All Forum Posts by: Clayton Mobley

@Piyush Shourie Welcome to BP! If you do a search for 'turnkey reviews' or anything similar, you'll find many many threads about this topic, with tons of experiences from actual investors, etc. I would start there.

With turnkey, and especially out of state turnkey (if you can't invest in your own market, which is common for NY folks), the team is going to make or break your investment. Even more than market, you want to do your due diligence on the people you will be trusting to manage your investment. There are several markets throughout the south and midwest with relatively comparable returns on relatively comparable properties, so it's really about the company you work with, since they will be the ones that have scouted/analyzed the properties to begin with, done the rehab, and will be selecting and managing your tenants long-term.

I, and others, talk a lot on the forums about what to look for, and what to look OUT for, when buying turnkey. Below is a partial copy/paste of a recent post I did, just for simplicity, but I'd recommend taking a look at some these recent threads about this topic, I've provided a few links to very recent threads below.

1. They should be full-service, meaning they do everything from finding props to rehab to long-term management. If they sell you a property and then sign you off to a third-party PM, that's another team you need to vet, and means the TK company has less skin in the game (ie once you close, they're work is done).
2. They should have solid, data-backed answers to your questions at-the-ready. Any TK company worth your time knows their vacancy and maintenance rates, turnover, avg move out costs etc off the back of their hands. If they don't, they're not paying enough attention to the metrics that help them improve performance, which is a bad sign.
3. Some will disagree with me on this, but I advise most investors (and new ones especially) to stick to B/B+ properties and areas. This means places that nurses, teachers, skilled laborers, etc live. Places regular middle-class folks would be happy to raise a family. These areas have the best combination of cash flow, appreciation potential (never guaranteed), exit options (you might be able to sell to an owner occupant rather than another investor down the road = higher sales price), and stably-employed tenant pools. Cash flow for lower-tier props can look amazing on paper, but there are a lot of other factors that make real-world returns less impressive. New investors, esp out of state, should look for reliable, consistent cash flow and capital preservation. If you want to get into C/D class props, take your time to learn the ropes and try to invest in your own market so you can self-manage to minimize expenses.
4. Use Google Earth to check out the neighborhoods they list in. Ask for a couple properties they have sold recently and take a virtual walk around those neighborhoods to see if they line up with the class of property you're being sold. There is a difference between B- and B+, and it's sort of a 'you know it when you see it' situation. But you'll know right away if something is being listed as a B but is actually a C or D ( I have seen folks listing props in C+ areas here in Bham as being A-, and someone from another market wouldn't know the difference without looking). In B areas, homes will be modest but maintained, grass mowed, no cars up on cinder blocks, etc.
5. After you've narrowed down your choices to your top one or two, just make the trip out to meet them. See the city, tour the neighborhoods, check out some properties, meet the team. Face to face is still the best way to gut-check your decision, and this is a long-term relationship you're getting into, so make the investment in your investment and just fly out. If you invest with them and it goes well, you don't need to make the trip again, you can build your portfolio with that provider pretty easily.
6. Even if you haven't narrowed down your list yet, ask about a visit. Many fly-by-night operations will talk a real good game but then suddenly stop responding or 'not be able to accommodate you' if you ask about coming out to see them. Why? They don't actually have real boots on the ground in the markets they advertise, let alone offices. They're either marketers calling themselves turnkey (ie they don't own any properties, they get a referral fee from other TK companies around the country for sending buyers) or they're some sort of Morris Invest house of cards (search the forums for Morris to see what to avoid).
7. Pay attention to language. If a TK company sends you emails with a used car salesperson vibe, lots of ACT NOW!!!!!!! messaging or too-good-to-be-true promises, just walk away. This also applies to anyone who tells you that you need to sign a contract within minutes of being emailed a prop (ie before you have time to run numbers and ask questions). Real estate isn't going anywhere, don't let this type of hype make you pull the trigger on something you're not 100% sure is right for you.

For more info and answers to common questions new investors have, take a look at some of these recent threads.

https://www.biggerpockets.com/forums/48/topics/683...

https://www.biggerpockets.com/forums/12/topics/683...

https://www.biggerpockets.com/forums/12/topics/675...

https://www.biggerpockets.com/forums/55/topics/675...

