All Forum Posts by: Clayton Mobley

@Kevin Suttles late to the party I know, but I'm on a BP bender today lol.

Out of state investing can be a little daunting, but there are definitely ways to do it successfully. As a turnkey provider I am, obviously, a little biased toward my brand of investing (but it's definitely not right for everyone). BUT as an experience personal investor in many different niches, I can say with certainty that there are some things you should look out for when investing at a distance. Most apply to turnkey, but can also apply to any kind of more DIY investment that requires you to rely on other people to buy/sell, renovate, manage your investment for you.

Whether you’re investing out of state or one street over, the number one priority is data - statistical data- on vacancies, maintenance costs, average length of stay, eviction rates and average move out costs, the list goes on. don’t put your money into a new market without getting a firm handle on the data first.

Run your own numbers! Every turnkey company will provide you with ROI information, but not all of the information is made equally. Double-check that they have included insurance, vacancy and maintenance taxes, etc. whatever assumptions the company makes in their pro formas, you need to get the data that backs those up - what are they based on? Make sure you actually understand the math. if not, ask the company to walk through it with you. If they can't or won't, that's a red flag.

If you're going DIY, be extra conservative with your numbers because you don't really have any historical data on which to base assumptions.

Do research on the areas the properties are in. Yes, get info from the turnkey company or agent, but you also need to do some research on your own. Ideally, the research you do will just back up what the company is saying. BUT companies will advertise a property as being maybe an A- when any local would tell you that area is a C.

A good first step is just looking at the property/neighborhood onGoogle Earth and seeing how the property looks, is the house unkempt, how appealing is the neighborhood, etc. if you don’t think the property class is correct, then the company may be inflating the property class so they charge more. If the prop is listed as an A- but a quick Google Earth shows tire-less cars in lawns and peeling paint, it’s time to walk away.

Of course, market research is crucial, but nothing beats looking people in the eye. I usually recommend that folks take the time to visit their top one or two companies or markets before pulling the trigger, just to gut-check their decision. Any decent turnkey company should be ready to give a tour or even have scheduled ongoing tours. They should be able and ready to show you some props, take you around town, answer questions, shake your hand. If the turnkey company ‘can’t’ accommodate a tour, again, move on. Even if you're going the DIY route and relying on agents etc to steer your toward the right props, taking a drive or a walk (day and night) in the area can tell you a LOT about what you're being sold.

When it comes to actually buying a property, keep in mind that you can also get your own appraisal. The company should provide one, but they should be fine with you getting your own outside appraiser involved in you want to. If the company tries to steer you away from getting your own appraisal, that’s a red flag.

The company should also be fine with you using your own financing, but you should also ensure that they have time to vet the lender to ensure a smooth hassle-free transaction. We use preferred financing providers that we regularly work with, but if a client has a relationship with a bank they would like to continue, it’s no problem on our end. The main issue comes when companies require cash-only purchases or only allow in-house financing (where they’re the ones collecting your interest payments). There aren’t many of those outfits around these days but it’s still something to watch for.

Good luck!

@Coleman Cox I'm sure you've found already that you're not the only one in CA looking elsewhere lol As @James Wise said, most turnkey markets are in the south and midwest. But it's also really important to remember that the term 'turnkey' is used in a few different ways by different types of companies. So make sure you understand the difference between a co that sells 'turnkey properties' (ie rent ready) and a 'full-service turnkey company' (one company that buys, rehabs, sells and manages rentals in their market, all in-house). I'm naturally biased towards turnkey investing for folks who need to go OOS, but it's definitely not the passive, no-homework investment some people imply.

Whether you’re investing out of state or one street over, the number one priority is data - statistical data- on vacancies, maintenance costs, average length of stay, eviction rates and average move out costs, the list goes on. don’t put your money into a new market without getting a firm handle on the data first. Just because you're going the full-service route doesn't mean you get to just take everyone at their word.

Run your own numbers! Every turnkey company will provide you with ROI information, but all math is NOT created equal. Double-check that they have included insurance, vacancy and maintenance taxes, etc. whatever assumptions the company makes in their pro formas, you need to get the data that backs those up - what are they based on?. Confirm that you understand the math. If you don't understand it, tell the company that you need them to walk you through the information. If the no one's able to do so or communication dries up, that's not the company for you.

