman to me again with so many middle/upper middle class americans jumping all in on these investments
awesome comments everybody, i appreciate the guidance.
following up on this comment, "You can also buy at a higher price point but at a lower monthly cash flow to widen your pool of buyers if you need to sell."
what's your perspective on balancing appreciation with income?
I'd rather have a prospect of appreciation and feel like these more typical turn key markets (outside of Dallas) haven't had much appreciation. Tying it into the potential exit strategy, i'm hesitant to go into a market with almost no appreciation as that shows to me there's enough supply on the market. I don't necessarily need the income now so would rather have the chance of a sig. appreciation but do recognize the benefit of a model like this is the cash flow
The real money is made by principal pay-down. $50-$100 per month per property is an irrelevant amount of money if you really look at it. Think big picture. What the big picture really is (the majority of folks on Bigger Pockets miss this point day in and day out) the PRINCIPAL PAYDOWN.
You have the ability to quadruple your money while doing ZERO work. That's the real name of the game. Spend $1M funding the down payments of 10 houses & then have those tenants pay them all off for you. When you are all done and ready to retire you've turned your $1M into $4M without any appreciation. Ad in the appreciation & any possible cash flow it's a damn good gig.
Hi all, New investor, have spent a few mos doing my research. There's a few concerns regarding Turnkey Providers (+ any investing in the common markets) that I have. This might be slightly rambling and maybe i'm cynical, but tell me if i'm crazy:
1. With many investors investing in the same high cash flow markets (indy, memphis, dallas, jax, etc) if there is a downturn, there's super limited exit options without getting crushed. I mean how many memphis low-middle income houses are owned by this board alone? if you have a need to exit, could be tough
2. So many "average" people are investing in real estate and especially through TKP. Always concerned when an investment becomes so mainstream
3. If it's possible even earn consistently 7-10% on a TK house, why aren't the providers just keeping them? I realize they are making money on the mgmt fees, potentially marking up the house, but why not just own and continue to operate themselves and maximize their value?
4. Troubled by the salesman angle of every thing - i've listened to a bunch of podcasts and they're very informative, but I'm skeptical of an investment that's being mass marketed and sold to newbie/naive investors. Like the get rich by investing mindset and conferences, feels slightly snake oil salesman to me again with so many middle/upper middle class americans jumping all in on these investments
Welcome to the site Matt.
What you need to understand is that buying real estate is a proven way to build long term wealth. Honestly so long as you buy a home for it's appraised price & it's in a decent neighborhood it's almost impossible not to make money on it over time. That's just pure economics. Turnkey or no turnkey that fact will always remain.
It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.
Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
Make sure your property manager is a licensed real estate brokerage.
Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.
Hi all, New investor, have spent a few mos doing my research. There's a few concerns regarding Turnkey Providers (+ any investing in the common markets) that I have. This might be slightly rambling and maybe i'm cynical, but tell me if i'm crazy:
1. With many investors investing in the same high cash flow markets (indy, memphis, dallas, jax, etc) if there is a downturn, there's super limited exit options without getting crushed. I mean how many memphis low-middle income houses are owned by this board alone? if you have a need to exit, could be tough
2. So many "average" people are investing in real estate and especially through TKP. Always concerned when an investment becomes so mainstream
3. If it's possible even earn consistently 7-10% on a TK house, why aren't the providers just keeping them? I realize they are making money on the mgmt fees, potentially marking up the house, but why not just own and continue to operate themselves and maximize their value?
4. Troubled by the salesman angle of every thing - i've listened to a bunch of podcasts and they're very informative, but I'm skeptical of an investment that's being mass marketed and sold to newbie/naive investors. Like the get rich by investing mindset and conferences, feels slightly snake oil salesman to me again with so many middle/upper middle class americans jumping all in on these investments
You are doing the right thing by researching! You make a good point on some of those "hot" markets. A good idea is to find a city that is "pre-boom." This way it is increasing in ROI, but the market is not flooded with investors yet.
Real Estate has always been a popular investment, I wouldn't say it is "mainstream."
When values drop that doesn’t mean rents will necessarily drop proportionately, sometimes they go up. Now if prices and rents drop then yes it could get difficult.
Turnkey companies don’t keep these properties because it would require millions in capital to do so. They often borrow money to acquire and rehab. That’s going to be fairly expensive money hence they need to exit.