This is a HUGE thread, but if you want a really good lesson on what to look OUT for when choosing turnkey, take a gander at the reviews of Morris Invest: https://www.biggerpockets.com/forums/92/topics/392...

Best of luck!

Clayton

@Steve K. I should go look at his videos. I've avoided them because I know how pi**ed they'll make me lol.

@Bill F. Wow, what a fantastic analysis. This really all lines up so well, and I think this is a great post (maybe you should repost elsewhere for the masses) to highlight all the very human foibles that we are all subject to at times, but which can really lead you down the wrong path if you don't take the time to turn inward and really weigh your own biases. I think if people were a little more aware of/ comfortable with the fact that these human psychological booby traps not only exist, but are very easy to fall into even for the educated/experienced/professionals - it's how we're wired as animals - maybe fewer investors would get taken for these rides. Heck, a lot of these things have implications way bigger than just REI.

Also: "Now Gronk can tell Tad not to go into that valley because lighting strikes there all the time. Maybe it’s true or maybe Gronk doesn’t want Tad to find his sweet cave." I genuinely snorted into my coffee, sir. Great stuff.

@Steve K. WOW I honestly didn't realize that he was still putting out content. I guess people outside of BP wouldn't have a way to know what this guy is really up to unless they did the deep digging of checking to see if he's being SUED FOR FRAUD lol. I think most folks would assume that if he's actively still operating that he's not currently a defendant in a bunch of fraud cases, so they wouldn't even look - it's not the kind of thing most folks think to check. 

I agree, criminal charges have to be filed. The fact that he is still putting out content and even, I guess based on a few comments upstream, starting some new 'company' about financial advice just shows you how completely shameless he is - he honestly thinks he can/will/should get away with this - and truthfully if he's stolen enough money, he might. A big bank account can get you out of a lot of trouble.

And yes, we are a turnkey provider, but nothing like Morris - not just the fraud part. We actually live and work in our market, we do all the purchasing, rehab, and management - a full-service operation, not selling low-tier 'investments' all over the country. I'm not sure what I'd call the Morris Model, it's definitely not real turnkey, which is what is so annoying about what he's doing to the TK industry. People don't know the difference between whatever the heck he's doing and an actual investment company with skin the game.

@Jay Hinrichs couldn't agree more. There is something in American culture that makes us believe anything on TV or with a flashy enough veneer must be worthwhile. That all rich people (or at least those that sell the image of wealth) deserve everything they have and therefore must be trustworthy. It's not even a conscious thing, I think, it's deeply rooted somewhere inside us so that we don't even question: this guy has money and success, ergo he must have earned it, ergo I should trust him and follow his advice. But this guy proves you can have a 6000 sqft house and not have earned a single inch.

It really is so heartbreaking for the folks that lost so much to this guy. Certainly not their fault - crimes are always the fault of the criminal, not the victim, but it is still baffling that he got away with it so long.

I guess the upside maybe (for the industry, certainly not for the people he screwed, unfortunately) is that this is such a huge mess, so high profile in terms of our little corner of the investing world, that maybe it will serve as a reminder and a warning for a long time to come. This thread will be used for years as a shortcut for what to look for. New investors will say 'how do I choose a turnkey company and not get scammed' and we can just be like 'here's a link, look out for every single thing this guy did'. 

@Steve K. thanks for this detailed rundown. I haven't been keeping close tabs on this situation since it became so obscenely apparent that it was the scam of all scams, but somehow this guys name and business still keep popping up in new investor's threads. I guess the videos are still out there? The number of new investors I've had to direct to this thread and others, even in recent weeks.... somehow this guy is still hooking people! Honestly, this whole thing sets the Turnkey industry back in such a big way (and sharing a first name and last initial with him probably isn't doing me any favors).

Anyway, just thought I'd poke my nose back in to see what the latest was and, wow, the claims you outlined are truly jaw-dropping. How he got away with this for the amount of time he did is.... wow.

Thanks again for keeping us posted with the facts.

@Lynn Dickinson Welcome to BP! Your questions certainly aren't silly, they're very common. 

I'll give some quick answers to your questions here, but I also recommend you read this thread where @James Wise and I (and some other pros) weigh in on things to look for/ look out for when buying turnkey for the first time.

https://www.biggerpockets.com/forums/55/topics/675...

