I love my Turnkey Investments. BP is skeptical. Am I just lucky?

[Axel Meierhoefer]

I have a strategy I call out of state turnkey residential investing or "OOS TK SFR". We have all our properties in this model and have great experiences for several year now. When I speak to people here on BP, a lot of them tell me that turnkey does not have a good reputation on Bigger Pockets, sometimes even to the point of being surprised when I describe what we do, how we do it, and how well we have been getting the desired results, especially when it comes to cash flow.

Am I just lucky, what are your experiences, and what do you think about turnkey investing in residential real estate?   

[Axel Meierhoefer]

@Fernando E. I am in several markets, one being west of Chicago, one in the Cincinnati area, and one in Alabama. Memphis Invest (or now REI) is part of the list but compared to the other three I don't own properties with them (yet). We tried a few times but it didn't work out yet. They keep expanding, so maybe in the future.

[Axel Meierhoefer]

@Jay Hinrichs Totally true. I wish I could be that concise, but it's exactly how I see it.

To me, there is some analogy to leadership and you triggered what I studied in college by what you said.

As a leader, I need to give direction, motivate, trust but verify, and check-in to make sure that the direction towards the goal is maintained. The production comes from the operators and managers.

In that sense, when I say "passive", I mean the operational part, like taking calls, sending contractors, repairmen, checking completed work, finding tenants, writing lease agreements - that's all production and passive for me.

I am the leader of my portfolio and the TK providers I work with. Passive does not mean to only collect a check.

I wrote a few comments back about how I feel more as part of a family where I lead my part of the assets. We talk, we set strategy, we celebrate, we exchange gifts, and I set direction if I see something drifting away from the path to success. 

That also means it's collaborative and not just me as the investor demanding things and then leaning back. That interpersonal aspect I am sure you have seen thousands of times is what I like probably the most.

[Axel Meierhoefer]

@Nick Rutkowski Yep, that's true

[Jay Hinrichs]

Originally posted by @Axel Meierhoefer:

@Jay Hinrichs Totally true. I wish I could be that concise, but it's exactly how I see it.

To me, there is some analogy to leadership and you triggered what I studied in college by what you said.

As a leader, I need to give direction, motivate, trust but verify, and check-in to make sure that the direction towards the goal is maintained. The production comes from the operators and managers.

In that sense, when I say "passive", I mean the operational part, like taking calls, sending contractors, repairmen, checking completed work, finding tenants, writing lease agreements - that's all production and passive for me.

I am the leader of my portfolio and the TK providers I work with. Passive does not mean to only collect a check.

I wrote a few comments back about how I feel more as part of a family where I lead my part of the assets. We talk, we set strategy, we celebrate, we exchange gifts, and I set direction if I see something drifting away from the path to success. 

That also means it's collaborative and not just me as the investor demanding things and then leaning back. That interpersonal aspect I am sure you have seen thousands of times is what I like probably the most.

its really just a small business  with 1099 contractors..  its all about management. 

As well as having un realistic expectations Investors must engage  Just sayin.. 

[Axel Meierhoefer]

@Niraj S. Yes, I do. Some came from a 1031 exchange but I also always put money aside.

I own a consulting company and when I first started in 2005 I realized that there was no retirement plan I could find. I searched and it became obvious that I need to do something myself.

My goal was to put $2000/month aside for retirement funding and then buy a property about every 10 months. In reality, it did not work exactly like that because I didn't always have $2000 to spare. As I added properties over the years it became easier because I didn't use the cash flow to consume but added it to my accumulation-saving account. That way in some months I had $2500 or even $3000 and in some, I had $1800 of which 6 might have come from cash flow.

I was very fortunate in life: I joined the Air Force after school and become an aviator. Flying jets was awesome but your body can only do that for so long. At around 40 I wasn't able to pass the flight physicals easily anymore and had to make a choice at 41 to either retire or, as I call it "fly a desk". I decided to retire and it taught me that it is like completing a careeer.

I thought I would now have the freedom to do what I wanted but had to realize that I didn't get enough money in the door to stop working. I decided then that I needed to determine a "Time Freedom Point" when I would no longer have to work and really have the freedom to decide what I want to do with my team. That might include posting on BP all day long and leading my TK providers in the maintenance of my portfolio.

I made a bunch of mistakes in the early years and the great recession did not help me. I started my own company in 2005 and it hit in about 2008. Out of these mistakes the model and strategy I am now following emerged and by the end of this year I will reach the Time Freedom Point I set many years ago.

A lot of people reading this will probably say: "wow, that's a long time". That's true but its long because I made mistakes I hope to tell people on BP about so they can avoid them and I, by my own choice, live in an expensive area of the world. I could have probably reached the point years ago if I would be willing to move to a place where life doesn't cost nearly as much as here. Last week I actually saw apples for sale in the store where they wanted to charge $1.50/apple. Go figure.

I think on average, by avoiding my mistakes and being really diligent, someone can get to the "TFP" in 8-12 years. That's why i always hope that people in their 20's, 30's and maybe early 40's read here on BP and take action so they can have the freedom to decide what to do with their most valuable commodity "time" and not having to exchange it for money.

