Posted over 6 years ago

Turnkey Guide 2012-2018

Dear prospective turnkey investor,

The following is my constantly updated guide to turnkey. (Updated 4-2018) Email me for any additions or feedback.

Today I buy apartment buildings like this 193 unit in San Antonio but it took me almost ten years to get there.

As much as I poke fun at the asset class and jokingly call it "turkey" instead of turnkey rentals it all started here and is the foundation of my investing portfolio.

I bought my first couple rentals back in 2009-2012 in Seattle (Primary market/no cashflow). As the prices started going up I was forced to go out of my comfort zone and purchase out of state rents because I needed cashflow in order to achieve my goal of replacing my W2 income as an engineer. I bought one I Birmingham, without seeing it and set up a professional property management company to manage the day to day. That was proof of concept for me to sell my two Seattle rentals and buy 9 Properties in 5 Months via 1031 Exchange.

I work with a lot of engineers and a lot of them say they get analysis paralysis because they like data. I call them out of it and tell them they are just scared and losing $500 of opportunity costs and time per month! A real engineer would look at the numbers. IF rent minus expenses (with contingency) minus mortgage is greater than THEN fricken do it!

Example of capital expenses that need to account for in your expenses and contingency.

Let me be clear, I don't flip or wholesale or do any of that. I have a W2 job and not looking for another job or chore. I am all about leveraging my money and more importantly, time. For people like you and me who live in places (Seattle, West Coast, Hawaii, East Coast, to name a few) where the Rent to Value ratio is 0.5% or less we have no other option.

It drives me crazy when the Real Investor Peanut Gallery (internet forums) say we are overpaying... well if I didn't have a life then licking stamps and swindling distressed buyers I could buy at a good discount too and probably do it better too;)

My full-time professional job that earns more per hour than most folks even in real estate and more than these Turn Key providers do. So I'm like “Sure... I'll pay retail and rely on their volume and expertise.” Its all about leveraging your highest and best use, which maybe your day job. Sorry.

The problem is that you have to find the right property and people to work with. And have a so you are not getting screwed. Investing for cashflow is not a get rich quick schedule but a prudent way to build lasting wealth a few hundred dollars at a time.

When I first started buying the rehabs done by the turnkey guys in the blue collar areas, if you posted "hey I'm looking for turnkey" in the forums you get the usual suspects soliciting you for marked up properties. It's off market because they rehab it for the investor with more durable and less visually appealing materials than your normal retail product. I’m all for the wholesaler to make money because they do spend a lot of time and money on mailers and advertising but the layers of middlemen who add no value is excessive and is almost as bad as Wall Street.

These days’ people in my network are not on internet forums. They say its 95% of active people who are not high paid professionals and marketers. Here is some of the chatter:

The most important thing to do is to grow your network.

So you can bounce ideas off other investors and not a salesperson. I still do free calls but please review the free content I have put on this website first. No, I do not just give recommendations to good people to buy from because things change and I am not going to throw my brand around like that. And by the way that's an "ask-hole." I know your character and the trajectory of your success but how you add value to others first instead of taking first. Some people are unaware of this which is why I'm saying something so I aplogize. This could be the reason why people are not helping you out and you feel like a lone wolf.

I don't really see much difference in the secondary markets with robust economies (Memphis, Kansas City, Birmingham, Atlanta, to name a few). I have tried to set things up so my different markets complement each other. For the most part I buy in the 1.1-1.3% range. I take home 70% in 2015 but now in 2017, I buy in the 0.9-1.1% RV range and take home 60% of the rents after all expenses (vacancy and Cap ex).

I made this diagram in 2016 and it illustrates some of the popular "secondary markets with robust economies" that a lot of out of state turnkey buyers like to invest in. Things have changed a little but as you can see you can either have appreciation or cashflow. It's tough to get the best of both worlds.

I stress NOT to spend too much picking a market.The biggest thing you can do is vet the people. As you can see the same principal is what I use in my syndication due dilligence: 50% people & 50% the numbers of the deal.

There are three ways to purchase a turnkey rental:

Marketer - I would not recommend going through a marketer, they don't even invest themselves and they did not add any value. By the time I bought my 3rd rental I knew way more than those folks did. Unfortunately I probably overpaid by a few grand on each of those first few properties not knowing what I don’t know, Work with me only if you want to compress time and want me to look over your shoulder to get my unbiased opinions and guidance. Plus you will be setup with a plan and not shoot yourself in the foot like I did by buying a dozen non-scalable investments.
Direct from Turnkey Provider – You cut out the middle man and go direct to the source, theoretically getting the best price. Just know that you are not represented by a broker who supposedly has fiduciary responsibility to you. (BTW never trust a broker) The transactions are done with their paperwork and their rules. They are the pros and its dangerous for a newbie to go down this route. There are household Turnkey Providers (TKPs) out there but I call them the “Prada of Providers”. You pay for what you get and often times more than what it’s worth - I’ll just say you are paying over 105% of retail.
Hybrid method - When I was going through my buying spree in 2015-2016, I was going (off market) via an agent that had fiduciary responsibility to me to check all the BS that the providers give you - this is what I recommend only after going through the process a few times. Usually the agent helping you is not an investor and does not really know what type of amenities/floor plans and locations are best for rentals. You will need to drive the ship.