Do research on the areas the properties are in. Yes, get info from the turnkey company, but you also need to do some research on your own. Ideally, the research you do will just back up what the company is saying. BUT some companies will advertise a property as being maybe an A- when any local would tell you that area is a C. 

A good first step is just looking at the property/neighborhood onGoogle Earth and seeing how the property looks, is the house unkempt, how appealing is the neighborhood, etc. if you don’t think the property class is correct, then the company may be inflating the property class so they charge more. If the prop is listed as an A- but a quick Google Earth shows tire-less cars in lawns and peeling paint, it’s time to walk away.

As James mentioned, there are plenty of great investment markets around the country, it's the team you work with (either turnkey, or an assembled team that you find and vet individually) that will make or break your investment. Focus on people first.

Good luck!

Major second to @Mike D'Arrigo! Try to use .gov level data sources whenever possible. Another good resource is FRED: https://fred.stlouisfed.org/

I get tons of data from FRED and its great for comparative charting as well. Data is the No 1 most important thing in determining your best investment options, but sources matter big time!

@James Pettinelli as others have said, your PM team is crucial ESPECIALLY for OOS investing. But whether you’re investing out of state or one street over, the number one priority is data - statistical data- on vacancies, maintenance costs, average length of stay, eviction rates and average move out costs, the list goes on. don’t put your money into a new market without getting a firm handle on the data first.

Run your own numbers! Every turnkey company will provide you with ROI information, but not all of the information is made equally. Double-check that they have included insurance, vacancy and maintenance taxes, etc. whatever assumptions the company makes in their pro formas, you need to get the data that backs those up - what are they based on?. Confirm that you understand the math. If you don't understand it, tell the company that you need them to walk you through the information. If the turnkey company will not walk through this with you, that's not the company for you.

If you're going the BRRR method and don't have someone else providing you data, be super conservative especially with things like rehab costs and time (becasue rehab time = vacancy). You'll see a lot of folks on BP who try to run numbers a little emotionally and then ask 'too good to be trueee???' and the answer is yes, you want this property to work because you're excited to MOVE forward, so you underestimated your expenses. Always be a little more conservative than you think you should be, esp if you're going the DIY route and have nothing to base your assumptions on in terms of historical data.

@James Wise Yeah we are really excited about this project! It's a topic that gets thrown around a lot but you rarely see any real actionable advice for investors. Always love getting more educational content out there to the masses!

@James Wise great stuff man! Always adding value for the investor - love it!

I should also note that a lot of negativity about turnkey also comes from the occasional scam artist calling their 'business' turnkey, when it's absolutely not. It's become a bit of a buzzword lately so be sure you look for true turnkey companies: full-service, everything in-house from finding props to rehab to management; live and work in the market they sell; no used car salesman or pressure tactics.

Look up Morris Invest on BP to get a good idea of what to look out for.

@Daniel Mendez, @Charles Carillo is spot on - the issue many folks have with turnkey as a general model is that the opportunity to force appreciation and sell quickly for a profit is removed - because that's what the turnkey company has done, that's how we make money.

If you BRRRR or other DIY method, you find a distressed property, you renovate it, you either flip it for a profit or hold it as a rental. Either way, the value of the property after rehab is/should be higher than the total cost of the purchase and rehab work. That spread is called forced appreciation and its really the whole point of the BRRRR method. However, it is, of course, a ton of work and time. If you have a lot of free time, are handy yourself, or have a good network of folks you can contract to do the work, this can go quite well. But the inherent risk is that rehab takes longer, there's some unfortunate surprise along the way that adds time and dollars to the budget, etc. The longer it takes, the longer you're paying the mortgage (if you financed) without any rental income to cover it.

BUT when it's done, if it's done well, you have a property worth $200k that you only put $150k into, for example. If you want to hold it as a rental or flip it, you make money either way. You've traded a TON of time and energy and risk for a higher potential reward.

With turnkey, the primary benefit is that you don't need to do any of that. The company (which has networks and systems in place to find the best props and rehab to a high standard quickly etc) does all that legwork on their dime and on their time (ie no vacancy risk to you during rehab). You close on the prop after rehab is done and inspections are passed, so there's no risk to you during the rehab phase. In exchange, the turneky company is the one that benefits from the spread between what they put into the prop and the market price they sell to you at (should be market price, a reputable company won't inflate their values and third-party appraisals should back up their prices). Your returns will come from cash flow each month and, presumably, long-term appreciation (never guaranteed). You've traded extra potential return from forced equity for the luxury of having your time and energy back and having someone else shoulder the rehab risks.

