Bill Manassero got into the game late but is on his way to using real estate to gain financial freedom.
Turnkey seller and MFH investor discusses the cons of Turnkey rentals. Also discuss leverage and the current TK landscape in 2016.
The problem with the lower end assets, they are such a more hands on investments , just more of a headache. Which I’m about to tell you why. Yes, on paper the entry price point looks great. So folks are only seeing one side of things. Lower end properties tend to be higher maintenance, higher expenses, and much higher turn over rate. Another factor is the rental prices aren’t making sense, while still continuing to rise. We owned 37 of these exact type of homes (lower end in RH SC during the timeframe of 2004 -2009). So I’m speaking from experience, these type of assets tend to burn holes through investors pockets. Most folks start here, (1) Because they do not know any better and (2) The price point is much more attractive. These are what I like to call recycled product ( Quote by “Jay Hinrichs”) , which usually has a 5 – 8 year shelf life. Or in better terms ” the game of hot potatoes”- who or which investor is getting stuck holding the bag. Easy way to look at things are any institutional, or Hedge funds buying in this asset class. Now they are mostly buying A – B assets. Their is a reason Wall Street, and most private money are parking their funds into higher class assets. Most times this is why newer investors, jump in because its all that is left on the table for them ( lower end )or what the Gurus are selling.
I can dig a lot of great information up to prove what a great city Charlotte is. We are Atlanta’s little teenage brother growing up (fast) We are all lucky to be in a booming city basically still many years of growth left
I have to disagree on this being a good buy and hold market on most markets. From 2009-2013 this was one of the best buy ,and hold markets. Today we are facing an over priced market, rental returns are much less. I have some left over stock still holding from 2009. I was buying from $40k to $50k range. Same house now priced in $100k – $120k pre-rehab price range. I was also buying in 4 states; NC, SC, Georgia, & Florida. With that being said, “one man’s junk is another man’s treasure.” So for out-of-state folks with (ex: California or NY) they tend to have much higher entry points. So buying a house here from $100k $150k with 1% rental rule. Still makes this a very attractive market for out-of-state or international folks. This does not mean we have a great buy and hold. For me personally, it says we are lucky that we still have a lower entry point then most folks markets.
If we jump in and really become bit more analytical. It is cheaper to build than buy today. We will be building new construction rentals for a few years. I am seeing this as similar to the 2000-2004 market. So the box Vinyl Village type homes is the current build (mixed in with townhomes, duplexes, quads). That mixed with real estate cycles , which very folks even discuss or understand.
Now back to the 10% Cap rate this is why most international folks are going to get burnt, and USA folks will as well. When investing in these lower end asset classes, Folks brought in cities like Detroit and Michigan. Promised a 20% return on the properties. I challenged folks to show me that over 5 years period (I am sure those returns are a lot less). Keep in mind this has nothing to do with the homes. It has everything to do with our economy, salaries for the lower income bracket, and a renters mentality. No security in those type of jobs with very little insurance benefits so job changing is common among lower end renters. It is very hard for someone paying 35 to 45% of their income to pay rent. I know here comes that chatter, well property management will handle that, right? We owned a management company from 2009 -2013. We lost our asses with that side of the company. I did it mostly for our turnkey clients. Good Rule of Thumb for any management folks who want to get in the business. Get 300 homes plus or get out of the business. Not profitable with out the inventory.
Now back to low end assets, very rare you are every going to sell, and get retail prices in these areas. How many USA folks move to rental areas? Once a area is over 50 % or more rentals, values will eventually drop as will the area. We have artificially inflated prices, in most of the areas with cash sales to out-of-state folks, or local cash buyers( who just don’t know any better). Basically most people are showing up to the table, and all we have are scraps left! This is not just here; Kansas City, Indianapolis as most markets to just a name a few are going through same thing. I still jump on 3 to 5 webinars month with out-of-state folks seeing what they are selling. So limited sales potential down the road for every one.
I was working with as well as being one of these turnkey groups for a few years. We all setup table and booths in LA, San Fran, and other markets. Selling our cities, and our turnkey deals. Me and a few of the guys we got smart, and jumped into the international markets. I still play there my self and see a strong demand for the turnkey product (just not worth it for me). Folks if someone was to start a local solid turnkey business here in Charlotte NC (5/month ) there is a good demand out there for this product.
