Very thorough analysis and input on the TK subject, I wanted to respond to each one of your topics below individually. I think there is much to learn from one another and each others experiences.
Originally posted by
@Faisal Sami:
Well, after a long hiatus I am back on Bigger Pockets.
I started with a "turn key" company many years ago in Cleveland. I think the people who go into the "turn key" business are generally well intentioned people looking to make a prosperous venture. This is nothing against turn key providers. They provide a valuable service which is bring to investment opportunities to otherwise unsophisticated real estate beginners,,,,for a price. A pretty BIG price.
This is false, I think it is not fair to place a blanket statement such as this, about TK providers working for a hefty price. I think that if your provider is trying to make BIG money on your deal on the front end, this is RED FLAG #1 - this is probably not the right provider to work with. If you are working with a legitimate provider seeking to establish a long term relationship with the investor, and the business is well established the investor should still be able to pay wholesale and/or below market for the asset, as they are able to take advantage of the providers economies of scale.
- If the provider works exclusively with investors and this is the core competency of the business, investors can take advantage of there in-house construction services, maintenance, buying power, leasing and accounting capacity.
The acute problems come after the sale. After the glow of all the promises wear off the more mundane aspects of owning and managing rental properties come into play.
I can just hear the groans. "Well, if you have the RIGHT "turn key"/property management company you shouldn't have any problems."
Picking the RIGHT property management company and expecting unending success is like having to pick the RIGHT spouse and expecting a successful marriage---and only after a few emails, maybe a phone call or two and if you are lucky an in person meeting with the property manager. All of the reality of the horrors of what will unfold next will play out over the next several months and possibly at the expense of several more thousands of dollars coming out of your pocket.
- Wow, it sounds like you have a had a very bad experience working with management companies. Our company exclusively works with investors, we take all the challenges you have listed above and we have systems in place on the front end to insure this is not a common problem or investors are not incurring common problems as you list here. Additionally, we encourage you to come visit us and meet our team of professionals, if the team you defined cannot make themselves readily available or do not have the proper staffing in place to field general calls and keep in close contact with the investor, I would have to say this is RED FLAG #2 - you should probably find someone else before you engage in a purchase with them. I do not think this is a gamble as you defined above, on the contrary, if you ask the right questions and vet the operator thoroughly you should not have to fear this calamity as you proclaim in your statement.
Turn key providers are in the business of making a profit. There is nothing wrong with that. EXTREME caution and due diligence are warranted when dealing with turn key providers and their in house property managers,,especially when more than $50k is at risk. The good ones will cost you a LOT of money and will represent significant downside risk to your portfolio, especially if you have to carry mortgage debt and if you experience significant repairs(likely in the beginning.)
- On the contrary, the good ones should not cost you a lot of money because they have effective cost savings and efficiencies setup to run your portfolio whether it is (1) home or (100). A good TK operator, should be familiar with the business, be able to present hard scientific data about there success and failure and has ample experience to know where the pitfalls lie.
No property management company I have ever come across has been able to decrease the amount of repairs a property needs, decrease tenant vacancy rates, or communicate with me in an effective manner. Quite the opposite. After I fired my property management firms, my rent was collected on time, my repair costs suddenly went down and I was no longer paying 10% for a "management fee". Suddenly my properties were up 30 plus % and now even more. And I got to know all of my tenants; some of who I had to let go and others who have stuck with me for years.
- We would love the opportunity to show you how this is not true and it can be great. That your repair should not be riddled with costly on-going maintenance repairs. There are means and systems of mitigating these risks, a few notable steps you can take:
**If the home is a true turnkey, cash flowing now (day one) and the operator has already completed the renovation ask for the following items:
- Detailed scope of work (renovation details)
- Request copies of municipal permits
- Conduct a 3rd party home inspection during the purchase process
- Prepare a removal of contingency addendum to address any issues defined during the home inspection - handled by the operator
A good TK provider will want to mitigate as much risk on the front end as possible, I do not know anyone who likes or enjoys conducting maintenance. Maintenance should not be the core business for the operator if they are effective and professional.
