Author Topic: Thoughts on Turn-Key Investment companies?  (Read 11829 times)

KingCoin

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Thoughts on Turn-Key Investment companies?
« on: February 05, 2013, 07:20:45 PM »
I'm looking to invest in a property outside of my local area. Investment companies pitching "turn-key" properties seem like they could be an attractive no-hassle option, especially for a first deal. The properties are usually recently rehabbed, a purchase "comes with" property management services, etc.

Are there any common pitfalls in dealing with these companies? While I'd certainly do some local research, are their offerings usually at least competitive? Are their property management practices better or worse than average (I would surmise that they do a lot of their business through repeat clients, so they'd be unusually incentivized to treat you well)?

While I'm sure it differs from area to area depending on risk characteristics, what kind of Cap Rate bogey should I be shooting for with this kind of company? What kind of haircut would I typically be taking for not doing the work myself?

KingCoin

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Re: Thoughts on Turn-Key Investment companies?
« Reply #1 on: February 05, 2013, 07:23:55 PM »
Also, if anyone has a turn-key investment company that they've worked with and recommend, I'd appreciate the referral.

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #2 on: February 05, 2013, 07:34:50 PM »
It's like having an financial advisor invest for you.

You pay more for less.

Make sure your lawyer reviews everything, many turnkey companies are super shady, unfortunately, and can get real estate investors (especially rehabbers, due to their often shoddy work) a bad name. 

There are some good ones, however.  I've heard of a few good ones in various places around the country through word of mouth.  I still wouldn't recommend it, due to the first two sentences of this post, you'll give up a lot of your return, but at least you'll go from getting robbed to merely ripped off.

I'd rather invest with individual investors or companies within an area than a company that is specifically a "turn key" company, but YMMV.

Where are you looking to invest?
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plantingourpennies

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Re: Thoughts on Turn-Key Investment companies?
« Reply #3 on: February 06, 2013, 10:06:51 AM »
There were some turn-key companies available in FL during the tail end of the boom; at the time I took them as an sign of an over-heated market.

Agree with ARS about paying more for less-TANSTAFL, and they are getting a cut that could otherwise be yours.

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KingCoin

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Re: Thoughts on Turn-Key Investment companies?
« Reply #4 on: February 16, 2013, 02:13:05 PM »
As a follow up, biggerpockets did a piece on this issue:
http://www.biggerpockets.com/renewsblog/2013/02/16/turnkey/

The author is a bit of a neophyte, but she covers most of the relevant issues.

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #5 on: February 16, 2013, 03:59:29 PM »
That author is a great example of how the BiggerPockets blog has gone downhill in the last year as Joshua Dorkin's increased outsourcing has lead to less and less reliable authors.

Give me more articles by Marty Boardman and Jeff Brown, please.

She started real estate in the last year, and basically only purchases through turn key companies.  She's not really a real estate investor, IMO, and has basic knowledge, at most.  One article a week or so ago she mentions that she has "recently learned" of the concept of lease options.  Yikes.  Not the type of person I'd take a lot of advice from.

I don't mean to knock her too much, I'm sure she's a great person.  She's just not someone that should be writing in a position where people will take her as an authority, IMO.

Your opinions may vary.
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KingCoin

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Re: Thoughts on Turn-Key Investment companies?
« Reply #6 on: February 16, 2013, 04:39:10 PM »
Yeah. I thought it rather curious that a full-time real estate investor would want to essentially outsource every part of the investment process. If you have time on your hands, why not attempt some value-add? It almost reads like she's trying to justify it to herself.

I also raised an eyebrow at her charts which seem to pull numbers out of thin air. It would have been more instructive if she compared some actual turnkey properties in a given area with some properties she could have sourced herself.

illy5603

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Re: Thoughts on Turn-Key Investment companies?
« Reply #7 on: February 19, 2013, 10:54:52 AM »
I purchased two separate properties in the Memphis area from two separate "turn key" companies and my results have been mixed. I purchased the properties in May 2012, and here are the final tallies for 2012.
 
