“Turnkey Operator” has become the new buzz word for single family house investments in the United States. A turnkey operator is defined as a company that acquires, rehabs, rents houses and then sells them to investors as passive investments.
Proper turnkey operators break the barrier of entry for small to mid-size investors into the single family house world of investments. Most people in America and throughout the civilized world don’t make enough money to invest and have enough trouble putting kids through school and food on the table.
For those that do invest for their financial freedom, choices are limited. These are the most common investment choices world-wide, in every country:
1. Stock Market
2. Gold and Silver
3. Mutual Funds
4. Treasury Bonds
5. Certificates of Deposit (CDs)
8. Real Estate
Personally, I like absolute control of my investments and I can’t control numbers 1-6 above. In fact, I only invest in houses because they pay a dividend every month in the form of rent, they go up in value and have tax benefits. If planned properly, a portfolio of houses can replace your income for retirement. The other investment vehicles cannot do what real estate does and in my opinion, they are speculative as you rely on others to make decisions on stocks and mutual funds.
Annuities, CDs and Treasury Bonds will get clobbered by inflation over a long term investment. The point is: Turnkey operators have opened the door for investors not only in the U.S. but worldwide.
That’s the good news! The bad news is that there are many turnkey operators that really don’t have a clue how to perform a long term service to enhance their client’s internal rate of return. Anyone can buy a house, do some repairs and rent it out. However, the question that begs to be asked is, “What is the quality of the income stream?”
After the last recession where the real estate bubble burst in most parts of the U.S. around 2007, an entire new cottage industry in real estate of turnkey operators evolved. But let me tell you, in every profession and race, there are good and bad people.
We’ve all heard stories about how useless real estate brokers are and how bad attorneys can be. The generalization is not fair, but it is fairly accurate. But, there are terrific brokers and fantastic attorneys. You simply have to be aware and use common sense in your decision making.
This is especially true when you hand your money over to anyone for a financial decision and this includes a turnkey operator.
Turnkey operators are people and some people only care about themselves and not their impact on the lives of others.
Our company has promotors in other countries. Occasionally, we are asked to take over the management of houses for other investors that acquired houses from different turnkey operators. We turn down 80% of these opportunities to manage houses already acquired by these unsuspecting investors. They are turned down because of location, quality and foreseeable problems in the future. I’ve been involved in real estate for over 35 years acquiring properties in over 50 cities in 12 states; having performed over 3,000 real estate transactions. We know what to look for when acquiring a single family house for the long term production of income and where and how to source the type of properties to meet the cash flow and appreciation goals of our investors. Thus, I’ve outlined the qualities and characteristics that are important to us while providing a turnkey service and they should be important to you.
The Characteristics of a Proper Turnkey Operator
1. Experience – Nothing and I mean nothing takes the place of experience. Property managers are only as good as their sum total of their experiences. They require the characteristics of: counselor, negotiator, salesman, bookkeeper and it goes on. I would be wary of any self-professed turnkey operator that didn’t have a track record and a real list of referrals. The last thing you want is an inexperienced operator practicing his trade with your money.
2. Quality of Homes – If you’re investing in “the hood” than your investments are no good. Repeat after me: “The Hood is No Good!” From personal experience; I’ve owned as many as 350 single family houses and duplexes at one time. I described the type of property that we acquired and managed as the high-end of low income housing. I’m here to tell you that after 20 years of that, I realized I built my empire on the wrong foundation. It eventually collapsed and the business lessons I’ve learned have served me well. It’s no fun losing your capital. When you do, you don’t just lost your capital for today, you’ve lost the ability of that capital to make you money for the rest of your life! Most people never count the true cost when you make a financial mistake. Often, promotors or turnkey operators will market promotions of various houses using financial leverage. That is, the investor goes to the bank and gets a loan and a mortgage will subsequently be recorded on the property. The wise use of leverage can be a good thing but beware of paper returns. A well located free and clear house in a normal real estate market should provide a 5-7% cash on cash rate of return. This does not include an additional return on the appreciation of value upon exit. If you’re being shown returns significantly higher than that, then the first thing you should question is the location of the property. As your price points are reduced for single family houses, sometimes your cash flow increases and usually at the risk of safety. Lower income houses will have higher “paper” returns. Rarely do they stay rented for long periods of time and they always cost more for maintenance and management. What makes this scenario more dangerous is when promotors suggest financing these types of purchases. The yield could be 15-30% and the risk just went through the roof. A sure fire way to lose money and your credit rating is not paying the mortgage. Low income houses turnover a lot and turnovers can be costly.
3. No Exit Plan – If you buy any type of asset, you must have an idea when you will sell it and why. You must define your purpose and goals for owning anything, especially investments. In our system, we are more than a turnkey operator. We are a full cycle real estate system. This means, when and if you want to sell, we will handle that for you. So far in 2015 we’ve had 6 International investors that had a greater need for their money. We were able to sell each house, in less than 60 days while keeping the existing tenant, and the sales were to other investors. Every investor made a profit on their sale. The question that must be asked to any potential turnkey operator is “How do I get out of this house and who do I sell it to?” In the case of our 6 investors that sold this year, we could have actually got them more money if they could have waited. You see, the houses that we offer are in “homeowner neighborhoods.” That is, there are more homeowners than tenants in the neighborhood. This is what we want and it should be what you want because homeowners will pay more money than investors to buy a house. Homeowners buy for emotional reasons while investors buy based on overall financial return.
