Ladies and gents, as someone who for quite a few years has sat on the "buying" end of TK deals and is moving into the "selling" end of a fund - I've got a few thoughts here:
- at a minimum people need to of course do appropriate due diligence on integrity and client recommendations of a TK provider before jumping in. The number I've seen who for example try to post that an NOI / unleveraged CAP rate is simply calculated by gross rent less property management, insurance and taxes is stunning to me - and I almost believed it myself early in the game, until I saw my first maintenance expenses, vacancies, etc.
- even then, I'd ask some tough questions on any TK provider's model - even a reputable one - regarding when they make their money vs. when you as an investor make yours. Ultimately I abandoned the traditional TK model where your provider makes his money upfront and then you're left to make your money over time - it just isn't aligned and incentivizes even a completely reputable TK provider to "sell" deals to you rather than partnering with you to make money, which is ultimately what you want
- so I would challenge any TK provider to consider a JV partnership model - the on ground provider is putting in the work and the remote partner is putting in the capital. So instead of a fat upfront payment, I'd want my TK provider to take the same risks I am, that is, his work gets him a piece of the equity, not an upfront fee. That way he's eating exactly the same thing you are, and his incentives for the properties to perform aren't just so that he can sell you more of them, they're so that he makes his money (or not) depending on achieving what as an investor you actually care about: IRR. To me it's the height of insanity to expect that you'll be able to maximize your IRR over time as a remote investor with no one on the ground with expertise who's incentivized to maximize this - and don't tell me that's your PM, PMs (perhaps understandably given the business model) are incentivized only by maximizing revenue, nothing to do with controlling cost. This is all why I won't do any more deals where the on ground guy is charging fixed fees - I want him to have skin in the game, ideally putting some small amount of the actual equity into the deal, or at very least having most of his compensation depend on achieving the (long-term) results that I am trying to achieve as an investor
- the next logical extension to this is a fund structure where you as an investor hold fractional ownership in a larger number of homes rather than sole ownership of a smaller number of homes. In this model the "TK provider" just gets renamed as a fund manager and likewise his incentives are generally very closely aligned with yours as an investor
So bottom line for me is I'd only partner, never be a "customer" of a TK provider. I'd be very interested in others' views - is there any argument in favor of the traditional TK model?
