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?
- I visited the team a year later in Birmingham and Atlanta
- I felt really comfortable and was nice to see that they were a legit business
- 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?
- 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?
- 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.
- I don’t want to be held liable, things change
- 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
- I see this as an excuse to dumpster dive in “technical-Hell”
- 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:
- Kansas City
- Questionable on Dallas (lacks cashflow and more of appreciation play but I like it for apartments)
- NOT Arizona/Las Vegas (too volatile IMHO)
- Stand on the shoulders of giants!
- I don’t see much difference in Birmingham vs Atlanta other than $20 per month cashflow. Atlanta being more of an appreciation potential.
- 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
- picking the right market = deciding what the kids wear
- 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.
- 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.
- No garbage disposal (number one annoying fix I see)
- laminate floors
- no carpet
- no garage door
- no washing machine/dishwasher
- 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!
- Always use your detailed spreadsheet to account for all costs and verify each line item
- Chicago has 3x taxes and anti-landlord
- Florida had 2x insurance
- 2% investor tax upcharge in Indy
- 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?
- All about managing via phone/email and keeping those accountable. Just like corporate America.
- Be firm and your leverage is to fire them and get someone new.
- I know I pay markups and could run it better myself because after all, “no one waxes your car better than yourself”
- 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.
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.
- Can you break down the structure of your company for me? (Let them explain)
- Tell me how your process works from start to finish? (Let them explain)
- What does “turnkey” mean with your company? (Let them explain)
- Do you own properties close to the one you’re selling to me? (Determine if you are working directly with the TKP or middleman)
- Will there be a tenant in place before I close on the property? (There are pros & cons)
- Can I use financing to purchase the property? What happens if my financing falls through? (Determine if you are potentially overpaying)
- Is the home required to pass inspection and appraisal before I close? (Determine if you are potentially overpaying)
- Can I hire my own appraiser before closing on the property? (Determine if you are potentially overpaying)
- Do you use other companies to help you provide turnkey properties? (Understand where their deal flow comes from)
- 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?)
- 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)
- Who owns the homes? (Understand where their deal flow comes from)
- Who rehabs the homes? (Clarification on the buying process)
- Am I expected to pay for the rehab? (Clarification on what you are buying)
- Who manages the properties after the sale?
- How long have you been in business for?
- 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)
- Can I see a scope of work with expenses for one of your rehabs? (Check out markups and what is fixed)
- 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)
- What sets you apart from other turnkey companies?
- What are some mistakes you make when you started out, and how are you doing those things differently now?
- Do you invest? If so what?
SPC Git Er’ Done Action Plan:
- Make a list of Turnkey providers, markers, agents to have a conversation with.
- Send out emails to providers and schedule discussions.
- Get on the phone, learn, and exercise your BS-Detector.
- 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.
Guest on Joe Fairless Podcast, how I got started, and a bit about turnkeys and trench drains
Learn how/why I got out my high priced Seattle (Appreciation) market and into 9 Properties In 5 Months Via 1031 Exchange
Today ends a 9 property, 5 month, buying spree that started back in October 2015 with the sale of my subject Seattle portfolio. I did not know what to call these shenanigans and simply calling it a 1031 did not do it justice. Therefore I will name this feat a “1031-O-Rama” which is inspired by the good old 2008 days where one could apply for a bunch of credit cards with 0% interest. All of you are Real Estate investors and sticking money into a high-interest rewards checking account is kiddie stuff so if you’re ready to go gangbusters here we go…
From 2010-2015, my rentals in Seattle were cash flowing each with 400-600 a month (after vacancy/capex/repairs…), but it was because I bought these properties at the right time so when I tried to buy again in 2015 or early as 2012, prices would not cashflow with typical 20% down financing. My rentals were A+ class and were below the 0.5% Rent to Value Ratio… so amateur, I know. I think everyone would agree that like SF, Seattle has seen great appreciation over the past few years due to the influx of foreign money and tech companies. As a real estate investor you need to always be looking at the numbers and in this case the Return of Deployable Equity (ROE=your sales price minus commissions minus current mortgage balance). By sitting on so much “Lazy Money” in the form of equity I was making less than 5 percent in terms of ROE (The IRR metric is when you buy, the ROE is to evaluate the performance once you are in operation). If the ROE is less than 8 percent/year you are better off in the stock market even though I am not a fan of stocks/mutual funds. Let’s face it, rentals have some risks such as unexpected capital expenses, legal liability, and the low level of overall “PITA” (Pain in the butt). Since 5% < 8%, I needed to re-position my money. Now if this were a Las Vegas movie (funny how appreciation is like gambling) I would be grabbing my chips from the craps table, cashing out at the money cage, and retreating up to my room with my winnings and a beer/pizza.
