Podcast #15 – 9 Turnkey listener questions Part 1

I hope I’m not typecasting myself into just the turnkey or out-of-state hybrid (with agent assistance) dude. I see myself as an improving investor who does not know everything and building my network and experience to do bigger and better investments.

Questions from the Hopper:

  • Are you visiting these locations at any frequency and for the initial purchases, or are you able to have enough trust and working relationship with other professional resources at those locations?
    1. I visited the team a year later in Birmingham and Atlanta
    2. I felt really comfortable and was nice to see that they were a legit business
    3. Is it really needed from a business perspective? $2-$4k is what you make a year and you’re going to spend $1000 on travel/time?
    4. Do it, if you need the warm and fuzzy feeling or going to buy a bunch of them. Do you go to New York and shake hands with the executives of your mutual fund and stock companies?
  • Do you have any TK recommendations?
    1. Really? How lazy can you be, you need other to do your own due-diligence? You need to build a minimal level of People who ask these questions never follow through anyway. If you are that lazy find a referral person who will lead you to the “cave” and ditch your butt once they collect their referral fee.
    2. I don’t want to be held liable, things change
    3. I don’t care about the silly referral commission. I am looking to build investing peers to kick it in the future.
  • Well I need to narrow down my markets and look at the data
    1. I see this as an excuse to dumpster dive in “technical-Hell”
    2. There are about 8 markets that have good robust economies (not Detroit) and Rent to Value ratios that support viable cashflowing investments. Here are some in no particular order:
      1. Chicago
      2. Memphis
  • Indianapolis
  1. Birmingham
  2. Atlanta
  3. Carolinas
  • Jacksonville
  • Kansas City
  1. Ohio
  2. Questionable on Dallas (lacks cashflow and more of appreciation play but I like it for apartments)
  3. NOT Arizona/Las Vegas (too volatile IMHO)
  1. Stand on the shoulders of giants!
  2. I don’t see much difference in Birmingham vs Atlanta other than $20 per month cashflow. Atlanta being more of an appreciation potential.
  3. I had a conversation with another investor the other day and he was really into optimizing the data to find the best market. The response I gave was it is like raising young kids
    1. picking the right market = deciding what the kids wear
    2. picking the right vendor/rehabber = help your kid pick the right friendships

Send you kid with some decent clothes and emphasize on picking the right friends. I don’t have kids so what do I know about anything.

  1. I update a little heat chart outlining what I think how markets perform with cashflow & appreciation. Email me Lane@dev.simplepassivecashflow.com with “You name – TK Heat Chart Quadrant” in the subject line and screenshot of your iTunes review.
  • Tenant grade materials. I hear you mention this a lot, no garbage disposal, laminate floors, etc.
    1. No garbage disposal (number one annoying fix I see)
    2. laminate floors
    3. no carpet
    4. no garage door
    5. no washing machine/dishwasher
    6. We want happy tenants but the Goal is the rent (use a 20% IRR rule as a starting point)

 

  • I initially thought about Indy but wasn’t comfortable with the responsiveness of the TK I was talking to… so I backed off.

 

Remember these guys primarily rehab homes. It does not mean they are bad. Do you want to be paying for the extra bloat/overhead of someone to do sales all day long in the office?

 

  • Wow, the proformas/Rent-to-value ratios in Chicago and Florida are off the charts!
    1. Always use your detailed spreadsheet to account for all costs and verify each line item
    2. Chicago has 3x taxes and anti-landlord
    3. Florida had 2x insurance
    4. 2% investor tax upcharge in Indy
    5. In my opinion, when you add these market nuances, it really normalizes all the markets. To me, they are all the same… it’s the team in place that means more (KPIs for you computer programmers out there).

 

  • You talk about buying turnkeys three ways. Marketer, Hybrid w/ agent, and direct from the Turnkey Provider? What is the best?

 

Depends on your situation. A greener investor should go with a marketer or work with a mentor/agent. A more experienced investor can work directly. I personally switch between direct and with an agent.

 

  • Do you prefer to stay with newer homes say 1990+ or 2000+ or are you ok with old homes 70’s 60’s as long as they are in good neighborhoods and have been rehabbed?