1. While you shouldn't be paying over market price for a property, Zillow is often not the greatest resource for valuations and other metrics. I would ask about comparable properties in the area, speak with an agent in the market you are considering and ask about values for props with the same square footage, bed/baths, etc. That being said - no, if a turnkey company is charging an extra $40k (even an extra $10k) I would walk away. We make our money on the spread between the purchase price+rehab costs and the market price we sell at. If a company has to inflate its sales price that much to make a profit, there's likely something up the line in their business model that isn't so efficient. 
   • Re: negotiation; the company should provide an appraisal, but you should also be able to get your own independent appraisal (if they have a problem with this, walk away). If the appraisal says the prop is worth less than they are asking, you should negotiate. This will be a pretty rare occurrence for a turnkey company that does consistent, solid work. There is something to be said for professionally rehabbed properties in cash flow markets, but you don't need to pay a massive premium for it.
2. PM companies (whether turnkey or otherwise) typically charge 8-10% of your gross rents. This fee is not usually negotiable since PM work is almost a zero-profit business (it's a ton of work). 
   • The other fee is for leasing: typically one month's rent on a new lease and a smaller fee for a renewed lease from an existing tenant. Ask about their average length of stay, % lease renewals, etc.
   • Maintenance costs will also be your responsibility, though the PM company will take care of it for you and typically pay small expenses on your behalf, but asks for your ok on bigger items. However, maintenance costs should be incorporated into your prop analysis before you purchase and should not reduce your expected returns unless something major comes up unexpectedly.
   • Fees charged to the tenant for late payments etc should usually be split 50/50 - half to the company for doing the work of chasing down payment, half to you because it's your property and you had to wait to be paid.
3. As James said, do your own due diligence and get independent appraisals and inspections. It also helps to understand the different ways the term 'turnkey' is used on the forums (ie not everything that's called turnkey is actually provided by a full-service operator), what the differences between a B and C class property are, etc. The post linked above outlines some things to look out for in order to weed out the fly-by-nights.
4. Turnkey can be a great option for folks in your position, and once you've made the decision to hire someone to take care of the day-to-day operation of the rental, investing in a market where your money goes further also makes sense. However, remember that all investment has risk. You can mitigate it with research and due diligence etc, but there will always be risk - your property may not rent right away, there could be a natural disaster, you may get unlucky with timing or tenants. Be aware that REI, like any other investment, is not a guarantee of income, but if you do your research and take the time to invest wisely, it does tend to be a more stable, reliable investment than, say the stock market.

Best of luck!

Clayton

@Andy Ramdeen I think you'll find there are tons of other investors in your same position here on BP. Pricey home market, not a lot of free time. Turnkey can be a great investment (obviously I'm biased), but it's not the passive income holy grail that some people say. While there should be no real day-to-day interaction with your investment once it's made, you have plenty of homework to do before you get to that point. 

I'll answer some of your questions below, but I really recommend you read this recent thread on the same topic. I give some more in-depth guidance and James Wise also has some solid tips for first-time turnkey investors:

https://www.biggerpockets.com/forums/55/topics/675...