4. Market Place – Most investors know location is the key for real estate investments because real estate is local in nature. The market does not react and respond the same throughout the U.S. The underlying most important aspect of investing with common sense is to acquire properties where people are moving to. Follow the jobs and you will follow the people. You’re not a tree, you can get up and invest anywhere you want. I live in Tampa, Florida however I only invest in the metropolitan area of Atlanta. I see Atlanta as a “trophy market” – a first tier city that has current and future growth with a very diverse employment base. The point here is that I live in one place and choose to do my investments in another. The reason is because I view Atlanta as a much better area to achieve my financial goals. Most turnkey operators only operate in their city. It’s a convenience thing for them just like it’s an inconvenience for me. Just because someone lives in an area and does business there, that doesn’t make it a good area to invest. Promotors typically look for reasons to sell houses in one city or another. They look at price points, likelihood for financing and their commissions. Some areas won’t support their commissions thus they move around signaling it’s “too late” for Houston and Phoenix. They continue looking for soft spots in the market where their fee can be painlessly absorbed.
5. Own the homes they sell – This is really where the rubber hits the road. A true turnkey operator sells only the houses they deemed worthy enough to buy themselves, rehab and then make available to investors. You’re treading in “realtor water” or “promotor land” when they are simply selling for commission. If they didn’t own it, it’s really a challenge for them to stand behind it when something goes wrong. And folks, let’s be serious – shit happens and it happens to all of us at some point when involved with rentals. The selection process of the market place starts with the area of the country – the city – the neighborhood and then the location of that home within the neighborhood.
6. Property Management Systems – It’s impossible to be a proper turnkey operator without systems in place. A few years back we almost got involved in a joint venture offering condominiums in Miami to investors. The guy I was going to JV with insisted on doing the property management after the sale. I asked him the simplest question, “What software are you currently using for property management?” He didn’t know! I knew immediately that we would never do business together as I would not risk my reputation offering a product that was doomed to fail. It’s critical to have systems in place for:
i. Finding house opportunities
v. Distributions and reporting
These are the types of questions you want to drill a property manager on. Property management is the foundation of your investment. You could acquire the best house in the best area and still financially underperform due to bad management.
7. Team Approach – No one can do everything in their business. Thus it’s important to have a support team which allows your players to do what they do best. There is a book out there entitled, “The One Thing” by Gary Keller. The book revealed to me and 20 others I sent it to that we should all do only the one thing we do best. In my case, it’s evaluation, selection and negotiation of house opportunities. Really, that’s it! That’s my primary focus, each and every day. The members of our team have all taken personality tests. This allowed us to determine if they were right for their position before they started. The personality test really made a difference in our hiring and it allowed us to make more accurate assessments and distinctions on potential hires.
8. Overpriced Properties – Every house we acquire to make available for our investors was bought on purpose. Our selection process started with this premise: “We only buy houses that we would own ourselves.” For years I’ve had promotors suggest to me that we should acquire “cheaper” houses. I agreed to do it but only if I could use their money. They asked me why and my response was clear and to the point, “Because if you don’t sell them, we don’t want to be stuck owning them with our own money!” Remember that part about the “one thing?” Well, one of my “one thing” things is not to try and be everything for everyone. Thus, we only acquire well located houses in neighborhoods primarily consisting of homeowners. You really want to avoid some of the pitfalls of house selection such as these:
i. Steeply sloped lawns or driveways
ii. Houses near power lines
iii. Houses near commercial real estate or apartments
iv. Neighbors that don’t take care of their place
v. Houses located on busy streets
Sometimes overpriced properties are the result of overpriced purchases by other turnkey operators. This can happen to anyone especially if you acquire properties at auction. Auctions can be a great source for opportunistic house purchases but often, you can’t see the problems within and you don’t find out until you are the successful bidder. It’s tough luck if you overpaid on the acquisition or the rehab. It really doesn’t allow the seller to charge more because they screwed up. Just the opposite. If you’re a turnkey operator, sometimes you have to eat a loss as I know of all too well. The worst thing you can do is overcharge for a house to an unsuspecting buyer. As a buyer, you must always do your due diligence on the property. The important thing to remember is to compare apples to apples. For example, if we acquire a house that is 15 years old, it needs new air conditioning and a roof. Not to mention, updating of floor goods, walls and anything else in need of repair. A proper turnkey operator would not sell this house in “as is” condition due to expensive repairs on the horizon. Don’t get fooled with home warranties either. If the house is older, the mechanical systems needs updating. Just keep that in mind when you peruse the websites of Zillow and Trulia. These websites don’t take into consideration time or condition. In fact, you could be terribly mislead to base a purchase or sales decisions on this information alone. Recently, I used Zillow to negotiate buying a house from a seller. He said Zillow showed his house to be worth $115,000. I bought it from him for $105,000 and the reality is that it will be worth $160,000-$170,000 after rehab.
As an investor you must look past cash flow to upside potential of value along with the quality of the construction and location within the neighborhood. Turnkey operators are not all the same. If they lack a lot of experience – keep looking as you don’t want their knowledge and wisdom to grow at the expense of your hard earned dollars.