Now for the lack of inventory. We had a few smaller hedge funds here in 2011-12 buying before most folks realized. They were already here buying smaller up to 100 homes.. Then the big boys like invitation homes (Blackstone which is a large wall street fund for folks who don’t know ) came in purchased 7000 plus homes in little under a year. Most of the vinyl villages, anything built 2000 above; 3bed 2 bath or larger was their focus. Banks are realizing they can go into the property now . Taking a lipstick approach to rehabbing. Sell it them selves as well. So that’s a few reason for the lack of inventory.
So I hope I don’t offend any one and please answer back separately but I like networking and so should others. Great way to get out there and meet more folks.
So here we go another few answers or thoughts of mine on turnkey investing and why I made the jump to apartments.
And my latest post for folks if you think it has some substance please feel free to share with friend. First one was about turn key investments how they did over 10 year period.
First one must keep in mind most turn key companies did not exist 10 years ago. This was a product the market created. These same properties the lower end were subprime homes. So folks sold them locally in their own market. We were approached by LA reseller in late 2008. Back then everything was sold retail, very few investors (very few smart) were building their own portfolio. Most of these guys have been involved in this business for a very long time
Next point- the mess started in 2007 – 2008 when most of the product was created. Now that being said, I see the same lower end crap returning and being sold as great turn key deals. These type of deals are going to cost folks a lot of money. Again, nothing to do with the asset, but more to do with the mindset of the renters.
Now on the flip side, if you purchased between 2009 – 2013 most of the numbers made sense in many markets. Right now the nice properties (A and B limited product) as most folks can sell these retail.
So why sell turnkey or through a reseller? Look at most resellers or turn key with the exception of one or two companies. They are selling lower over priced assets or a nice products that is super over priced. The problem is even over priced, the entry level makes sense compared to most folks (local entry point). Lack of good solid deals make folks have to stretch the numbers or present good deals to others. If all these deals were so great why would any one sell not keep?
At the same time, I used to buy 4 properties sell 3 to keep one free and clear. So every person’s motivation is a bit different. I would just be careful to anyone who has not seen or been through the 2007- 2008 crash selling deals. I don’t think they can or will truly understand things. Especially when selling for profit and their motivation is profit. Which is why I get it; because they are in the business to make money, by selling a product. I just think the shelf life of that product has passed. So one can look at wall street or other investments, or jump in the turnkey market.
I don’t want folks to think I am against turnkey. I just feel the window has passed on solid buys. The market tells us what to do, you just have to listen. Right now I’m building rental properties all in for $65/sqft. So cheaper to build than buy. There is no rush to investing. Sometimes it is better to sit back and watch. See what the market is saying and find the best place to park funds. Real estate is not always the best, but not the worst either.
Now what am I doing~ building new construction retail and rental. Taking the profit and buying apartment buildings. So I am hoping to have 200 units paid free and clear in the next 5 years along with being a private lender for local folks. Knowing I know the numbers better than most.
So I hope I answered your questions and have not made it more confusing.
Post number 3 was turnkey investing in general
I was a turn key guy who also provided for resellers. I think the window for solid deals has passed. Most of the folks selling or giving you advice here are selling an asset or being paid referral fees to sell that asset (nothing wrong- it is a business and they are providing a service or the asset itself). During 2009 – 2013 was the prime time to purchase the solid cash flow rentals. Right now folks are way over paying for higher class assets or buying the lower end scraps. Lower end is basically recycled product that did not work out for the investor the last time around. Lower end is usually not a winner, but more of cash drain for your pockets. I see Indy and Kansas city being spoke about as they are the first recycled cities that I can attest to.
What I mean by this, in 2009 when I was doing seminars around U.S. areas, so were the guys from both of those markets. Now I am seeing the same older junk make its way back around only as higher priced. Again, I am not against turn key. We were scheduled to build 150 units for one company (turn key rentals). That number is now up to 500 units in a few markets in the southeast. We are rebuilding the vinyl villages that were built in 2000 – 2004. Very similar product, actually identical product. Just cheaper to build than buy, which then tells me the cycle has changed or moved on.