The main draw back to turnkey that people need to understand is you need to hold it long term ie 5-10 years in most cases. If you know that going in like James wise said you will likely be fine.
You are right to be concerned and approach cautiously. Your research should include visiting markets and visiting with providers to see firsthand the quality of their work and the types of streets where their investments are located. Then it becomes more clear which providers you can trust over others.
Exit strategy will depend on the type of house you invest in. If lower price/rent point, then your exit will likely need to be to another investor, which could be a challenge in a downturn. If you hold for long term it is less of a concern of course. You can also buy at a higher price point but at a lower monthly cash flow to widen your pool of buyers if you need to sell.
The TK provider doesn't hold the properties themselves because really they are operating as a flipper - they make money on every transaction by marking up the purchase cost and the renovation, and they also borrow the money for the holding costs while they are renovating. They probably hold some back for themselves but don't have the money to hold all of them and don't want to tie up all their capital or have so many long term loans.
I had the pleasure of making the mistake of investing with a TK company out of Kansas City. I won't go into the boring details here, but PM me if you want the full write up.
Overall, I think if you are willing to put in the time, energy and research....you can build a team and establish yourself and keep the equity in a property without buying something and leaving the equity with the TK provider.
I know people will argue and say that TK is just fine and you will be fine and you will cash flow...but why not cash flow and have some security of the equity.
Find a rock solid realtor and use their contacts to build a team. Unfortunately its easier to find a TK provider on here than a good realtor. But do some digging and build YOUR real estate empire, NOT theirs.
Matt Scott
1. Being a turnkey provider is an actual business model that allows the turnkey companies to buy/flip and then buy/hold and then repeat. I seriously doubt if they’re selling all of their inventory.
2. Most investors going through a turnkey company are investing for cash flow so most of the time they are not value investors. However when my company was providing turnkey services we served as boots on the ground and allowed investors to pick their prooerty, our contractors would rehab and we would then turn them over to PM to place tenant and manage. We charged a set fee so fees weren’t built in to the price of acquisition so there was value an cash flow. This process takes longer but gives the best of both worlds.
3. Cap rate and ROI is dependent upon your market and purchase price. I know often times turnkey providers sell cap rates but do your research so you know what you’re really getting.
awesome comments everybody, i appreciate the guidance.
following up on this comment, "You can also buy at a higher price point but at a lower monthly cash flow to widen your pool of buyers if you need to sell."
what's your perspective on balancing appreciation with income?
I'd rather have a prospect of appreciation and feel like these more typical turn key markets (outside of Dallas) haven't had much appreciation. Tying it into the potential exit strategy, i'm hesitant to go into a market with almost no appreciation as that shows to me there's enough supply on the market. I don't necessarily need the income now so would rather have the chance of a sig. appreciation but do recognize the benefit of a model like this is the cash flow
@Matt Scott your being very much a contrarian on how most of the BP investors think and act.
most of them their tag line is "cash flow is everything appreciation is gambling". Further many will go on to say they don't care if the houses ever go up becasue they are only interested in cash flow and will own them forever.
Now i get that sentiment.. but I have also been selling real estate for 44 years.. and i can tell you most people don't hold any kind of property more than 10 years.. life happens.. things change.. they decide to move work moves them.. divorce death health.. kids need collage money all the things a 30 year old investor is not thinking of right now.. its so far from their thought process.
But your post are very accurate... one needs to think about these things.. And at least from my perspective you want some chance of value increase you need that other wise you will not come out whole.
and you can mitigate that a ton by not buying in the hood like what Morris sucked people into doing.
However at the end of the day even on A class if it does not appreciate and you have to exit probably not going to do well.
So one should think if rental property is really right for them at all... were as notes they just pay off.. you dont worry about exit you buy prime performing notes and the returns are as high you mitigate will it appreciate with a Acutal who cares because your note does not cost you money to get paid off or depreciate ( it can if you buy a bummer) but again a well chosen note is pretty rock solid and very appropriate for SIDRAS...
I owned over 350 homes 5 years ago I own now 2 rentals.. I have moved all to debt.. ....
So thats just a different perspective.. and of course there are many locals who stack rentals and do very well. .but to buy one or two.. not sure that as stated REITS or some other investment might be better than all the RISKS your delineating in your post.
