Private Lending for Turnkey Properties?

Question

Hey BP!Over the last month and a half, or so, I've been deep in the rabbit hole that is Turnkey Investment Properties. I've seen opinions strongly for, against, or just indifferent on the topic, but that's not what I'm looking for with this post. Given that I live in Seattle, and I don't know enough quite yet to source, rehab, and tenant (BRRRR) a property on my own yet, it makes sense to me to look at out-of-state turnkeys. I have a $100K HELOC (I bought at near the bottom of the market here in Seattle, so this doesn't leave me overly exposed) that I've taken out with the sole purpose of using it to purchase cash flowing rentals. Long story, short ... I've found two turnkey properties (one SFR, one Duplex) in Birmingham that I'm under contract on right now. I found them through a Marketer/Promoter, and became really comfortable with the actual provider and the management side of this particular company. The provider is reputable, and the numbers pencil out decently even with the HELOC payment factored in ($238K combined purchase price, $2750/mo rent ... $300/mo NET cash flow), so I'm comfortable with it.Here's what I'm trying to figure out, and would love some help. I've found a couple of Turnkey providers that appear to be reputable that offer the ability to jump in on the front-end of the process, and fund the purchase and rehab part of the deal. BUT ... you have to be a cash buyer. Doing it this way would save me thousands of dollars going into the deal, which of course would increase my returns. I love the idea, since I'm a well qualified borrower and can refi the property after it's tenanted and performing, and it gives me many of the effect of the BRRRR strategy.My problem is that I could likely scrape cash together to do an all-cash deal, but I wouldn't be able to do these kinds of deals at the speed I'd need to in order to reach my passive income goals within the time frame I've set for myself ($6K before March of 2021, if you're wondering). I'd probably have to do them so slowly (MAYBE two a year) that it probably makes more sense for me to just take smaller returns on a larger number of deals.So, as my topic name suggests ... what are my chances of finding private money out there to fund the purchase & rehab costs, where I'd be getting the Private Lender his/her money back in 3-6 months, or at tops a year? I'm not expecting to find private money right now, while I only have one accidental rental, and two turnkeys under contract. But once I have multiple properties under my control, with the same provider, and can show a proof-of-concept of sorts, could I find a private lender to lend that money for 3-12 months?That's a bit of a novel, I know! But it's a thought that I've been throwing around in my mind, as I try to figure out a way to add some extra juice to my efforts to escape the rat race.Thanks!

Elo Xen · Answer

For active turn-key (you pay cash and fund the rehab), if you have the right provider, you will refinance and pull most of your capital back out of the project. If you have a W-2, the income can offset working capital left in the property, and you've built equity in the property. You should be able to roll capital through 3 of these a year. Let's say you built $350 cash flow per property.That's +$1050 cash flow per year (equity gain ~ 60K)If you successfully BRRR some of them, you will have additional capital from W-2After 1-2 years, you can begin to run 2 every 4 months.You see where that goes.Then you can sell or 1031 the oldest properties to recapture the equity and scale further.This is not passive. You have to qualify the properties and know the market, build provider relationship and manage the managers, work with lenders (it changes after 6 and 10 properties), and make decisions and deal with inevitable stress. But it scales.Other than finding a provider that delivers, the biggest risk is that your capital gets stuck because the property doesn't appraise, and then you wait until your W-2 generates enough capital to restart the cycle. @Ali Boone can help you on the provider side. She's connected to a good one.

Corey Smith · Answer

@Jay Hinrichs Thanks for chiming in on this, and that makes sense. I didn't know that this was how it worked previously. That would be my biggest fear in the whole thing; not being able to refi out of it, and not being able to make whoever I was borrowing the money from whole again.Given the money I have tied up in two typical turnkey properties, I may need to just exercise some patience and stack up enough capital on my own to take on one of these projects all on my own dime. It'd probably take me a year, year and a half, to get there using my W2 and other rental income. But once I did I could probably grow my passive income number at a much faster pace than "Save $20K, then buy the next turnkey property" method I'm currently working on. Plus, I'm finding that I'd like to be more "active" in my investing than simply finding good traditional turnkeys, buying them, and managing property managers. But being in Seattle, having a full-time job, and three kids ... I need to find a space somewhere in-between Passive and Active (t least until I can free myself from the 9-5 world). And I think getting in on the front-end (BRRR) on out-of-state rentals feels like where I need to be.But I'll continue to get out and talk to as many people as I can, and maybe I can find $70K-$100K via a lender that I can use to get the ball rolling before I can build the capital all on my own.Thanks again for the input!