Yes, I had to learn the business. I had to speak to a few tenants. I actually had to visit my properties a few times each year. But over the years I have developed systems and practices that now all hum along nicely. It's just not that hard folks. I read the comments above about not having the time or the "expertise" to start with your own real estate investments and I just shake my head. This is not rocket science folks. Its people, process, product. There is nothing very complicated about a simple income producing duplex with two tenants. Even in the worst of areas I can make this property work. We don't intentionally go into the worst of areas but the point is that BAD THINGS WILL HAPPEN regardless of where your properties are located. Your ability to bounce back from a setback is what will make you successful in your investing.
Agreed, bad things can happen, they can happen anywhere to anyone regardless of your management team. However, there are ways to mitigate those risks on the front end by conducting proper due diligence of the TK operator you elect to work with.
If you have to speak with your own tenants and you have a management company in place, I think the problems maybe more extensive then that. This is definitely not a good partner to have in place.
I do agree, just because you have a team in place, you still ant to learn the business, you want to understand it, but learning the business with seasoned and experienced professionals is much easier and less costly then having to go out and make bug $ mistakes on your own.
You may not even know of a vacancy if you have the "wrong" property manager. Much better for you to find out on your own and deal with it in a common sense way and get on top of it. I have many permutations of every horror you can imagine happen at several of my properties while under the care of property managers. Almost all of which I could have done a better job of handling on my own had I given myself permission to do so and let myself out from under the shackles of "not being an expert" in the field.
- After this last paragraph, you reference some pretty awful situations, I must say you did not have a qualified or professional management company in place if this is the situation you fell into. Thats the bottom line, the manager was simply not experienced or capable of conducting this duty. If the problem got so bad, you should definitely file a grievance with the State of Ohio Commerce Department, as all management companies need to have a licensed broker on record, otherwise this is not a legitimate management company,
Food for thought: If you are going to own LESS than 3 properties and just want rental income for some diversification , the using a "turn key" provider and outsourcing your rental income management MAY be for you. Be prepared to experience low positive cashflow though or even losses. HOWEVER, if you are looking to build a portfolio of rentals of greater than 3 properties you must learn the business. That does NOT mean you need to study toilet repair, HVAC principles or drive a junky car to your properties. The modern landlord today can use technology, other people and some basic common sense to solve and manage many investment property issues.
- Disagree, you can find great efficiency and success with (1) or (100) properties, you can build a very large portfolio with the proper team in-place. If you plan on having a substantial portfolio and being a good landlord and make good honest money, you want a staff in place and you want to have a competent management team, otherwise you will need to build your own company for your investments. Hypothetically, if you own 100 homes, how do you expect to rent, manage, collect, account, maintain and renovate those homes successfully in the long term. Did I mention field calls and communicate with tenants? How about screening and vetting tenants?
- We have clients with (1) home and (200) homes that hold there portfolios under management with us. Furthermore, they purchased the homes cash flowing day (1) from us with screened and vetted tenants. We establish long-term relatioships we believe in a high quality renovation on the front end and being very strict in tenant placement. This is a highly successful practice we have established to mitigate all those risks you had defined thought the post. Don't get me wrong I think that many people have had or have bad experiences, I just want everyone to know, that good experiences are also as plentiful and in existence as bad ones. Its understating the bad ones which helps us define good practices I think your post was very thurough and helpful. However, it is a bit one sided, I encourage you to explore us and call me. I would love to help show you the good side of turnkey as we have for clients all over the globe and domestically for many many years now successfully.
Bottom line: Be prepared to pay significant sums in profit to "turn key" companies for their service. While there is nothing wrong with this, factor this into your long term investing goals. While I maintain that 80% of all "turn key" companies/property management firms are excellent.....;))), its the bottom 20% I worry about--and those are the ones that will cause you significant financial losses,,,,,and the ones to run, not walk away from.
- The 80/20 rule applies to all of life not just proper managers, this is a long standing theory, especially in business, it can be used to measure both success nd failure. I think the take way is do lots of due diligence on the front end and find value in partners that have vast experience and knowledge. As a TK investment can be very fruitful.
All the best !
Faisal