OK so thats the contrarian view point LOL and again not popular on this site..
awesome comments everybody, i appreciate the guidance.
following up on this comment, "You can also buy at a higher price point but at a lower monthly cash flow to widen your pool of buyers if you need to sell."
what's your perspective on balancing appreciation with income?
I'd rather have a prospect of appreciation and feel like these more typical turn key markets (outside of Dallas) haven't had much appreciation. Tying it into the potential exit strategy, i'm hesitant to go into a market with almost no appreciation as that shows to me there's enough supply on the market. I don't necessarily need the income now so would rather have the chance of a sig. appreciation but do recognize the benefit of a model like this is the cash flow
The real money is made by principal pay-down. $50-$100 per month per property is an irrelevant amount of money if you really look at it. Think big picture. What the big picture really is (the majority of folks on Bigger Pockets miss this point day in and day out) the PRINCIPAL PAYDOWN.
You have the ability to quadruple your money while doing ZERO work. That's the real name of the game. Spend $1M funding the down payments of 10 houses & then have those tenants pay them all off for you. When you are all done and ready to retire you've turned your $1M into $4M without any appreciation. Ad in the appreciation & any possible cash flow it's a damn good gig.
@James Wise I love when people remember principal paydown as one of the four areas of return when investing in rental real estate.
1. Cash Flow
2. Appreciation
3. Tax Benefits from Depreciation
4. Principal Paydown
Is @Matt Scott suggesting that the turnkey investments he's considering are getting 7-10% cash on cash return? That's much better than we see here in my local market where cash on cash return on investment with 20% down payment is very close to 0% when you use real numbers including mortgage payment, taxes, insurance, maintenance, vacancy and capital expenses (assuming you're managing it yourself). Having a property manager, it is worse than 0% cash on cash.
Lately, in our market we've seen unsustainable appreciation rates between 5% and 10% per year. A much longer historical average of same house over house appreciation is closer to 3 or 4% per year which means if you're putting 20% down payment, you're seeing a 15 to 20% return on investment per year from that. By the way... the 3% or so per year from appreciation matches Case-Shiller's long-term numbers and makes real estate appreciation look an awful lot like just inflation (since that's before inflation numbers).
I think the point @Jay Hinrichs was making is that it is the minority on BP that really consider the appreciation part of the return.
If your turnkey property is not seeing appreciation, that return may truly be closer to zero. I don't know and you'd want to research that from whatever source you like, but I might suggest trying the one you're already paying for from our government:
Back to returns. The tax benefits from depreciation (after tax) are a little more challenging since you typically take the value of the property (excluding the land) and divide by 27.5 years to get the amount you can depreciate each year. The really, really rough (never use this on your tax returns... but it is a good way to impress your friends at cocktail parties) is to just take 3% of the purchase price to estimate your gross depreciation for the year.
Then--and this is controversial since I am mixing pre-tax and post-tax returns--multiply your gross depreciation by your effective tax rate. Further controversial since some would argue you should use your highest tax rate since that is the one you're really reducing paying in. So, if you're buying a $100,000 house... really, really rough math says you might be seeing $3,000 per year in gross depreciation times... let's say you're in a 15% tax bracket because my math with 16, 17, 18 and 19 times 3 isn't great (even though all real estate agents can multiply by 3%)... that means you're saving $450 per year on your tax return in what I call "cash flow from depreciation"... that is a fancy way of saying you didn't have to pay that amount in taxes so you got to keep that much more.
$450 per year on a 20% down payment or $20,000 down payment means you're getting a 2.25% return on investment (after tax) on your investment from depreciation.
And finally what prompted me to chime in... James' comment on principal paydown. I'm tiring of typing, but let me know if you want me to send you a whole class I did on the math behind this, but the short answer is the return you get from a 20% down payment loan being paid off over 30 years is 5.51% per year.
So... if you add up the returns for a turnkey property it might look like this:
7% from cash flow + 15% return (if you're seeing 3% appreciation) + 2.25% from depreciation + 5.5% from debt paydown = about 30% per year (if you squint really hard and don't check my math... because these are exact numbers to begin with)
Now... we had A LOT of assumptions in there... if cap ex is much higher (which it can happen on the lower end properties), cash flow can be a lot lower than 7%. If you don't see 3% appreciation, which is totally possible... there goes half your 30% return. As James points out... the 5.5 from debt paydown (paying down your loan) is about as close to a guaranteed return as you can get (without us ever daring to call it guaranteed) and provided they don't change the tax laws... the depreciation is probably a reasonable assumption as well.