1. I'll skip the 'what's your take' questions except to say that it will be in your favor to learn about the different ways the term 'turnkey' is used. One means just rent-ready - you could buy this from your neighbor, an agent, or from some big marketing company. The other refers to a specific type of investment company that buys, rehabs, sells, and manages rental properties in their own market. This is called full-service turnkey and is what you should be looking for. Long story short, it's the only type of turnkey investment that means 1) the company has skin in the game long-term because they manage the properties they sell 2) you have one team to vet and one relationship to build 3) there's a smaller number of fees and markups too look out for, since you have one team to vet - there aren't three or four different people (agent contractor PM) trying to get a cut, and 4) you're buying from people that live and work in the market they sell - some big marketing companies call themselves turnkey providers but they don't actually own any properties or have staff in all the markets they sell, they get a referral fee for sending your business to whichever turnkey operators will pay the most. 
2. Out of state turnkey is popular for the reasons you listed - your home market is overpriced and if you're going to go turnkey anyway, might as well do it in a market where your capital can go further.
3. I always recommend that you make the trip to visit your top one or two choices for turnkey providers once you've done the legwork of narrowing down your choices. If you build a good relationship, you won't need to make this trip for each prop you buy with that same provider, but for the first deal it's still the best way to gut-check your decision.
4. See the link above for things to look for / look out for. 
5. There shouldn't be a ton of different fees involved.
   •  Turnkey companies make most of their money on the spread between the cost of the property + rehab costs and the market price they sell to investors at. You shouldn't be paying more than market price. The reason turnkey companies can make good money on this spread is because we have efficient, streamlined rehab processes (same thing for every prop, no surprises), super honed selection criteria for properties, and we get wholesale prices on rehab supplies/fixtures/appliances. It's an economy of scale thing. 
   • The two fees you'll see are the PM fee, which is typically about 8-10% of your gross rents, and a leasing fee, which is usually equal to one month's rent on a new lease, and something smaller for renewal of a lease by an existing tenant. There shouldn't be other little nickel and dime fees.
6. Long before you make an investment, you need to get used to analyzing properties. BP is the best place to learn about this. Learn about all the metrics that play into your return (vacancy, maintenance, capex, taxes) and get familiar with common rates, establish your own comfort level (some folks like to use very conservative figures to play it safe, for example). Use MLS to just run numbers on random props - not looking for a deal just getting to a point where the math is second nature.
   • We have an interactive ROI spreadsheet we use to run numbers on our props that I always offer to new investors. You can change the inputs and it does the math for you, so it can be used for any prop, not just ours. Let me know if you'd like to take a look.

Again, take a look at the thread linked above for some other tips from me and from some other seasoned pros.

Good luck!

Clayton

NOTE: I AM NOT A CPA. You should consult a qualified tax professional before pulling any triggers. If you are considering a 1031, you also need a Qualified Intermediary. Make sure to do your research and speak with professionals before you make any moves. If you sell your property before hiring a QI, you are automatically not eligible for a 1031 exchange.

It is difficult to advise without more specifics (do you already own this property? for how long?) but my guess is your best option is not the 1031, but rather the Sec 121 exclusion. If you have owned and lived in the property for at least 24 out of the past 60 months, then you can sell and take up to $250k of capital gain tax-free (or $500k if you're married filing jointly). Unless you are willing to convert it completely into a rental (ie move to another house yourself), then the portion of your value that could be used in a 1031 exchange (if you managed to qualify) would be barely worth the effort ( a garage is likely only a small portion of the entire property).

From the info provided I think your options look like this:

If you've already purchased the property and live there as your primary residence:

If you have owned the property for more than 60 months AND lived there as your primary residence for more than 60 months (these periods don't need to be the same 60 months) within the last 5 years, then you can sell it and take the Section 121 exclusion on your capital gain (up to the limits outlined above).

From your brief post I'm guessing this is your best bet.

If you've already purchased the property and live there, but can afford to move to another residence:

You can move out and rent the entire property long-term, thereby converting it into a rental and eventually becoming eligible for a 1031. Again, since the amount of gain (100k) would be below the Sec 121 thresholds (250k/500k), I don't see this as a necessary step unless you've taken a large amount of depreciation deductions while using it as a rental. If it has never been a rental previously, a 1031 is going to be more work than its worth based on the amount of gain you listed.

If you haven't purchased the property yet, but need it to be your primary:

Purchase the property and live in it for at least two years before selling. If you need to rent out a portion of it, you can do so, but only a pro-rated portion of your capital gain may be eligible for exclusion:

This applies to separate dwelling units on the same property. If the garage is converted into its own apartment (kitchen, bathroom) and has its own entrance, then it is a separate dwelling unit and you must prorate any capital gain on the sale.

For example, if buy at $120k, rent out 25% of the property and sell it at $300k, then your total capital gain is $180k but you are only eligible to exclude (not pay taxes on) $135k (75% of $180k) because you used 25% of the property as a rental. 

* this also applies if you currently own the property and use it as your primary residence, but want to rent out a portion of it. As a general rule, if you use a property for both your residence AND a rental, then there's more math involved *

In this case, you have a mixed-use property and the portion used as a rental (25% in the example below) could qualify for a 1031 exchange, while the rest is covered by the Sec 121 exclusion. Again, I think this is more work than it's worth if you're only renting out a small portion of a prop worth $200k.