Jay Hinrichs · Answer

Corey what you delineated is how turn key worked prior to 08 mortgage meltdownyou the buyer would borrow from me the HML and then your turn key company would source rehab and then you refi paying me off.. I did a few thousand of these.. you had me also controlling the rehab since it was my money that you borrowed from me. many of us got burnt myself included when the mortgage meltdown happened any you the buyer could not refi and were stuck in my HML.

Corey Smith · Answer

@Elo Xen I'd never seen it referred to as active turnkey, but that sounds a lot like what I've had in my mind. Very much like it. I've been working with Turnkey Marketing companies in hopes of finding providers that I'm comfortable with, and that offer the option to pay cash to fund and rehab. So far I have found one, and I've also been in contact with one that @Ali Boone referred me to.I like that this method can speed up my progress. I just need to find a way to more quickly find the cash to make it happen. Which is why I was asking about the likelihood of finding a private lender that will lend on this type of deal. I'd imagine it'd be looked at the same as if I were trying to BRRR a property all on my own. Maybe even better, since I would be working with a team that is more experienced with it than myself. I almost wish I hadn't tied up the money I have so far in traditional turnkey properties.

Ali Boone · Answer

Yep, exactly. If someone has the cash to do it, it's a great gig. Message me anytime once you get rolling and happy to chat about it!

Corey Smith · Answer

I have thought about friends/family as a means to Private Lending, but there is not a lot of resources there for me (which is why I am beginning to get out and start attending local investor group meetings to expand my circle).And I definitely agree with everything you said as far as finding a company that I'd be completely comfortable with if I went the BRRRR+Turnkey method. And the reason you just said is the reason why I'd be interested in it ... so that I could roll the equity to the next purchase and get more out of the $20K-$25K I can put in than just one property. Because obviously with traditional turnkeys, you're not getting that money back out of there anytime soon!

Corey Smith · Answer

I hadn't heard of the Sharpe index, but I'm about to check it out.I'd agree that it may not make sense to take extra risk, if my W2 pay is good. But I'd also like to find a way to more aggressive than just being heavily passive, like through standard Turnkey or syndications ... at least at some point. Turnkey will work for me in the short term, which is what I plan to do, and once I have a few of those under my belt and understand all of it more thoroughly, I'll spend some time looking into syndications.But while I make a decent wage, I still would only be able to purchase two, possibly three, properties a year if I'm having to save $20K-$25K to put down 20-25% down to buy each one. Not the worst situation, but I have goals that will require me to be able to move at a faster pace. Trying to find that way.

Ali Boone · Answer

Hey Corey! Have you thought about friends and family as loaning the money? Also, if you do the BRRRR+turnkey method (yes, it can definitely work but be cautious which companies you work with), you can continue to roll/snowball the appreciation from each property into buying more. I'm working with people buying those types of properties a lot right now and most of them are rolling the income. I know it's not as fast as straight loans, but there are all sorts of combinations of how to creatively finance them. Just be cautious with whatever creative method you use, you feel extremely comfortable with the company you are using to BRRRR the turnkeys. Because all of your money (meaning, an investors' money) is the source of the risk in that model, losing it would be detrimental to one of those loans. Maybe once you're done with the regular turnkeys, try one or two of the BRRRR ones on your own (if you can) first so you know exactly the risk factor.

Lane Kawaoka · Answer

Corey Smith google the sharpe index. Risk vs reward. If you make a good professional wage it may not make sense to take the extra risk and do active activities like flips or brrrs. Of some it maybe be to take a more passive role in turnkey rentals or syndications. Ask yourself. What are you???