If you want, hit me up and maybe we can run some numbers in my new real estate modeling/simulation software for the turnkey stuff... I've not turn that before.
OK... off to watch some TV with my wife and eat a late dinner. Hope that helps someone. Thanks!
awesome comments everybody, i appreciate the guidance.
following up on this comment, "You can also buy at a higher price point but at a lower monthly cash flow to widen your pool of buyers if you need to sell."
what's your perspective on balancing appreciation with income?
I'd rather have a prospect of appreciation and feel like these more typical turn key markets (outside of Dallas) haven't had much appreciation. Tying it into the potential exit strategy, i'm hesitant to go into a market with almost no appreciation as that shows to me there's enough supply on the market. I don't necessarily need the income now so would rather have the chance of a sig. appreciation but do recognize the benefit of a model like this is the cash flow
The real money is made by principal pay-down. $50-$100 per month per property is an irrelevant amount of money if you really look at it. Think big picture. What the big picture really is (the majority of folks on Bigger Pockets miss this point day in and day out) the PRINCIPAL PAYDOWN.
You have the ability to quadruple your money while doing ZERO work. That's the real name of the game. Spend $1M funding the down payments of 10 houses & then have those tenants pay them all off for you. When you are all done and ready to retire you've turned your $1M into $4M without any appreciation. Ad in the appreciation & any possible cash flow it's a damn good gig.
when I started in real estate in 1975 ish.. that is the return.. let your tenant pay your house off EVERYTHING ELSE is the BONUS.
so for those that bought in the Bay area this turned out to be one of the biggest wealth generators of the 20th century hands down.
you bought a home in Cupertino or Palo Alto or any silicon valley Penninsula location in those days and let the tenant pay it off your sitting on 1.5 to 3 million in cash today CASH EQUITY that is real..
in some Markets you just paid off a home and it never went up might have gone down.. think Detroit Rochester other rust belt areas.
You might be new to investing, but your questions are very well informed. You've done a great job of identifying potential issues with the turn key model.
First, I think it is important to understand that every TK provider is different. From the way they source properties, the way they oversee renovation and ultimately the management, each provider is going to have its own strengths and weaknesses. There are some fantastic companies in the market place (I'd put my company in that lot), but there are also some providers that play things fast and loose. You really need to investigate the track record of anyone you want to work with prior to spending the money.
Addressing your questions specifically....
1. Options in a market saturated with investor owners - The real estate market is a cycle. Values go up and they go down. It's important to enter an investment with a projected timeline for the exit. On turnkey investments, you should anticipate a 5-10 year period to hold the property, at a minimum. This allows the investor to choose a time toward the top of the market to sell. This will allow you to ride the wave of market fluctuation. In the mean time you'll make cash flow returns every month. In addition, you should always be buying with equity. Our clients see about $20,000 in equity on every property. This gives you options. If you have to sell quickly, at least you won't get hurt.
2. "Average" people moving into the investment - Before the model A was released by Ford, cars were a luxury items only available to the elite. Now, most families have multiple cars parked in their garages and driveways. Bringing a good investment vehicle to the masses is not necessarily a bad thing. So long as the TK provider provides a good product at a price that leaves room for the investor to make money, mass appeal is great. But if the product is no good, average investors will get hurt. Investigate the provider!
3. Why aren't TK providers keeping these houses? - Many TK companies do buy a lot of their own properties. Selling TK investments provides the opportunity for an additional income stream and added income today. At the same time, their portfolio grows. 7-10% returns are great over time, but a few hundred dollars per month in cash flow doesn't always pay the bills.
4. Snake oil sales people - Any industry that has the potential for large profits tends to attract unsavory characters that just want your signature on their contract. Cash flow investing is a way to get rich slowly. It's certainly not a get rich quick plan. There are plenty of quality providers across the nation. Choose someone you trust. Investigate them. Look for unhappy customer reports. Ask about situations that have gone poorly as well as those that have gone well. In the end, don't work with someone you do not trust.