If the garage is just a room and the tenant must use your bathroom and kitchen and entrance, then it's part of your dwelling unit and you don't have to prorate your capital gain on the sale. However, you may or may not be required to pay depreciation recapture taxes, depending on whether you were eligible to claim a depreciation deduction for that space (you probably are) for the time it was used as a rental. 

If you haven't purchased the property yet and have another primary residence:

Purchase it and hold it as a rental long-term (more than a year, at least). This is now an investment property (not your residence) and can qualify for a 1031 exchange. You may want to do some work to establish your intent to hold it long-term however, since your post here, again, is basically proof that you're looking at a short-term investment. 

Here are some links that outline the ins and outs of the Sec 121 exclusion and the 1031 exchange:

https://www.law.cornell.edu/cfr/text/26/1.121-1 (look two-thirds of the way down the page, '(e)Property used in part as a principal residence')

https://www.irs.gov/publications/p523 (info you need is a little more than halfway down, 'business or rental use of home')

If you have other information about whether you currently own the property and for how long etc, then I'm sure you'll get some more relevant answers from the BP hive mind.

@Account Closed if I understand your scenario correctly, you will only be eligible for a partial 1031, if any. Primary residences are not eligible for the 1031 - it is only for long-term investment properties. Typically, investors agree that you should hold the property for 12-18 months as a rental in order to appease the IRS and prove your intent to hold it. Since you are here stating that your intent is to buy as a primary and then sell it within one year, it is clear that you do not intend to hold it as a long-term investment and therefore would not be eligible for a 1031 exchange.

Now, even if you bought it as a primary residence and then decided to rent out your garage (or any other portion of the property that is not the entire home) then you now have a 'mixed-use' property. If you sold it, only a portion of the property would qualify as an investment, and the rest would qualify as your primary residence since you continue to live there.

The only way to qualify for a 1031 would be to purchase the property and hold it as a rental. As in, you don't live there, you rent the whole thing out. In your case you're still up against the issue of intent - as your post here illustrates that you intend to sell within one year. 

@Steve Hartkopf I second the recommendations of @Dave Foster and @Jay Hinrichs . If you want to stay invested in real estate, a 1031 is going to be your best bet. If you have appreciated property you could likely turn two properties into a whole portfolio of cash flowing rentals in markets with better returns. You could, potentially, keep executing 1031 exchanges until you die (morbid but effective), at which point, your heirs inherit your properties with a 'stepped up' tax basis equal to their FMV at the time of your passing.

Basically, you leapfrog from investment prop to bigger/better/more investment props via 1031s, deferring taxes all the way, then when you die your heirs get the props and, if they sold them the day after you die (for example), pay zero taxes. If they hold onto them and they appreciate more, they'd only pay CG taxes on the gain accrued after they inherited them. Same for any depreciation recapture if they keep holding them as rentals.

It sounds like you're going to have both a hefty CG bill and a large depreciation recapture tab, so if you're ready to get out of the REI game, look in the Charitable Remainder Trust that Jay mentioned. Basically, you 'donate' an asset (like rental property) to a charitable cause of your choice via an irrevocable trust. This removes it from your estate for tax purposes. You continue to receive income from the asset through the trust (there are rules about how much and for how long) and then at the end of the period the remainder of the trust value (the actual properties, for example) pass to the charitable organization of your choice. It's fairly complex and you definitely need a good CPA on your team, but if you have a sizeable estate and lots of appreciated assets, it's a good option to be aware of - and it's not only for real estate. You can also use the income from the trust to purchase a life insurance policy (within another trust to keep it out of probate court) that replaces any lost inheritance for your family.

You can also just 1031 your way into a good sized portfolio and THEN use the CRT, no need to do it now.

Dave and I actually talked about this option a while back on a different thread, where I go into more depth about how CRTs work and can be used for wealth preservation: https://www.biggerpockets.com/forums/48/topics/458...

Alllll that being said, **I AM NOT A CPA**. I'm just a finance nerd and an REI pro, so I talk to our clients a lot about how to build and preserve wealth for the next generation. If you like the 1031, talk to Dave. If you want to learn more about the CRT, do some research and talk to a really good CPA about the ins and outs.

You've got options, best of luck!

Clayton