All Forum Posts by: Rob Hakes

@Gwen Fyfe @Solomon Morris

Below is a portion of the letter they sent out.  It is obvious that they are extremely overwhelmed as each landlord and each tenant will be effected In some way.  

They give the option for the landlord to opt out as it will be at my expense.

"In an effort to encourage tenants who are minimally affected to pay rent on time, if April rent is paid on or before April 5, 2020, the tenant will receive a $75 credit towards their April rent. We will also have the same procedures for the month of May. Everyone has been affected in some way, and this is an opportunity for us to provide some financial relief during this difficult and uncertain time. If the rent is not paid on or before the 5th of the month, the tenant will not receive the $75 credit.
If you are opposed to this, please let us know. Please ONLY respond to this email if you are opposed to this new arrangement. It is impossible for us to reach out to every tenant individually, but if we do hear from your tenant we will update you directly. Otherwise, please look to the owner portal for all updates in the coming days and weeks. We are experiencing a high volume of emails and currently have limited access, and we are prioritizing essential communication first. We appreciate your patience and we will try to respond to all emails as quickly as possible.
Since some of our tenants have been affected more than others, we will be sending out a mass survey to each tenant to see how they have directly been impacted. This will give us a better idea about how our tenants are being impacted as a whole."

Just got an email from my PM stating that they will offer tenants a $75.00 discount if they pay rent in April or May.  From first glance i am okay with this.  I think this might weed out those that won't pay due to Covid, but probably still could.  As much as we can mitigate massive repayment plans that probably wont work, i think i need to know who the tenants are that may still be able to pay.

Any thoughts on this?

@Lisa Clouse

The terms sound reasonable for hard money, but double check your numbers on a turnkey property. You always want to make sure your annual ROI is well above the rate that you are borrowing. From my limited experience with turnkeys, you wont get much more than a 9% return and you wont have exit options because you are paying a bit above what you could resell it for, especially if your loan comes due in 12 months. At that rate you may want to get something that you can add value via flip and have some exit options.

@Jeremy Hackenberg

Also make sure you are figuring in any lease up or tenanting fees.  This is a hard cost that does not get included into the PM fees typically and does not go away.  This should add another 3-4%for a lot of turnkey companies.  Also don't calculate your vacancy based on just a percentage.  Find out their average length of stay, average turnover cost, and average months on the market, and then come up with a conservative estimate on that.  

Also prepare for taxes to go up.  Depending on market, it is very possible that once a county sees a bunch of out of state investors start to own houses in their jurisdiction it can become a feeding frenzy for revenue.  I saw two of my turnkey properties have taxes jump by 40-50% after only owning for a few years.

@Tim Rector i think you are off on your Midsouth calculations.  I have run the calculations on their properties and i am stretching to get it over a 9% cash on cash.  Are you figuring in their lease up costs and tenanting costs?  This WILL be there every year.  Also, maybe you are not calculating in closing costs as part of you money in......

Im seeing 10% cash on cash in best case scenario with most turnkeys right now.

@Nathan Nance  

Once you have selected a provider make sure you take your due diligence on the property a few steps further.  

-Call some insurance agents and get actual quotes on the insurance rather than relying on the providers estimate.

-Know what market rents actually are and be conservative. Will you be able to rent out a 'not brand new' house for what you did on the first tenant?

-Become familiar with the taxes and expect them to go up.  Alot of these turnkey houses are bought for pennies on the dollar from the provider and the property taxes are low to start out.  Once the county gets wise to the fact that a ton of out of state investors are paying top dollar for properties, they could jack up the taxes and you cant do much to argue the value because you, (the last buyer) paid top dollar.

I have done some turnkey, and even with a good provider these things have really compressed returns to unattractive lows.

Here are my 2019 Returns.  I calculate them the same as I did last year.  My cash on cash includes all closing costs and everything up front into the deal.  

COC Return -13% (that is negative 13%)

Return with principle paydown not expensed -8% (again negative)

Actual cash lost out of pocket $ 3024.00.  Blechh.

Here are some take away lessons from this one in 2019

- With a long vacancy it really gets ugly.  It was almost $1100.00 in just keeping the place up while empty.  Mostly utilities and mowing.

- Repairs are surprisingly high for a "newer" house.  I have had a tenant in there since July and there have been 3 maintenance calls for around $240 each.  Just different little things that need to be fixed up.  I always planned on this number being smaller for the first few years because of how extensive the rehab.  Spartan's maintenance estimates are definitely way low ball.  My other house with them is similar with high maintenance expenses (sewer problems).

- The silent killers.  While all this years turmoil was ongoing with this property the real killer is the county's aggressive property tax hike combined with the reduction in rent income as we had to lower the rent to get a tenant in.  With that compression, even if i had a year without any maintenance or vacancy i wont hit my minimum 'hoped' for.

-The positives.........crickets.............check back in a year and we'll see.

@Michael S.

Sorry for the late response.  To answer a few of your questions

- The neighborhoods are advertised as B/C neighborhoods.  I would say this one (the back property line is the birmingham/centerpointe line) is a C.  I still bounce back and forth on deciding whether to go out and look at the property vs. just trusting what i see on Google Earth/Street.  I know that i would have the most informed decision if i were there for a day or two scouting the area, but there is also the time and cost involved in all of that. 

- Question 3.  No i don't choose less return.  I don't care what the neighborhood is like if it will produce a consistent return.  At this point in my investing career i have focused more on a cash return rather than appreciation.  Mostly because i can compound a cash return, but appreciation (if any) can take quite some time to realize.  I do acknowledge that more returns CAN be realized via appreciation IF it appreciates well. Jury is still out I guess.....

@Kevin Charles

Thanks for the post.  Good question.  

I cant speak about the location even though i did as much due diligence as possible (google maps, online reports, etc) from my desk, i don't really know the areas.  This could have contributed to the tenant issue.  I think with the turnkey model we rely pretty heavily on the company to know which areas to absolutely avoid.  

As far as the long vacancy goes - this situation was tenant specific as they did everything they could to avoid the eviction.  Once we got it back on the market it was a few months until we got it rented.

Probably the biggest thing to reduce the vacancy length would be to make sure your rental price is not on the high end of the market rates.  It seemed we were a little high at listing and kept having to lower and lower the price till we got bites.  I think there was a run up in rental prices for a while (right when i bought) and then it cooled down once i had to re-tenant.

I also think it is easier to ask a higher rental price on a brand new remodeled house in 'untouched' condition.  unfortunately we expect that to be what we can get from future tenants.

In a few days i will post my actual returns for these properties too.  (spoiler - they are ugly)

@Pak Wu - What a total bummer.

I am really surprised that their initial reaction was to have you sell the property. Especially after a they just rehabbed it and sold it to you a few months prior. Were they going to try and sell it to another one of their investors? (if so that is puzzling because if the so property was so hopeless that they recommended to sell it, you figure they would want nothing to do with the property either, unless the sales commission was that important to them)

These turnkeys definitely have limited exit options the first few years.  If they can get a tenant within a few months, and they can figure out the issues with the wacko neighbor, you may be best off to stick it out.  

Sounds like a bad situation, and hopefully the tenant left it in good enough condition there are not tons of turnover costs.