I also like that I will not be dependent on any government programs when i decide to dial back my work hours and switch to growing exotic fruit. :-) 

[Axel Meierhoefer]

@Kanwar Sodhi very true. I would only add that your numbers should be based on solid research to the point that you can explain them to others.

[Axel Meierhoefer]

@Paul S. Ok, got it. Was just an observation

[Axel Meierhoefer]

@Jay Meola Thank you Jay. In my mind I do and other might say it's not enough. I am on the path and in my case, can now see the finish line. That's invigorating.

[Axel Meierhoefer]

@Dave Poeppelmeier I can totally imagine. I always say that teh PM function is teh most important as soon as ine has the purchase side completed. That's why the number of TK's that meet my criteria is so small. The balance between a good reno that still allows for a sales price that appraises is an art form and then also having a good PM system is rare to find. 

[Axel Meierhoefer]

@Jay Hinrichs True. Still, I am sure you deserve a lot of credit for making it run as it does...

[Jay Hinrichs]

Originally posted by @Axel Meierhoefer:

@John Morgan I am a little jealous when I read your post about managing yourself. I wish I could do that but my properties are so far away that it's not feasible. It's not just the distance but also 3 hours time difference.

Still, nice to know how that can work

I bought 12 new construction in the Jackson MS metro area  ( Madison and Rankin counties) Post Katrina for the GOZONE tax bene's now to be fair you had to be a real estate professional full time to take those tax bene's and it had to be new construction..  these were purchase at 150 to 225k each.. and i bought 6 a year for two years.. Until the tax bene's sunset.. the Gozone allowed section 179  so we were able to depreciate 50% of the purchase price ( minus land cost) year one.. so it was in those hey days of big income for us Real Estate folks.

But my main point for talking about this is I could do what John did and I could do it from Portland.. since these were A class rentals brand new in neighborhoods of 90% owner occ and the very best school districts in Mississippi ( which is a huge deal) I got top flight tenants with 700 plus ficos NO section 8  .. I was able to simply have a local realtor list them for lease ( just like I do with my A class in Vegas) And they placed the tenant .. No chasing rents I had a very good handy man which is all I needed.. Plus being brand new I had builders one year warranty and if I was buying new construction again I would buy the 2 10 warranties ( which I offer all my buyers on the new builds I do currently)  although with all the foundation problems in certain markets they may not offer it.. IE  deep south Texas etc.

So point is you can basically self manage and save a bunch of cash flow if you buy the right assets.. Section 8 NO WAY NO how unless you live there and its your baby..

Now I just closed on the last house ( sold them ) in December.. was it a good investment I would say it was good temporarily since it saved me about 250 to 300k in income tax's two year in a row.. but without that.. Nope.. by the time you go to sell you have a 15 year old rental that needs 10 to 15k minimum to be relevant to sell to an owner occ.. 

[Mike D'Arrigo]

@Axel Meierhoefer I doubt it's because you are just lucky. I suspect that you did your homework upfront and vetted your turn key company well. Just like in any business, there are good turn key companies and there are bad ones, but there are many good ones right here on BP. The beauty of real estate investing is that there are a lot of options and no one strategy is right for everyone. Turn key may not be for everyone but the BRRRR strategy certainly isn't either. For someone like you who is investing out of state, it's often the only way to go and certainly the least risky. Turn key is a great option for someone that has a demanding job, busy family life, little or no experience and buying out of state. I think those that knock the approach and say that everyone should be buying a property and fixing it up on their own are doing them a disservice and exposing them to a lot of risk. For someone has a lot of time, inclination and experience, BRRRR might be a good way to go, but they also have to be realistic and understand that many markets are highly competitive and have little inventory. Buying right and at the right price are key to making BRRRR work. In today's competitive markets, it's hard to do that. For anyone considering turn key, here are some key things to look for and avoid in a turn key company.

• Don't allow financing or a finance contingency (it can be a good indication they are selling above market value)
• Don't allow for your own independent property inspection
• Are not realistic with their pro forma's (i.e. they don't include vacancy or maintenance projections or use unrealistically low vacancy factors)
• Require you to pay for any renovation upfront
• Sell only in cheap. low end neighborhoods
• Don't accurately represent the neighborhood/property classification
• Don't have consistent rehab standards for all properties
• Don't provide a scope of work for the property
• Can't provide references of repeat investors

[Axel Meierhoefer]

@Mike D'Arrigo Thanks for the comment. I totally agree and the "things to avoid list" is great. Thanks for sharing that.

Risk management is definitely one of my driving factors.

I also find that some of the often promoted strategies, like BRRRR or flipping, are most suitable for younger people with less family attachment and more time flexibility. If you can move into a place that needs a lot of love and you are by yourself and can accept some pain for maybe 6-9 months until the first unit is renovated, that works. For anybody more mature with a spouse, kids, a full-time job, etc. it's hard to make that work. same for flipping if you try to do it or manage it beside a full-time job versus being willing to make it a full-time job for a few years early in your career.