For some investors who don't work full time or just think DIY stuff is enjoyable, it seems crazy to trade away forced equity return for convenience, which is where a lot of turnkey naysaying comes in. But for folks who work full time or more, live in pricey markets, or just want something more passive, turnkey can make a lot of sense. It all depends on your goals and what you need from your investment right now. Many folks start with turnkey because its simpler and lets them put capital to work while they learn the ropes of higher-risk strategies. It's not a lifelong choice- you can alwasy move into BRRRR after you learn more and have a cash flow buffer behind you.

It's sort of the difference between building your own stock portfolio from scratch and leanring as you go and investing in a professionally managed mutual fund or ETF. You trade higher risk-higher potenial return for lower risk-limited upside potential.

Before you decide either way, just make sure you have an honest conversation with yourself (and/or partner) about your goals and what you can realistically dedicate to REI right now in terms of money, time, energy, and risk.

@Vic Hartounian absolutely - leverage should be used inasmuch as you are comfortable, and there's no reason not to combine a cash and leveraged approach. 

100% agree if you do OOS turnkey the team is what makes or breaks your investment (although to be fair this is also true of OOS BRRRR - but you have to build the team yourself). I'd say focus on people first and foremost because if you go with a reputable team with a good/long track record, you know the market supports their business, so its a little bit of built-in market vetting (though certainly not the limit of the research to be done).

Yes, of course, I'm biased toward Bham ;) Having not had direct experience either personally or professionally in any other markets, I can't give a recommendation based on returns I've seen. But I do know that @James Wise seems to run a tight ship in OH with an ethos similar to ours. There are several markets around the south and midwest that are popular for turnkey investments, and BP is the place to find them.

Good luck!

@Vic Hartounian I typically advise folks to leverage unless they are so uncomfortable with debt that it would be more stress than its worth. And the comment above is spot on - leverage is great but you have to use it wisely. 

To your question, however, while leveraged purchases are always higher risk than cash (all else being equal), the point you make about multiplied losses doesn't make sense to me. Assuming the options are buy in cash or buy leveraged (ie not buying isn't an option) the risk of a market downturn is somewhat equal, or potentially even better for leveraged properties since you have less of you capital tied up. 

Over time the RE market has moved in an upward trend, with occasional (and, yes, sometimes major) downturns. But if you look at a chart of values over time, the trend is still positive overall. So, though we do appear to be nearing the top of this cycle, a new cycle will begin and more than likely bring values up above the current level over time, if history is any indication. https://fred.stlouisfed.org/series/MSPUS

If you buy in cash and values go down, that's money down the drain until the value goes back up. If you leverage and values go down, you have only put in 20%+ so far and will continue to pay on the loan as the market ticks back up. So either way, you're waiting on the market to recover that value over time. The only way to really avoid the risk of an upcoming downturn is to wait to purchase property and try to time the low end of the next cycle, which carries risk of its own.

However, one aspect of this debate that isn't touched on is the impact of interest rate changes. Despite recent increases, we are still near historically low interest rates - so it's more likely that they will continue to rise in the coming years than that they will drop down lower. What this means is that it becomes harder (more expensive) to borrow money, which equals fewer new owner occupants and more renters, generally. 

The primary risk of a leveraged property comes from having to pay your mortgage with no rental income (vacancy), but if the current interest rate trend continues, it should actually boost rental demand - there will be more qualified tenants who would otherwise be able to buy a house but are put off by higher rates - thereby reducing the risk of vacancy. Of course, this is assuming you're looking in B-class areas or above. Interest rate changes don't have much impact on the tenant pools of C class areas or lower because people that need to rent in those areas likely won't be able to buy regardless of interest rates.

Of course, higher rental demand reduces the risk inherent in all rental investments, regardless of leverage use. But since the primary fear people have with leverage is 'what if i have vacancy and have to pay out of pocket?' I think this interest rate point is worth making.

All that being said, if cash flow is your primary goal and you think putting capital into fewer properties with higher cash flow per prop is the best use of your investment, it's definitely still a valid option. Personally, I prefer to put my money to work by putting Other People's Money to work (the bank and the tenants). Leverage is always inherently riskier than cash - I just don't think our place in this current market cycle amplifies that risk.