Total Rents: $15,629
Total Expenses: $10,533
Total Cashflow: $5095

Expense Breakdown:
Expenses: $4608 (includes repairs and Property Management)
Property Taxes: $2665
Interest on Mortgages: $3260
 
That said I just endured my first vacancy / pile of repairs so 2013 is starting off in the hole. One thing I like about the property managers is that they employ an economy of scale and can get repairs done quickly and cheaply. At least compared to what it would cost me if I picked random dudes out of a phone book. Point being, they do take a lot of the hassle out of the investment.
 
Random thought, if it weren't for these companies, I would not be involved in real estate investing. I did the whole REI meetings, bigger pockets reading for a couple of months before buying and decided that I was either going to go turnkey or invest passively (hard money for other investors.) I went with turnkey because of timing. I got great rates on the mortgages and the prices were right at the bottom in my market. They have since started heading north. There is no way in hell I would ever be interested in rehabbing or managing properties. Ever.

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Re: Thoughts on Turn-Key Investment companies?
« Reply #8 on: February 19, 2013, 11:11:22 AM »
+1 on Arebelspy's comments on Bigger Pockets.  Some of the articles these days are downright embarassing.  Hiring the "business consultant" to shape up the site did not do Dorkin much good, in my view.

You can also read Jeff Brown at bawldguy.com and Marty Boardman at flippingphoenixhouses.com.   I have talked to Jeff on several occasions and he's a wealth of information.  His latest comments about the banks flushing out all the "subject to" deals when interest rates go back up are spot on.  Marty helped me out on a vendor referral in an e-mail request.  Both guys are well worth your time to read.

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #9 on: February 19, 2013, 12:18:09 PM »
+1 on Arebelspy's comments on Bigger Pockets.  Some of the articles these days are downright embarassing.  Hiring the "business consultant" to shape up the site did not do Dorkin much good, in my view.

You can also read Jeff Brown at bawldguy.com and Marty Boardman at flippingphoenixhouses.com.   I have talked to Jeff on several occasions and he's a wealth of information.  His latest comments about the banks flushing out all the "subject to" deals when interest rates go back up are spot on.  Marty helped me out on a vendor referral in an e-mail request.  Both guys are well worth your time to read.

100% agree, and both those blogs are on my RSS feed (unfortunately both have also stopped blogging as much - Marty because I think he's busy, and Jeff has switched to 3-5 minute "fluff" videos).  Anyone interested in real estate should add them to their reading list.

I've also spoken with Jeff and he's a very experienced individual.  Wish he went back to writing articles on his blog.

And yeah, right now due on sale clause doesn't have much teeth, and I wouldn't worry about it for a few years, but because of it sub2 is not a long-term plan I'd build an ER around.

I do like the keywords alert change on BiggerPockets quite a bit, but sad where the blog has gone so far.  Time will tell.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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KingCoin

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Re: Thoughts on Turn-Key Investment companies?
« Reply #10 on: February 24, 2013, 08:22:58 PM »
Total Rents: $15,629
Total Expenses: $10,533
Total Cashflow: $5095

Expense Breakdown:
Expenses: $4608 (includes repairs and Property Management)
Property Taxes: $2665
Interest on Mortgages: $3260
 
That said I just endured my first vacancy / pile of repairs so 2013 is starting off in the hole.

You bought them in May 2012 and you're already dealing with vacancy and repair? Was the lease month-to-month? Were these properties rehabbed before purchase?

What was the projected cash on cash, (including management fee, excluding allowances for vacancies and repairs) when you invested? What are you projecting now?

I've pricing up some offerings, and, allowing for 10% repair and 6% vacancy, I'm arriving at around 6.5-7.25% cap rate. Not horrible, but not exactly a call to action either.  Makes hard money lending look a little more attractive vs turn-key.

illy5603

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Re: Thoughts on Turn-Key Investment companies?
« Reply #11 on: February 25, 2013, 11:16:57 AM »
Total Rents: $15,629
Total Expenses: $10,533
Total Cashflow: $5095

Expense Breakdown:
Expenses: $4608 (includes repairs and Property Management)
Property Taxes: $2665
Interest on Mortgages: $3260
 
That said I just endured my first vacancy / pile of repairs so 2013 is starting off in the hole.

You bought them in May 2012 and you're already dealing with vacancy and repair? Was the lease month-to-month? Were these properties rehabbed before purchase?