Turnkey-style real estate investing is a great way to build wealth over time. Look for a company and a location in which you can be comfortable investing. Trust your gut.
Thanks all for the help, it's been super informative. Just trying to think through all of the angles - i'm starting to get the feeling like everything else, there's safety in diversification, so it could become a combination at some point of the note buying, reit buying, and direct rental ownership.
Again, appreciate everyone's patience
@Jay Hinrichs very insightful stuff. buying notes directly wasn't something i had considered. where do you recommend starting to research?
@James Orr I was following all of your comment, but got lost at "+ 15% return (if you're seeing 3% appreciation)" can you explain that again?
and just to push a little on the debt paydown angle, i get it, but it's really a choice of the owner whether that money earned from the renter is used for principal paydown, or used to help purchase a new property, or buy anything else really if they wanted?
@Joshua Weidman -i see everywhere that it's advisable to hold for 5-10 years. since you're paying closing costs & fees when selling anyway, why is 8 years better than 3 for example? (outside of trying to time the cycles like you mention which makes perfect sense) and yes "Bringing a good investment vehicle to the masses is not necessarily a bad thing." 100% agree
Thanks all for the help, it's been super informative. Just trying to think through all of the angles - i'm starting to get the feeling like everything else, there's safety in diversification, so it could become a combination at some point of the note buying, reit buying, and direct rental ownership.
Again, appreciate everyone's patience
@Jay Hinrichs very insightful stuff. buying notes directly wasn't something i had considered. where do you recommend starting to research?
@James Orr I was following all of your comment, but got lost at "+ 15% return (if you're seeing 3% appreciation)" can you explain that again?
and just to push a little on the debt paydown angle, i get it, but it's really a choice of the owner whether that money earned from the renter is used for principal paydown, or used to help purchase a new property, or buy anything else really if they wanted?
@Joshua Weidman -i see everywhere that it's advisable to hold for 5-10 years. since you're paying closing costs & fees when selling anyway, why is 8 years better than 3 for example? (outside of trying to time the cycles like you mention which makes perfect sense) and yes "Bringing a good investment vehicle to the masses is not necessarily a bad thing." 100% agree
there are many note exchanges one is FCI ... for whole notes.... also your local HML many times have opportunities for you.
and you can always send me a PM for other referrals .. its a nice option even if just to balance a portfolio.. Notes chosen correctly don't miss payments like rent can.. and they don't have cap ex or need turn over or have management fee's ( at least not large ones.)
> I was following all of your comment, but got lost at "+ 15% return (if you're seeing 3% appreciation)" can you explain that again?
Let's look at a $100,000 property. If you're appreciating at 3% a year, that's $3,000 per year in appreciation. Since you put 20% down payment, you put $20,000 down. $3,000 on a $20,000 investment is 15% return on your initial $20,000 investment. That's how I got the 15% return. If you put 20% down, you multiply the appreciation rate by 5 to get your ROI from appreciation.
> and just to push a little on the debt paydown angle, i get it, but it's really a choice of the owner whether that money earned from the renter is used for principal paydown, or used to help purchase a new property, or buy anything else really if they wanted?
This is NOT extra debt paydown... this is the normal debt paydown you get automatically by getting a 30 year amortizing loan. If you're making your mortgage payment, you're getting this return from debt paydown.
If by saying it is the choice of the homeowner to get an interest only loan or a 30 year year amortizing loan as to whether they decide to get debt paydown or not, I would agree with that. I think many investors are getting 30 year amortizing loans since it is the most common loan I see. Not sure I've ever seen stats on that, but my guess is that is the most common. Anyone know of stats that show that?
@Matt Scott, the 5-10 year window is mostly about timing. I tell investors to expect a 5-10 years to time an exit at the top. It also sets expectations related to market fluctuations. If you buy today and we're at the top of the market, it might be 10 years. Wrote you see any significant increases in property value. But for 10 years you'll have good cash flow and principal reduction. Basically, a 5-10 year window wards off the gut reaction to sell if prices drop. It's all about going into the investment with the right expectations.
Matt Scott tks are not scaleable and you are paying retail price for them. But it’s better than the stock market and you don’t have the experience nor network to source non sucker deals.
It’s a good start and how I did
