@Mike D'Arrigo @Account Closed
Both of you say all investors don't have the same goals. I agree. But I think it's safe to say all investors do share the goal of not losing money.
My point isn't about investors preferring A, B or C areas, it's that most turnkey providers are selling inventory that wouldn't sell well, or at the same price, on the open market. AND most buyers of turnkey properties aren't factoring in real depreciation into their numbers or the fact that they're buying into an area that is saturated with rentals (or will be soon.) The later is by no means the fault of the turnkey provider, it's the buyers responsibility to educate themselves.
I do think that turnkey providers occasionally have inventory in areas that have more tailwind than headwind, regardless of A, B, C, but they're far and few between in a sellers market (in a buyers market it's different.) It's up to the buyer to know enough to select the right properties and understand the interests of the turnkey provider may not be aligned with their own.
I think it would behove investors to ask themselves "why is this turnkey provider selling me this property instead of putting it on the MLS and opening it up to countless buyers that could potentially offer a price higher than what's listed?" Or said another way, if you owned a great rental in a great area would you A. put it on the MLS and see how high a price you can get or B. Sell it at a set price to one buyer? Assuming the set price isn't higher than the market price why wouldn't you put it on the MLS and see how high of a price you can get?
Selling at a set price to an investor without trying to sell it on the open market first doesn't make a lot of sense, so why are they doing it?
I'm currently in the KC market all day every day. I've bought and sold well over a million dollars of property here, in the past few years, just investing for myself. (And by the way, I own property in A, B and C neighborhoods so it's not that I'm bias towards A or B properties. Theres good C areas with more tailwind and bad C areas with tremendous headwind) I can tell you from boots on the ground experience KC investors are tripping over themselves to buy good properties in good areas regardless of A, B, or C. The key phrase there being "good properties" in "good areas."
Just last week I looked at a property in a good B area that would've been a great rehab/rental. I went to look at it within an hour of hitting the MLS and there were 5 other people looking at it when I got there. I submitted my offer that day and my agent said they'd already received over 10 offers and I'd need to submit a "highest and best offer." I offered 10k over the asking price...I wasn't even close. It sold for 20k+ over asking price of 50k. At that buy price there would've been little to no margin in the rehab for a flip so most likely a local investor was buying it to rent and was happy with 5k in built in equity.
My point is local investors are so hungry for deals, and yield, they're paying high prices and falling over themselves to do so. Why then would a turnkey provider sell a property at a set price to an out of state investor if they could flip it to a local investor in 30 minutes and potentially have a bidding war?
Is it possible the turnkey providers are selling inventory that local investors just don't want or at a price local investors aren't willing to pay? It's the job of the investors to dig into these questions.
Another thing investors need to understand, and think through, is the business model of property management.
As an example: Let's say a property manager runs 400 properties and that requires 1 employee per 100 properties (probably conservative.) This hypothetical company would have 4 employees, maybe a receptionist, a full time maintenance person and let's say a leasing agent...6 or 7 employees total. Let's assume these employees make 36k a year so that's 3k a month. Total payroll would be around 20k per month. Then they need an office, another 2k a month and phones, internet, computers, fax, banking, office supplies, insurance, vehicles, misc. legal and accounting fees etc. As someone who was an entrepreneur for 15 years, running countless businesses of all types, I'd say their fixed expenses are between 27k and 32k a month.
Remember our hypothetical property manager manages 400 properties, at 8% of gross rents collected. Let's assume they're in KC and the average rent collected is $1000 a month...That's 32,000 a month in revenue for a company that has 27,000 to 32,000 a month in expenses. Not exactly a cash cow.
Thinking through this it's easy to see how a property manager most likely won't make profit on the 8% fee, that just covers the monthly nut, but on up charging for maintenance and evictions.
I'd then pose the question to investors "Is it remotely possible some turnkey providers (offering property management), that sell the majority of their properties in unattractive areas, where maintenance and evictions are a much bigger issue, do so because the money is made on the maintenance and evictions?" And if the money's made on maintenance and evictions that means it'll be tough for the investor the type of return they're hoping for. I'm not implying they charge investors for un needed maintenance, I'm saying these properties will be prone to maintenance issues because of the area and type of tenant and some turnkey providers bank on this.
To me, the take away is many turnkey providers wouldn't sell to out of state investors if they weren't getting higher than market prices up front or planning on making it up on the back end with excessive maintenance and evictions.
When you consider that, along with the likely depreciation of the asset and excessive rental supply in many of the turnkey areas it's prudent for investors to proceed with caution.
Hopefully it's obvious I've refrained from mentioning any turnkey providers. In the first post I went so far is to not even mention the city. My goal isn't to throw turnkey providers under the bus (again, occasionally they will have some great inventory) it's to encourage investors to educate themselves better, think through the business model and use this to your advantage to make sure you're buying a property that fits your needs and wants exactly.