Basically what I’m saying, it is cheaper today to build than buy in most markets. That is why I don’t think the turn key is a great buy today. I think folks are getting the bottom of the barrel or very over priced assets. Keep in mind, most the major hedge funds came in 2013 they took majority of any of the solid deals. The nicer homes A – B type assets most local folks can sell them retail. So why would they pay a reseller or flip to investor? Better money in retail sales in most markets, which is similar to 2005-2007. Folks sold these same assets to subprime buyers (lower end) or retail to home buyers (A-B) asset. So you can see, first and foremost, there is inventory shortage in most markets. Folks now have to push other cities (lower end product). As you folks in California have such a high entry points. Most markets still look attractive. Trust me when I say on paper numbers look great. In the long run I feel the return for folks from 2014 – present will be a lot less than the prior years. In 2009-2013 if you purchased during this time I think you made great buys. As well as hitting the timing of the market correctly.
Real estate is a lot about timing and cycles. At the same time the market tells folks what is working and what is not. You have to listen and not recreate the wheel. Still good deals just harder to find. I just prefer apartments over houses.
Joey Noel Turn Key Rental Buddies Interview – Jeep Wranglers, Maxing out Fannie Mae Loans, Helocs, re-inspections, dating two property management companies at the same time, and what to be aware of when on BiggerPockets
Tarl Yarber has been investing in real estate for the past 11 years and is the owner of Fixated Real Estate LLC and specializes in systemized high volume fix and flips in multiple states. Between 2014 and 2016, Tarl and his team flipped over $25 Million in single family homes with rehab budgets between $30k-$250k per house.
1) How much simple passive Cashflow are you making today and how are you doing it?
Rentals with net monthly at 1235/m and a third in rehab for another 415/m once done. We also have tied up a 4plex that should net apprx $1625/m net cash flow after we remodel and get new tenants.Most of what we do is large volume rehabs for this area, our systems free up a ton of time and help bring in the cash.
2) What is your Han Solo moment – Han Solo and his buddy Chewbacca from Star Wars were cruising around the galaxy as lowlife smugglers but then cross paths with Luke and Leia and his life took a pivot point. Describe the resistance that was the catalyst for change. Did you “burn the boats” or did you let it happen naturally – was there an internal (you decided to make a change on own – what was thought process?) or external (you got fired) trigger?
11 years ago at a real estate wealth expo. Extreme changes needed in my life. I did the opposite of everything I was on track for and went a completely different way in life. Ill explain on show if needed
3) Worst life/business moment what did you do after? Lesson learned?
Business partnership failed, I felt utterly betrayed and destroyed. I learned to always get things in writing, to always be the better person and do whats right in a deal at all times. More lessons as well.
4) A mark of a high performer is to put your ego aside and accept the help of others and mastermind. 2 week experiment and 6 month project? (90-180 day goal) Perhaps people can help you out? Any secret habit to share?
5) What is your simple passive Cashflow number? Now imagine you had 2x that amount… Describe your ideal day, detailed routine, and what projects you are working on.
$1mil a month
6) Something that you have recently or thought about “burning your cash” on for time savings or an improvement in quantity of life.
Lots and lots of VA’s. And a new house with a sauna, meditation room, gym, land, etc. Sanctuary. Plus a dive boat that is capable of long trips.
7) Tony Robbins identifies two large concepts that we are continually struggling to gain perfection at: #1-Art of Fulfillment and #2-Science of Achievement. If you died tomorrow and this was your final words of wisdom, what is your secret to the “Science of Achievement?” And “Art of Fulfillment?” How you do contribute back?
Secret to achievement: lots of objective self-analyzation and taking full responsibility for your life and how you build it and react to the challenges that arise during it
I love all emergency medicine, teaching real estate, ski patrol big time
8) Anything we missed and contact info if you would like anyone to get a hold of you. URL?
Connie discusses grinding through Corporate America and how she dabbled in real estate. Then finding cashflow rentals and seeing the light at the end of the tunnel.
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.