One supplemental strategy as a precursor to my OOS TK SFR strategy I find rarely discussed is what I call "Property Share" as a way to get enough funding to move into TK investing. The beauty is that it can work even in expensive markets. Most people, when they are young and independent (I almost typed 'alone') look for small living spaces just to have a place to sleep. The "Property Share" idea would be to find a large place that has as many bedrooms/bathrooms (ensuite) as possible. Something like a 5B5B SFR. Then you live in 1B/1B and rent out the other 4B4B to fellow young people. you can use your first time home buyer low down payment advantage and get a property like that for very little initial investment. Then save the cash flow until you have enough to invest in TK properties and then use the combined cashflow after about 3 years of "community living" and get your personal mansion, start your family, and live happily ever after, adding more TK properties each year.

[Axel Meierhoefer]

@Jay Hinrichs Thanks for sharing. I keep learning and reading as the rules and options constantly change.

I read about opportunity zones. Did not work for me but it was new and worth researching.

I read and took massive advantage of the COVID CARES act rules. I know it wasn't predictable that it would last 1 year but now that it did, I totally didn't mind not having to pay mortgages. The saved money now moves into new investment properties.

I wouldn't be surprised if there will be new "stimulus initiatives" in 2021 and beyond that we can all potentially benefit from.

Those "bene's" you described sounded very juicy :-)

[Jay Hinrichs]

Originally posted by @Axel Meierhoefer:

@Jay Hinrichs Thanks for sharing. I keep learning and reading as the rules and options constantly change.

I read about opportunity zones. Did not work for me but it was new and worth researching.

I read and took massive advantage of the COVID CARES act rules. I know it wasn't predictable that it would last 1 year but now that it did, I totally didn't mind not having to pay mortgages. The saved money now moves into new investment properties.

I wouldn't be surprised if there will be new "stimulus initiatives" in 2021 and beyond that we can all potentially benefit from.

Those "bene's" you described sounded very juicy :-)

Ya opportunity zones were quite different than the go zone.. go zone was bene's year one  not in 10 years.. 

[Mike D'Arrigo]

@Axel Meierhoefer I agree with your comment about the BRRRR strategy. It can be a good strategy for someone that has a lot of time to devote but even then, it's very difficult to manage from out of state and there is no guarantee that there will be equity left. All the stars and planets have to align for it to work.

[Axel Meierhoefer]

@Mike D'Arrigo Good point. I stick with what works for me :-)

[Duane Alexander]

You have to understand that BP is a business. They have a book on BRRRR and out of state investing so that's what they talk about a lot and present the process in a manner where like it's an easy slam dunk. It trickles down into the forums and now everyone thinks they can easily BRRRR, find deals and manage rehabs from out of state because that's what BP preaches.

[Axel Meierhoefer]

@Duane Alexander Yes, I totally agree. That's part of the reason for me to post my experience and views. Thanks for sharing

[Fernando E.]

Originally posted by @Axel Meierhoefer:

@Fernando E. I am in several markets, one being west of Chicago, one in the Cincinnati area, and one in Alabama. Memphis Invest (or now REI) is part of the list but compared to the other three I don't own properties with them (yet). We tried a few times but it didn't work out yet. They keep expanding, so maybe in the future.

Thank you for the response, I've also read your other response in this thread, wanted to let you know that I appreciate your generosity of your time and knowledge gained from your experience including mistakes that will help other members of the community. You're a good man Axel, more success to you in the future, cheers! 

[Axel Meierhoefer]

@Fernando E. You are very welcome Fernando

[Spencer J.]

Yes.....I have invested in these types of properties and the "law of averages" has been against me for well over a year.  Property # 1 was purchased dec. of 2016 in 72209 - fantastic property, cashflowed very nicely for months.  In my excitement of how well it was going I purchased property # 2 in july of 2018 in 72114 - 3 mos in, the tenant stopped paying and property # 1 went vacant for 5 mos.....Meanwhile property # 2 flooded in may of 2019 ($900) - the roof leaked $600, the tenant left (3 mos vacant) A/C condenser line had to be replaced at property # 1 - $675.  Lesson learned don't get too excited , invest slowly especially if you're states away.  Sold property # 2 to another investor in nov of 2020 , I still own property # 1  currently.  Looking forward to the day when I have 6 mos of steady cashflow again.

[Axel Meierhoefer]

@Spencer J. Just curious, did yuo "renovate prop #1 and prop #2, did someone else or where they just bought as is and rented?

I am asking because this thread is mainly about turnkey investing out of state, and you are totally right, it mainly depends on the TK provider and how well they work to have a nice passive deal - or the kind of deals you describe.

I hope you use the experience as lessons learned and keep your interest in REI. It's a great field and generates wealth if done right. If you like to talk, please PM

[Spencer J.]

@Axel Meierhoefer Thank you Axel, first of all, I love your name .  I was going to name my youngest son "Axel" but I didn't win that discussion.

second: these properties are the traditional turnkey

1)fully renovated - by the turnkey provider

2)professional property management

3)tenant placement

4)cashflow from day one

third - I would like to know who your turnkey provider is?  If things are going that well for you, maybe that should be my next market?

[Axel Meierhoefer]

@Spencer J.Thanks for sharing. You probably saw in the PM response.