 

I prefer newer because that means you will have a newer curb appeal however those come with a bit higher price. So it’s unclear if it makes sense in terms of value (utility/cost). I don’t discriminate older homes (granted they are not functionally obsolete such as hallway type kitchens cause people today like open floor plans). Renters can’t be choosy but if you have an option in the beginning, choose well.

 

There is something to be said about an older home that is time tested and has got the kinks out. Don’t forget about capital expenditures. I have heard that certain eras (I am making this up but 1980-1985) have used superior materials than today and vice versa. I think it’s too tough to know this for a passive level because the differences vary so much between the decades and individual markets that it’s not worth creating a thesis on it.

 

  • How do you manage your out of state properties? What kind of challenges are you facing there?
    1. All about managing via phone/email and keeping those accountable. Just like corporate America.
    2. Be firm and your leverage is to fire them and get someone new.
    3. I know I pay markups and could run it better myself because after all, “no one waxes your car better than yourself”
    4. Too many people have this old school mentality that they need to live near the rental and do everything. Read the E-Myth book and open your eyes. Don’t be a landlord, be an investor.

I bought my first Turnkey in 2013. Today with more and more stock market refugees the margins are getting smaller and smaller.

Just one HVAC going out guarantees that you will lose money (cashflow wise) that year for that property.

Review my article on the hidden ways you are making money with real estate. The cashflow is just the tip of the iceberg. Remember there are other ways you are making money and that is why it is worth the extra effort overstocks/mutual funds. But its not worth the extra stress if you are just flat out bad at this stuff.

I did not figure out how to do things until I got three or four of these things (overpaid by a few thousand each time) because I just did not know what the heck to do. But you cannot read your way through it. 70-20-10 rule where 70% is doing, 20 % is by peers/mentorship, and 10% is reading like this blog/podcasts.

Podcast #14 – 22 Questions To Ask A Turnkey Provider

The turnkey world was explained in this previous post. If you are going down this passive investing path, here are some questions to ask. This is not an interview, but simply a conversation starter. Use the salesman to educate yourself and exercise your BS-Detector. A lot of people ask me who the people to work with are. I am afraid for those who think like that because they will not go through this important education phase.

  1. Can you break down the structure of your company for me? (Let them explain)
  2. Tell me how your process works from start to finish? (Let them explain)
  3. What does “turnkey” mean with your company? (Let them explain)
  4. Do you own properties close to the one you’re selling to me? (Determine if you are working directly with the TKP or middleman)
  5. Will there be a tenant in place before I close on the property? (There are pros & cons)
  6. Can I use financing to purchase the property? What happens if my financing falls through? (Determine if you are potentially overpaying)
  7. Is the home required to pass inspection and appraisal before I close? (Determine if you are potentially overpaying)
  8. Can I hire my own appraiser before closing on the property? (Determine if you are potentially overpaying)
  9. Do you use other companies to help you provide turnkey properties? (Understand where their deal flow comes from)
  10. What is your role in the sale of the turnkey properties? (Get a sense of the size of their operation, are they the sales guy, rehab guy, or everything?)
  11. Who are the “boots on the ground” in these areas? (Are you talking to the actual guy who manages the crews or just their sales person who never leaves the office)
  12. Who owns the homes? (Understand where their deal flow comes from)
  13. Who rehabs the homes? (Clarification on the buying process)
  14. Am I expected to pay for the rehab? (Clarification on what you are buying)
  15. Who manages the properties after the sale?
  16. How long have you been in business for?
  17. Is there a warranty on the property after the sale? (Beware if they provide vacancy assurance or warranties on work. They sound good but the provider could just be covering their work with a 3rd party insurance company)
  18. Can I see a scope of work with expenses for one of your rehabs? (Check out markups and what is fixed)
  19. How many properties are generally in your inventory month by month? (The more properties means better economies of scale but can also mean more bloat and more competition from other buyers)
  20. What sets you apart from other turnkey companies?
  21. What are some mistakes you make when you started out, and how are you doing those things differently now?
  22. Do you invest? If so what?