What was the projected cash on cash, (including management fee, excluding allowances for vacancies and repairs) when you invested? What are you projecting now?

I've pricing up some offerings, and, allowing for 10% repair and 6% vacancy, I'm arriving at around 6.5-7.25% cap rate. Not horrible, but not exactly a call to action either.  Makes hard money lending look a little more attractive vs turn-key.

The first property to go Vacant was the one that was already rented when I purchased it. Come to find out, it was an older rehab and needed a bit of repair work after it went vacant a few months after buying it. It is now repaired and rented but now the other home is late with rent and I expect it may go vacant soon as well. All of the leases are one year leases but that doesn't stop someone from missing payments and getting evicted.
 
You can never tell with this stuff, I did all of the math too but you just never know. As for my cap rates, the utility I used to project it had me at about 13.51% or so per house. I am sure it is less than that, especially now, but I am not really in the mood to run the numbers.

One thing that I keep in the pocket and don't talk about so much is the fact that homes have appreciated in value and I am building equity in them by paying down the mortgages. Also, I am expecting a nice tax shelter over the next few years. You don't get these last three benefits with hard money lending.

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #12 on: February 25, 2013, 11:35:06 AM »
One thing that I keep in the pocket and don't talk about so much is the fact that homes have appreciated in value and I am building equity in them by paying down the mortgages. Also, I am expecting a nice tax shelter over the next few years. You don't get these last three benefits with hard money lending.

No, but you also get a lot less work, hassle, and stress.

What you need to do is compare total ROI to total ROI.

I have a cash on cash ROI that just computes my cash flow over my investment amount, but I also have a total ROI that takes those other benefits into account.  You should as well, so you can actually tell what those other benefits are worth, and if it's an investment worth continuing, increasing, etc.
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illy5603

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Re: Thoughts on Turn-Key Investment companies?
« Reply #13 on: February 25, 2013, 12:37:45 PM »
Yes, I should be keeping better track of the numbers but part of me doesn't want to look at them and just react you know? I think my first half year went fine, I made money off of someone else's money, but that may not be the case this year. Right now I am committed to keeping the homes even if I have a lean year or two. But yes, agreed, I need to get back in the saddle and pay more attention to the bigger picture. 
 
Would you mind sharing the two different formulas you are using? I think I can figure it out by just plugging in what I had to put down on the two rentals plus the costs related to securing that money but if you have a minute, I will just use yours.

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #14 on: February 25, 2013, 01:10:19 PM »
Mine are calculated off the numbers in my spreadsheets, but it's basically:

(cash received minus all expenses, i.e. net cash gain) / initial cash outlay = cash-on-cash ROI

total gain (cash received minus all expenses + equity gain via appreciation and principal paydown + tax benefits, if you like to count those) / initial outlay = total ROI

You should have both a pro forma (i.e. what you'd expect in a "typical year" given the gross rents of your property, average vacancy for the area, expected expenses based on age of property, etc.) as well as an actual, so you can compare (and adjust what you are doing or expectations).

I had a worse than average year last year due to some vacancies at a bad time killing my ROI.  Still positive, but not happy with it.  I will be monitoring closely this year.  The year before that I had a better than average year, due to no vacancies the whole year (all expiring leases were renewed).
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whentruthdivides

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Re: Thoughts on Turn-Key Investment companies?
« Reply #15 on: February 28, 2013, 05:12:32 PM »
+1 on Arebelspy's comments on Bigger Pockets.  Some of the articles these days are downright embarassing.  Hiring the "business consultant" to shape up the site did not do Dorkin much good, in my view.

You can also read Jeff Brown at bawldguy.com and Marty Boardman at flippingphoenixhouses.com.   I have talked to Jeff on several occasions and he's a wealth of information.  His latest comments about the banks flushing out all the "subject to" deals when interest rates go back up are spot on.  Marty helped me out on a vendor referral in an e-mail request.  Both guys are well worth your time to read.

100% agree, and both those blogs are on my RSS feed (unfortunately both have also stopped blogging as much - Marty because I think he's busy, and Jeff has switched to 3-5 minute "fluff" videos).  Anyone interested in real estate should add them to their reading list.