You seemed bored reading… There is no such thing as turnkey. Check out these disaster photos from an eviction that ended up being a $37K repair bil… https://photos.app.goo.gl/R4PZLuOLGHONO5Rl2

As I was in the middle of my 1031 buying spree (#6 of 11), a lot of TKPs started to come out of the woodwork and offered their properties to me and gave me the royal treatment (discounted prices from what they normally offer). I got to meet a lot of them via meetups and national conferences because I had this podcast and they were interested in getting at the Hui Deal Pipeline Club ecosystem. Since I was pretty experienced and they liked working with me they offered me referral fees to simply send guys like you over to them with a simple "CC'ed" email. Sort of like a referral source where they would give me $1000 per home sold. I thought it made sense for them because it was a lot cheaper than paying $6000+ to a Marketer (#1 above), but as you know when you go with a marketer or this sort of referral program the buyer (you) don't really get any value add.

Personally, I'm not really into picking up $1000 referral checks and passing you off to the TKP (never to hear from you again) since I'm more looking to give back to other investors and build my network for my larger syndication deals in the my network. I think turnkey rentals are ok for people starting.

After over 1000 strategy calls with investors and coaching clients over the past couple years here is what I tell W2 employees... For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool/good for you... but just remember why we got into this... To be free from a JOB. A lot of us (80%) who stumble upon simplepassivecashflow.com and start drinking Kool-Aide will be financially free in 4-7 years pending taking action. So I always urge people to start with the end in mind and take a more passive approach.

"I have B- class rentals and high that rent for at least $900 a month and I am still having a hard time selling dang properties to other cheapo investors"

Do the math here… you with 300 dollars per property (2 months of work to buy a turnkey rental) you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place but have 1-2 evictions a year and 3-4 big things that happen. Image if I had 30, just 3 x those numbers.

Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard-working efforts of the middle class.

I currently work with one business who I can align with because they offer sort of a hybrid between the marketers (I know you know the reasons why to stay away from them) and going straight to the TKPs since you lose a lot of the protections when you do that and it's sort like signing agreements in the "wild wild west". The reason I do it this way is that I get a licensed agent that has a fiduciary responsibility to your best interests and guides you along the transaction as you buy through the TKP. Basically it's like having MLS agent to cover you for the off market deals. All the properties are aggregated from only the good TKPs and the same price that you will find on the weekly digest that is sent out by the local TKP. This is the way I buy my properties and if nothing else it's good for browsing what's out there.

Can you please recommend a good turnkey provider? You said you would help...

Short answer is not really. A provider will try to size you up and try to pull a fast one on you when they get the chance. I will not endorse anyone! The only way to protect yourself is to network with other investors by providing value first – if you are a cheapo. If your net worth is over $300K, have at least $50k liquid, and have a time crunch (kids) I think it’s a no brainer get me on your team and stop screwing around.

There is really no reason why you cannot put in an offer on a property and start collecting $300 a month with a $25K down payment in under 90 days. Someone who is still “reading”, “contacting investors”, or “picking a market” frankly lacks focus (finish one course until success) or scared of making a move. Every day you don’t do anything is of opportunity costs!
My rentals in Seattle were cash flowing each with $600-800 a month but it was because I bought at the right time and I did not look at the numbers like a sophisticated investor does. Although my cashflow was good (bad in terms of percentages) I realized that my return on deployable equity was very low, in fact it was under 5%. Now each rental I get typical cash flows by $350 but I think of it like $250 to be conservative and more importantly, my money is not being lazy. I think if you're making less than 8 percent you're better off in the stock market despite my aversion toward stocks or mutual funds. A sophisticated investor does not say “well… at least I’m able to cover my mortgage”. They are constantly monitoring their return on equity.

I wasted a lot of time in 2012-2013 looking for rentals in King, Snohomish, and Pierce county (Washington state) and nothing cash flowed. I still have the spreadsheets where I underwrote how crappy the Cashflow was. Now prices are even worse.

I helped dozens of people with this out of state investing game and have pretty much figured it out after making a bunch of mistakes that I didn't realize till later - this is why it makes me laugh with the “do it yourselfers”.

One mistake I see people making is going after these sucker properties that only can be sold to "Californians," "Hawaiians," or any rich person not from the area perceived to have trees that money grows on, from a trust fund, and drink seven Mai Tais on the beach everyday. (Personal Note - I have lived in Hawaii for about six months now and I have only been the beach twice).

These types of people (not follows of SimplePassiveCashflow.com) like to pay a plumber for ten hours to fix a small toilet leak.

Sucker properties are in the wrong area that none of the locals would touch with a ten-foot pole. They are C or D class properties that the Broker calls "B-Class or good area" and usually cost sub $60K for $750 rents a month.

"It may look good on paper but stick to rents that are higher than $900 a month"

The second thing I see newbies doing is buying 2-8 unit properties after hearing all the good things about multi-family and scaling. I think most highly paid professionals will graduate to syndications (which is why I structure business and own investing around them) and therefore will need to sell these SFHs to move up. The exit strategy on selling 2-8+ just is not there. They look good on paper but the exit strategy kills you. If you are thinking you are going to hold on to these properties for cashflow for 7+years think again because that is not what sophisticated investors do because they monitor their ROE and they know the cap-ex tidal wave will hit them in year 5-12 taking back all those profits from the earlier years.

How many turnkey homes are people buying. Here is one data set I found from one popular turnkey provider. Takeaway - most (82%) get a few properties and the rest don't get it or are too lazy.

The main thing is building the relationships and knowing who has the integrity out there. More importantly, you have to buy a few and go through the process of buying/selling and operating a while to learn how this mouse trap works. Tactically, it's no different than what I have learned in corporate America (although I'm trying to leave the rat race) by setting expectations and keeping people accountable via email remotely. Trust but verify and financial freedom will be yours.