 

SPC Git Er’ Done Action Plan:

  1. Make a list of Turnkey providers, markers, agents to have a conversation with.
  2. Send out emails to providers and schedule discussions.
  3. Get on the phone, learn, and exercise your BS-Detector.
  4. Email (Lane@dev.simplepassivecashflow.com) me a screenshot of your iTunes review and I will send you the spreadsheet with some of the most popular Turnkey Providers to start your call list.

Podcast #3 – 1st Step in Deal Analysis – the Rent-to-Value Ratio: “Rental Real Estate’s Tinder Filter”

When I am looking at potential investment properties the rent-to-value ratio is the very first metric I look at with evaluating an investment. To calculate this metric you take the monthly rent divided by the purchase price/value. For example a home that rents for $1000/month that costs $100,000 has a rent to value ratio of 1% (1,000/100,000=1%). The higher the better. I typically look at a huge list of properties so using excel to make this calculation is the best practice. It’s sort of like using the dating app Tinder… but with a filter…. I’ll stop there… you get the point, a lot of options, how do you best narrow them down. In the spreadsheet if you are so inclined to use conditional formatting or spark charts to flag the best ratio values… well, no wonder you are bored at your day job. If you create a bunch of Macros to do this, wake up! You are seriously being underutilized in this world.

I actually don’t care about how many bedrooms, square footage, if it’s Victorian era, made out of bricks, in a hurricane zone, or if Heath Ledger grew up there. I’m not interested in any of it yet because I am just checking out if it hits the numbers first. Dummy Alert: Just because it meets the 1% threshold does not mean you have a winner. For example, I can find homes all day that is $50k and rent for $800. You’re probably thinking “Wow, that’s so rad it has an (800/50k) 1.6%+ Rent to value ratio”. But in reality, those homes typically have lower quality tenants who screw up the property and have more vacancy. In some places, you might have to carry a gun to pick up the rent. I personally like to find properties that are right in that 1% zone but are also the most expensive (highest class), e.g. a $145k property that rents for $1400/month.

There are similar metrics such as the Cap Rate or Gross Rent Multiplier, but these are typically not used in the non-commercial realm of Single Family Rentals. Using such vernacular can tip you off to an agent that you are either inexperienced or European… not that anything is wrong with being European except they do things ass-backwards like the whole Kilograms thing and drinking pints. ‘Merica! This is also an indicator for you that you are working with an inexperienced agent or one that is coming from the commercial world trying to “get rid of a few SFHs” as a side-gig. I am no one’s side-gig!

Home Value Rent/Month Class
40K 600 D
60K 800 C+
70K 875 B-
90K 1000 B
110K 1100 B+
130K 1150 A-
160K 1200 A

Figure: General Rent to Value Ratios w/ Classes in top Cashflow Markets

SimplePassiveCashflow.com Financial Freedom Independent Mentor Freedom~Number Value-Add NOI Teams Mortgage Integrity Charity Income Escape~the~Rat~Race Empowerment Equity Portfolio Legacy Entrepreneur Millionaire Ink~it~up Choose~Your~Path Prudent~Leverage Net-Worth Stabilized Appraisal Small~Deals E-Myth Pro-forma Network Turn-key Re-position QVD Appreciation=Icing~On~The~Cake Working~for~the~Man Stocks=Ponzi Who~needs~a~401k Cap-ex Assets Rates Cap-rate Syndication 9-to-5 JOB=just~over~broke Wisdom Risk/Reward Retirement~Now Work~On~Your~Business~Not~In~It No~Crystal~Ball Tax~Benefits Inflation~Hedge 1031 Manage~Team Leadership FYIFV Revenue DSCR IRR LLC S-Corp 1099 Schedule-E DTI FannieMae Good~Times Systems Reserves Note Rich Delegate Market Statistics Investing Strategic Proactive Bucket~System Frugal

Note: Monthly Rents on vertical, Home Value on horizontal: Varies by market, this is simply to illustrate that this line is not straight

Nuances to recognize:

  • The value and rent relationship would not be linear (straight line); instead it would be a curved line (see graph above) where you have aggressive returns in higher ratio rents in the beginning (lower class properties) and lower ratio rents in the end (higher class properties)
  • As properties get more expensive the rent to value ratio typically decreases – see the graph above as the home value gets over 100k it gets flatter (horizontal).
  • Just know that the rents per month in this chart are Proforma rents, which mean subject to real life – and if it’s coming from a sales agent – yup straight up BS. If you are totally understanding the graph above, note that the curve will flatten out (less bendy, straighter) as you transition to actual real life performance. Or in other words, you will have to pay a lot more expenses per income in the lower classes than higher classes because lower class tenants tend to be harder on the home. What the graph does not depict is your mental currency that you have to expend on “pain in the ass” (PITA) tenants. I personally try to minimize the PITA potential in all levels of my investing because I am lazy and my best and highest use is at my day job. I like real estate but I don’t love it enough to make it my full-time job. Remember – this is the investment that’s supposed to allow me to quit my job or free up my time for other things.
  • If you want my input on my preferred class of properties (especially when starting out), I like to stay in the “sweet spot,” which occurs right before your rent to value numbers flat line – this is typical of the B to B+ range. You have to make your own judgment call here for your own strategy. Also, there is something to be said about being diversified in several classes. For example in Houston where blue collar jobs (C & B rentals) are suffering because of bad oil trends, it would also be good to have some higher class properties (B+ & A- rentals) with jobs tied to white-collar jobs despite the lower returns. Lots of things going on here and that is why real estate investing, although simple, is not for dummies. And now that you are confused and you don’t know what to think… someone told me that the 80% of the median home price (not average – which is typically skewed higher and a figure that is easily found online) is a key price point to try to be around because that is where most of your renting population will be. For example, if the median home in Birmingham is 120k (80% x 120K = 96K) the magic price point is 96K – hey that’s right above a B class property how lucky is that. Hey, it’s my blog so I pick the examples.
  • There are many well-written articles on this subject and here is one of them:

http://affordanything.com/2016/04/28/one-percent-rule-gross-rent-multiplier/

 

SPC GET ‘ER DONE PLAN

  1. If you are new, make a spreadsheet and just start listing the potential rents and market values of properties you see.

Free access to spreadsheets, mindset tips, networking offers, and deal-flow access! Value-add for even the experienced investor! Plus Coming Soon… “The Turnkey Guide Book” & “The LP’s Due-diligence Guide to Syndications “

Get ready to change your life!

 

Hidden Returns of Rental Real Estate – 30%+ ROI a year smokes the pants off stocks/mutual funds

Here is a discussion that will hopefully put to bed the annoying quarrel that people outside of real estate just don’t get. I’m going to show you the hidden ways you make your money on real estate rentals that blow REITs, Crowdfunding deals, and Real Estate Notes out of the water. There are potentially better investments (risk divided by reward) backed up by a hard asset, however, those deals are not obtainable by the average individual who does not have access to a rich and powerful network of people (not this bottom feeder one) and who does not have a net worth exceeding $1-million. These are the deals that happen behind closed doors in the country club crowd, but that’s not what we are here to talk about today. If you’re wondering, I too am Tiny Tim peering into that window of that exclusive party. The simple rental is something that is accessible to everyone and today we are talking about the math behind it. So put on your propeller hats, because we’re about to talk numbers.

“Hidden Returns of Rental Real Estate – 30%+ ROI a year smokes the pants off stocks/mutual funds”Continue reading

My Rental #4: Birmingham

I promised real life properties and updates and here is the first one. For obvious reasons, the address will not be released for the tenant’s privacy but I am renaming the properties with the city name (Birmingham, Alabama) and the corresponding number that it was acquired.

04AL

This property was put into service in September of 2014 and was the successful beta test to prove the concept of remote out-of-state investing. I acquired the property from a marketer that makes connections with the rehabbers in certain markets and finds buyers such as myself who are typically located in low price to value ratio locations (this does not necessarily mean high-priced locations) such as California, New York, Hawaii, Seattle, Portland, and basically the coastal areas that all the cool kids what to actually live. Marketers have their place if the buyer is totally clueless but once you purchase a few of these properties the marketer really does not offer much value. The only thing I see that they would offer would be someone to be the bad guy role in a negotiation but many of the marketers are buddy-buddy with the rehabber because of their business relationship and won’t stick their neck out for you. As the buyer, you need to take ownership of the due-diligence process and negotiations because that marketer is not a licenced agent and does not have a fiducial responsibility to you.

“My Rental #4: Birmingham”Continue reading