In the end, I traded two properties via two 1031s that cash flowed a total of $1,000 a month for 10 properties that cash flowed over $3,000 a month (after expenses, vacancy, turn over, capital expenses, and property management). Now I beckon the recession to come because I have more than enough buffer in each individual rental to lower my rents by a couple hundred dollars and since pay the mortgage. A mentor of mine told me that the risk is not the interest rate or amount of debt but the lack of buffer in the spread between your rent, expenses, and mortgage.
Throughout the lending process, I know there must be clones of me with all the DNA samples the lenders/underwriters needed from me (well not really) but it’s a huge PITA to go through the Fannie Mae loan process and execute on multiple loans.You think Fannie loan #1-4 is tough, #5-10 is another level. At any one time I had parallel processes of purchases sale agreements pending, inspections, re-negotiation, inspection punch list, property management interviews and setup, contractor logistics, etc. What a mess. A lot of lenders will recommend that you cross-collateralize your investments so you can get more Fannie Mae loan (max as of now is 10) but I don’t think it should be used in all situations. Remember that loan guy gets paid whenever you originate a loan so of course they are going to recommend it. Also the Fannie Mae loans aren’t really that much better than a portfolio loan…just saying (I can expand on this later in a different article).
On a couple of the properties (#6 of 9 and #9 of 9) I actually didn’t really want them because of things I found in the due-diligence process but I had to close because they were on my “45-day Identified Property List”. I could walk from the deal, but I would have to pay taxes on my unused 1031 funds. The business decision was that it was better to overpay by $6,000 and get the property than have no property and pay the government 25% of $30,000. If you are considering this madness, try not to let your sellers know what you are doing because I got bamboozled by sellers since they knew I had nothing else on my 45-day list of potential properties and HAD to close.
People say that the 180-day deadline is difficult but I would argue that only being able to purchase properties off your 45 day list (period after your subject property closes) is the biggest hurdle and should be really pondered over. A good best practice is to line up your purchase and sale agreement for new acquisition(s) when you are 1-2 weeks before your scheduled closing date so when that date comes…boom you have 5 purchase and sale agreements executed and you are off and running on 45 day closes.
Who did I buy from? I can write about this later in more detail on my site but I had to work with 4 agents/turnkey providers. But here is where I bought one in 2014 and basically had my proof of concept before I went balls to the wall on this stuff.
Now I am so relieved to be out of the roller coaster high appreciation Seattle market and in boring appreciation markets. I know that a few years from now someone will read this note that Seattle properties have gone up 2x in value. However, I’m totally content with my passive cashflow portfolio AKA just chillin’ with my yes… that beer and pizza back in the hotel room watching the movie “The Big Short”.
PS: Now I know a lot of folks will say that I have bought lukewarm deals and yea I agree. But all I know is that it’s a lot better than the stock market and they were good deals for a passive investor/level of effort to obtain them not being an active investor. Other side notes.
Also a link to more 1031 exchange tips and tricks.
Let me first say that what I do is nothing special. I know who to work with and have real relationships (heck I consider friendships) with people on my team but for the most part there is nothing special about me.
That brings up the *Time-Money-Experience* triangle. I know that there are a lot more experienced folks who have the ability to find 2-3% rent to value deals and do magical things. Again I have a full-time job that I make a good salary and I enjoy going to for the most part (I get free coffee there).
BiggerPockets is a great resource tool, however there is a nuance on the forums that I call the #BPBP Syndrome (the BiggerPockets Bi-Polar Syndrome). What I mean is that the vocal folks on the forums are very active saying and they can do much better deals. Real Estate is their job and they are damn good at it. I am a passive investor who has limited time to source screaming deals and just needs to place my money and quit screwing around on the sidelines. I believe folks like myself who are passive investors like myself are actually the (quiet) majority of folks on BiggerPockets.
What active and passive investors can all agree is that real estate is the best investment vehicle out there. What I love about it is that even when I buy these “lukewarm” deals I still reach my goals (4x) faster than the stock market.
If you are holding deals close to your chest or not giving to your so called competitors. You need to operate from an Abundance Mindset.
If I were starting out investing here are the Fab Four Books and Trifecta of Business Books that everyone should read before making a purchase:
It’s important to note that reading anymore is just overkill. Don’t be that ‘Shelf’-help guy or use the crux “oh I need to read and get more educated”. You need to step up and take action how many freaking books are you going to read? Many Fortune-500 Human Resources departments use the theory of 70-20-10 in developing employees which apply here. 70% is learned by doing, 20% learned from peers, and 10% is academic/book/classroom training.
Below is another rendition of the same theory. This also explains why after a few years of doing this podcast and helping others get started by modeling the way has accelerated my own growth.
Tim Ferris talks about the $100,000 MBA, where you don’t really go to school but you jump right in with your business/investment. This method may lead you to operate at a loss but you will have far more experience than getting that silly $100,000+ MBA degree from some brick and mortar school.
