All Forum Posts by: Keith Anderson

@Daria B.  I think that the owner (turnkey buyer) can generally switch out the property manager if they're dissatisfied. There do seem to be volume discounts on PM fees (e.g. 1% discount after 5 properties under management), and the PM side of the turnkey operator is eager to keep clients happy to encourage more property purchases. But there's nothing keeping you with a sub-par manager.

The term "turnkey" is used loosely by folks that operate different models.

Some acquire (own), rehab, and re-sell the property to the turnkey buyer.

Some broker the property to the turnkey buyer, who funds the rehab out of pocket.

Some are marketers/promoters that collect a fee from the actual rehab/property management team and steward the buyer through the process.

In the sense that property management is often handled in-house by many turnkey sellers, there is a "vested interest" in the property's condition and tenant quality. But in the single-family market, I am not aware of any turnkey models that include fractional ownership of the property itself on the part of the seller/turnkey operator. 

Those kinds of JVs seem more common in the multi-familiy market, particularly commercial properties (5+ units). For example, I discovered one company offering individual units in their apartment complexes with pre-approved, non-recourse financing--but you could only qualify by investing with a self-directed IRA.

I've only found a few that meet your criteria (fully integrated, around 10+ years): Memphis Invest (which operates in Dallas and Houston as well) and MACK Investments in Chicago. 

Norada has been around for 10+ years too and I believe is vertically integrated in some markets and promotes in others. I'm not certain on that one but perhaps @Marco Santarelli will clarify.

That said, even if I buy from a "blue chip" turnkey seller I still plan to have contingency plans in mind. 

Though I have no intention of selling the property in under 10 years, what are the odds I could sell it at market value?

Do I have 1-2 backup property managers identified? Could I eventually transition to using brokers or PMs for lease-up and self-manage month-to-month?

This is a good thread. To me, the major downsides are:

• Diligence risk -- It's often said that "There's no diligence you can't do" on a remote property, which is technically true. But it's inarguably harder to vet a neighborhood & property from far away. My experience so far has also been that turnkey operators have preferred lenders and inspectors. I'm sure this helps deals close smoothly, but I (and many buyers) would probably prefer to work with independent folks of our choosing. 
  
• Liquidity risk -- Properties purchased at or above retail will be difficult to unload except at a loss. (Obviously, turnkey buyers should not be buying expecting to have to sell, but the limited exit strategies are a drawback.)
  
• Potentially misaligned incentives -- As already noted, property managers that make money on repairs & turnover can eat away at an investor's returns. Of course, you want to buy from turnkey sellers that also own an in-house PM operation, but you need to do a lot of diligence to understand how they run PM.

I still see many upsides, especially for those with demanding day jobs who want real estate in their portfolios but don't want to be active. The keys are diligence, realistic expectations, and contingency plans.

Great of you to share your experience Joey. Most people only post the good, and it's very helpful to hear from actual buyers -- especially with turnkeys.

It validates the need to read everything carefully; have independent professionals confirm what you're being told; and manage the manager.

Sorry to hear about this, but I agree that with persistence you can turn it around.

Thanks @Jim Tiernan

I did diligence on the same property. Here were some of my conclusions:

• Rent seems reasonable
• The price is ~8% higher than the median home value in the area (I prefer homes in the 70%-100% of median range)
• Trailing 5-year average appreciation rate for this neighborhood has been 0.59%
• 35%+ of the neighborhood rents (I like < 25%)
• Crime is not great
• Schools are not great
• Last tax assessment was $5,308 vs. the pro forma's $4,680
• Insurance might come in higher than the pro forma based on the neighborhood profile
• My data suggests vacancy & turnover is an issue in this neighborhood

This provider also offers a 1-year rent & maintenance guarantee, so their pro formas don't include allowances for vacancy or maintenance. 

Be sure when running the numbers you allow for vacancy (I assume 10%) and maintenance (I start with $100/mo and adjust based on the age of the property).  

They also have a pretty low property management fee, so I adjust management fees up to what I would expect to pay if I fired them and hired another manager.

In my analysis, the year-1 CoC return is 5.1% with monthly cash flow of ~$115. Not enough for me personally given the risk profile of this hood.

@Jim Tiernan Would you mind sharing what neighborhood these properties were in? I'm doing a lot of diligence on Chicago right now and it would be helpful to know where this problem property was.

Just PMed you. Happy to share privately with anyone else that has questions.

Keith

@Joel Owens @Jim Tiernan

Joel, I'm evaluating the company now and agree with all of your points. They claim to manage 1200+ rentals, so I don't get the sense that they're a fly-by-night company; they just don't seem to have the same highly visible presence on BP that some of the other big turnkey operators do. Their strategy and approach are pretty clearly documented, but there are still some questions...

1. Question the rents.

They claim that their pro forma rents for each property are the lowest they've received in that specific neighborhood over the last 6 months. Using Rentometer to check on a few of their currently available properties, they seem to be priced ~20-30% over market averages, but their rentals do seem to have premium amenities.

2. Question the PM company.

The PM company seems experienced and well run. I'm a little confused / concerned about how cheap it is though: a flat $100 / mo. It's "not a profit center," but a flat property management fee combined with first-year rent and maintenance guarantees makes me a little suspicious about years 2-10...

3. Question the rents.

I haven't vetted enough of their properties yet to say for certain, but if the few I've looked at are representative, I'm not surprised that vacancies are a problem in some cases.

4. Question the rehab.

The standard scope of work they've shared seems thorough. They use reasonable life expectancy to decide whether to replace mechanicals and bring all up to code. They generally replace countertops & flooring. 

5. Question the purchase price.

From my research so far, their homes don't seem to be marked up quite as seriously as others I've been looking at, and there aren't any red flags around financing/appraisal. It seems to me that they're buying right and leaving a bit of equity for their turnkey buyers, or at least pricing right about at market value with a thorough rehab.

Anyway, I'm interested to hear from Jim how this works out, as well as any others that have invested with them. I'm touring with them next month and will be happy to report back impressions.