Feedback on Turkey- Memphis Investment Properties company

[Mina Skoutelakis]

Hello,

I am from California, a newbie, looking for out of state opportunities as a first investment.  I have been looking at Memphis Investment Properties (turnkey) and wondering if anyone has experience or feedback about them?

Thanks very much,

Mina Skoutelakis 

[Eric Fernwood]

Hello @Mina Skoutelakis,

Turnkey is a purchase method, nothing more. Buying turnkey does not reduce your due diligence effort.

Location

Start by selecting an investment location. The location is the most important investment decision you will make. Select a location that meets all the following criteria.

• Appreciation - The number one location selection criteria is appreciation. Inflation constantly erodes buying power; each year, it costs more to buy the same set of goods. If you buy in a location where pre-COVID prices and rents increased faster than the current inflation rate, you will continue to have the funds you need. If not, the initial cash flow will be the highest you will ever receive, and you will have a continuously declining standard of living.

  You may have noticed that I use rent increase and appreciation interchangeably. The reason is that appreciation and rents are tied together. If prices increase (appreciation), rent will follow, but with a 2 to 10-year lag depending on the market. What is happening with property prices before COVID is an excellent indicator of what will happen with rents in the future.

• Population Size - Greater than 1 million. Small towns may rely too much on a single business or market segment.
• Population Growth - If people are moving into a location, many things have to be right. Never invest in any location where the population is stagnant or declining.
• Crime - People and companies will not move to locations perceived as dangerous. One source of cities to avoid is Neighborhood Scout's 100 most dangerous cities. Avoid any city on this list.
• Disaster Risk - Some parts of the country are more prone to natural disasters. The best indicator for natural disaster probability is homeowners insurance cost. I would avoid states with high insurance rates. Note, even if insurance pays for all the damage your property suffers, you still lose. When a significant disaster occurs, people and jobs move to locations where they can make money today. The location may take years to recover, or it may never recover. ValuePenguin is a good source for the relative cost of insurance by state.
• Operational Costs - Costs like property taxes, insurance cost, state income taxes, regulatory costs (ex: time and cost to evict), inspections, rent control, etc., have a tremendous impact on your return. Select a location with relatively low operational costs. Operational costs are a direct hit on profitability.

If you select a location that meets all the above criteria, you are off to a good start. The next step is to decide what to buy. It is not as simple as buying a property that looks like a good investment. When you buy a property, you also select many things that you cannot change in the future. See the diagram below.

As shown in the diagram, the property defines the tenant pool. The vacancy cost differences between tenant pools can be huge. For example, there are three major tenant pool segments in Las Vegas. Below is an illustration showing the annual vacancy cost for each.

Determine the tenant pool you want to target by interviewing multiple local property managers. The best tenant pool will have a high concentration of "good" tenants. I define a good tenant as someone who:

• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Has a financial history that shows they are stable and pay all their bills on schedule.
• Does not engage in illegal activities while on the property
• Does not cause problems with neighbors
• Takes care of the property
• Stays for many years

Once you know the tenant pool you want to target, you can then define the property characteristics this tenant pool is willing and able to rent. Below is the least you need to know.

• Type: Condo, high rise, single-family, etc.
• Configuration: For example, 2,000SF, two bedrooms, three-car garage, large back yard, single-story, two stories, etc.
• Location - Where your target tenant pool wants to live.
• Price - You must profitability rent the property within the target tenant pool's rent range.
• Wants - Tenant pool specific property features. For example, bars on the first-floor windows might be very important for one tenant pool. For another tenant pool, it might be granite kitchen counters.

Now that you know what kind of the properties you want to buy, the next step is to decide on a purchase method.

Turnkey vs. Investment team

Turnkey

In general, turnkey properties will always be more expensive than a direct purchase, which results in a lower return and lower equity. Turnkey providers must charge enough to cover renovation, carrying costs, marketing expenses, tenant acquisition, and profit. These costs are in addition to the actual property acquisition cost. Below is a diagram illustrating the cost difference between direct vs. turnkey. The difference between a direct purchase and buying turnkey is what I call the "convenience fee."

Note that even though you pay more with turnkey and have a lower return and equity, you save time. Convenience is the main value of buying turnkey.

Investment Team

An investment team has all the skills you need to acquire investment properties including the following.

Most of the services will be low cost and some will be free to you as the buyer. Working with an investment team will increase your return and initial equity, but it will take more of you time.

Turnkey Considerations

Below are two of the concerns I have heard from people who purchased turnkey.

Property Condition

Most turnkey providers put all their money into cosmetics, not systems. Painting, carpet, and light fixtures are small cost items compared to termites, roof, plumbing, wood rot, electrical, HVAC, and foundation issues. For example, during a recent inspection of a flipped property, we learned that the plumbing system was shot and the flipper patched over leaks. Estimated cost to re-plumb the house,$10,000. In comparison, the paint and carpet and everything else probably cost under$5,000.

I have also heard that some turnkeys do not provide an independent inspection report or even allow the property to be inspected. Unless you know the property's actual condition, how do you know the actual acquisition cost? Never buy a property without an independent property inspection. Also, do not use a property inspector recommended by the turnkey company.

Property Management

One of the selling points for turnkeys is that they manage the property after the sale. The flip side is that you cannot use a different property manager, even if you are dissatisfied with their property manager's performance. Read the turnkey's property manager's reviews. One large turnkey's property manager has a rating of 1.5 stars based on a large number of reviews. Such a poor-performing property manager will result in more frequent tenant turns, generating more income for the property manager and lower returns for you.

If You Decide on Turnkey

I recommend the following as a condition of a turnkey purchase.

• The right to have the property inspected by an independent licensed property inspector of your choosing.
• A list of all repairs made by the turnkey to the property - you need to know which items (from the inspection report) still need to be corrected. Get a quote for all the needed repairs so you know how much the property actually costs.
• Get independent rental and sales comps for the property. This will enable you to compare market rent and property value vs. what the turnkey is stating.
• Get copies of their management and leasing agreement and read them. For example, I've seen management agreement terms requiring you to sell the property through them at a very high commission rate. This may not seem important today but will be very important in the future when you decide to sell.
• You must have the right to choose the property manager. You want a property manager that works for you, not the turnkey. From what I have heard, you do not have that option with most turnkeys. Property management and maintenance is where turnkeys derive a lot of their income.
• You will receive all disclosures provided by the prior owner of the property to the turnkey. In some locations, the seller must provide detailed disclosures on the condition of the property.
• A written statement from the property manager with specifics on the time and cost to evict a non-paying tenant. Then, confirm what they state with multiple sources.

If you obtain all the above, buying turnkey or direct becomes a simple time saved vs. return decision.