I've also spoken with Jeff and he's a very experienced individual.  Wish he went back to writing articles on his blog.

And yeah, right now due on sale clause doesn't have much teeth, and I wouldn't worry about it for a few years, but because of it sub2 is not a long-term plan I'd build an ER around.

I do like the keywords alert change on BiggerPockets quite a bit, but sad where the blog has gone so far.  Time will tell.

I live in Phoenix so I checked out Marty's Blog. Seems like a sharp guy but not a big fan of his strategy....

1. From what I can tell he doesn't seem to live a mustachian lifestyle, though I could be wrong about that...

2. I am not a big fan of the strategy of short term flip investors. Many short term flip investors are anti-mustachian at heart living lavish consumption driven lives (at least in my experience of the ones I have met) that can only be fueled by living in the vicious circles of more flips. They are driving up the price in the market, I believe artifially faster than it should at least here in Phoenix. One of his articles looked at ASU's research that in June 2012 30%+ of the houses on the market were getting bought by investors, and that is the % they can track. There are also small time investors that are buying houses to flip that don't show up in these numbers. I believe this high price change prices out the regular everyday home buyer that could afford a home and would stabilize the market long term.

Also he says he wants the market to increase to push out long term investors, like ME! Flippers can always make money even at the height of the bubble and he shows evidence of that. But for the local real estate market short term flippers aren't necessarily a good thing in my opinion at a point. The flippers can add value, but too a point where they are buying every house on the market I think the pricing increase becomes less stable long term.

Personally as a long term investor and someone who wants to live in Phoenix it is tough competing to buy a house with investors with cash to burn and ok with losing money on a house here or there. The point he wants the market to increase to is the point where it doesn't make sense to buy a house in Phoenix for a savy long term investor or home onwer...rewind to 2003 to 2008...and creates an unstable market for the Phoenix Economy.

Anyways I am through with my complainy pants part of the post.

Back to the post. I think a turnkey can be a win...say if you were to have bought a turn key in Phoenix a year ago... you would be buying low with strong rents and price appreciation. Even now you can find houses to rent with good Investment returns, but the rental market is going to start getting very competitive here.

Though I do agree with other posters you are potentially missing out on some return by paying someone else to do a job for you...and to be honest many of these short term flippers do shotty work and just make it look good cosmetically to get the thing to sell. Thus you may end up with more out of pocket costs than expected for repairs that seem like they have been taken care of

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #16 on: February 28, 2013, 05:30:08 PM »
I don't read or recommend him for his personal finance savvy.

I read him because he knows his stuff. If you want to learn about flipping, he's a good one to listen to.
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Re: Thoughts on Turn-Key Investment companies?
« Reply #17 on: February 28, 2013, 07:32:47 PM »
IIRC, Marty is also assembling a portfolio of rentals for future income.  He does not discuss them on the blog, which is focused on flipping.

Flipping will slow or stop when it is no longer possible to buy an ordinary house at a small discount, do mostly cosmetic updating to make it look and feel like new and then sell it at a profit to an owner-occupant.  You might as well blame the builders for rising prices in Phoenix over the last 18 months because of the almost weekly price increases.  Or blame Bernanke for keeping mortgage rates artificially low, increasing affordibility.  Prices go up because there is demand for the product.

imustachemystash

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Re: Thoughts on Turn-Key Investment companies?
« Reply #18 on: June 17, 2015, 09:22:26 AM »
I'm reviving this old post to see if anyone has any new information to add to it.  I'm considering purchasing a turn-key rental in Indiana.

arebelspy

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Re: Thoughts on Turn-Key Investment companies?
« Reply #19 on: June 17, 2015, 09:38:29 AM »
I'm reviving this old post to see if anyone has any new information to add to it.  I'm considering purchasing a turn-key rental in Indiana.

Same fundamental principal--you give up returns having someone do it for you, but it's a lot less work.

More important is: do the numbers make sense and work out to be something you're happy with?

AJ (her screen name on the forums) was at CMII, and she's invested in turn key properties, you may want to touch base with her as well, I know she's satisfied with it.

I think it makes sense for some situation, but again, it all comes down to the numbers.
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