And a word on real estate training: Why would someone want to spend $20-30K on training when that alone is a down payment on a cashflowing property that you can learn through doing and make 300-400 a month cashflow. Heck, you could even buy an overpriced 2nd tier turnkey property and get your education that way too.
SPC GET ‘ER DONE PLAN:
- Read these books
- Keep yourself accountable. As Arnold says, “stop being a whiny baby [and Do IT]”.
Please note that some of the links found on this website are affiliate links. And at no additional cost to you, paid by the seller, I will earn a commission if you decide to purchase which helps pays for the various costs of running this website. Please understand that I have previously used these products. Do not feel the need to purchase these products but if you do please use these links. If you have any additional questions on how I optimize the use of these products please let me know.
Are you aware of Cap-Ex or Capital Expenses the big unknown in your deal analysis spreadsheet. Learn 3 ways to calculate Cap-Ex… So You Don’t Get Screwed a Year Into The Future
Blog article with all the charts. Sign up for the e-newsletter with your email to get the Cap-Ex spreadsheet.
Why the heck are we talking about, a board game?
When people in the very final stages of their life were asked, “what they regretted,” the response that often came up was that they wished they ‘played’ more. (Also in the top responses was a regret of spending so much time at work) The point is, although we are making investments and working hard, we should not forget to ‘play’ or have fun. I had a friend that played hours of video game baseball. Other than the fact that nobody plays baseball on video games, I always gave him crap. Now a little wiser, I realize that he was right… it made him happy and that was important (Side note: I do not condone mindless World of Warcraft addictions). Read on for the second lesson from this board game.
For the past decade, one award-winning board game called “Settlers of Catan”, has built up a huge, cult-like following, garnering hundreds of 5-Star reviews on Amazon and played by normal people unlike the Magic Gathering Card game or Dungeons and Dragons. In other words, females play this game and guys, who could probably save their lives by throwing a football play it too. If you have not heard of this game then you probably have never heard of BiggerPockets.com and you live under a rock. The strategy-intensive game, is intended to last less than 45 minutes. During that time, players collect resources and use them to build roads, settlements, and cities on their way to victory.
Check out this well made 4 minute documentary on the game.
The board game presents players with many decisions that parallel those facing many experienced real estate investors. In Settlers of Catan, there are 5 resources which include sheep, lumber, ore, brick, and grain. In the beginning of the game, sheep and wood are sought after, whereas in the dramatic ending of the game, ore is needed to lock in a win. Side note – I actually have a t-shirt that says “Nobody wants your F-ing Sheep” because as a typical occurrence in every game there is always one unfortunate player who is lagging behind and still trying to peddle their surplus of sheep.
The life cycle of an investor starts with typical equity building with rentals that utilize leverage (sheep/wood) and progress to larger deals (brick/grain). As the investor reaches the second half of their progression and surpassed the “critical point” where they have amassed enough equity build-up to live off their “dividends,” the investor will look to convert their portfolio to a more cash flowing portfolio via de-leveraged rentals, private lending, or notes (ore in Settlers of Catan). This stage is often called the end-game strategy. So often I see newbie investors with low cashflow/low assets with shiny object syndrome and want to get into notes or land contracts because that happened to be what Guru seminar they attended.
So if you don’t care about this fricking game and skipped ahead to the conclusion here it is. Whatever path you take in investing keep the end in mind… the end game… the goal. Have a series of if/then exit strategies in mind with everything you invest in. A few examples:
- A lot of people talk to me and say that they are tired of investing for appreciation and want to go for 100% cashflow to hold on to indefinitely. Having a few years of experience I realize that nothing is forever and things happen. Those investments that you bought, might have gone up in value 20% and it makes sense to cash out or you find another investment that is so much sweeter. But at the time of purchase, you did not think of these potential decisions when you bought the low 40k homes or a duplex/triplex/quad that are inherently harder to sell to a retail buyer as your exit strategy. Perhaps buying a higher price single family home would have been a better way to go (forgoing optimum cashflow).
- You have that meeting with a lawyer who sells you on this elaborate corporate structure but it might be a bit overkill since your dreams of building a 50 home portfolio transitions to other investments.
- You waste your time and money creating a small network of contractors to serve as part-time staff to service your 3 duplexes in the area. However, now it looks like you should sell and you wasted all that sweat equity in creating that system.
- You heard about the wonders of the Self-Directed IRA from a local Real Estate meeting and rush out to make the conversion and deploy your cash into a Real Estate notes. Now you realize that you have lost your leveraging ability but more importantly you are unable to use your IRA as cash reserves to get Fannie Mae loans.
SPC Git Er’ Done Action Plan:
- Don’t let this article give you an excuse for analysis paralysis, but inspire you to find that mentor who can help. You will never know all there needs to know by yourself.
- If you have implemented your Real Estate plan and looking for something fun to do, go out and enjoy life and buy this game! (Help support the site buy via Amazon affiliate link)