Real Estate 005: Questions to ask your Turn-Key Provider

Below is a list of questions that I typically ask when interviewing a turn-key provider. A good/experienced turn-key will be able to answer all of these questions and feel comfortable sharing information with you, as they have a vested interested in your success. 

General Questions:

  1. How long have you been in business? 

  2. How many properties do you sell to investors a month? 

  3. Can you walk me through the purchasing process from beginning to end?

  4. How many investors (clients) do you have? How many are from out-of-state, or out-of-country?

  5. How many properties do your typical investors have on average?

  6. Do you have any references?

  7. Why did you choose this market?

  8. What price ranges are your properties?

  9. Do you offer any rent income guarantees (first or second year)?

  10. Do you own the homes? Are you a full Turnkey or a Marketer?

Market Specific Questions:

  1. Is the market tenant friendly or landlord friendly? What is the eviction process like? Have you had to evict any tenants?

  2. How are rent prices determined?

  3. What neighborhoods do you invest in and why (A/B/C, can you define them)?

Rehab Questions:

  1. What major cap-ex items (roof, hvac, furnace, plumbing, electrical, etc.) are repaired or replaced? How do you determine whether items are replaced or serviced only?

  2. Do you provide a full scope of work for each rehab? 

  3. What appliances come with purchase of the property?

Financing Questions:

  1. How do your lenders obtain financing? Who are your preferred lenders?

  2. How do you deal with properties that do not appraise for the purchase price?

  3. Do you require earnest money?

Closing Questions:

  1. If a third party inspection report uncovers additional repairs, how do you handle them (Will I get photos)?

  2. When are the timing of the additional repairs (before or after closing/are they included in an updated contract)

  3. Do you provide warranty on the rehab? 

Owner Communication Questions:

  1. How do I get paid?

  2. Do you utilize an owner online portal?

  3. How often is the communication on accounting/issues on maintenance/in general?

Tenant Related Questions:

  1. What does your tenant background check consist of? What are the requirements of a tenant?

  2. How long is the tenant lease agreements? What is the current turnover rate?

  3. Do you rent properties to Section 8 tenants?

  4. What is the typical "get rent ready" costs when a tenant leaves?

  5. If tenant destroys a property in excess of the security deposit, what is the procedure?

Property Management Questions:

  1. How many units/doors do you currently manage in this market?

  2. What is your current and historical vacancy rate?

  3. How long does it take to find a new tenant?

  4. Do you utilize a checklist when a new tenant is leased?

  5. What is the property management fee?

  6. When are rents due from the tenant? Do you charge a late fee?

  7. What are the fees involved (lease up fee, marketing fee, renewal fee)?

  8. What are the markup fees for maintenance costs (cost + markup % or cost + hourly rate)?

Remember not to make it a interrogation session, because no one wants to work with an "askhole". Put yourself in their shoes, working with hundreds of out of state/local investors. Please be respectful and remember that relationships a built over time. Make every effort to fly/drive to the market you are interested in and meet with the team who will be your "boots on the ground". Please make sure you do your due diligence and talk to your CPA/Attorney/Financial Advisor before making any investment decision. 

Good Luck!

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Real Estate 004: Turn-Key Properties, too good to be True?

What is a Turn-Key property?

There is no formal definition of "turn-key", and its meaning can differ from region to region, company to company. However, I can better explain this by sharing what I believe is a turn-key property and you can make  your own informed judgment.

To me, turn-key properties mean that they are generally older homes that have been restored and are considered "rent-ready" by you or the property management company. During the initial purchase of your turn-key property, you should receive a seller's disclosure and statement of work (SOW) from the seller informing you of the items that were replaced or serviced during the rehab.

Typically, if you have purchased a "turn-key" property from a legit provider, you should have received a property with little to no deferred maintenance (i.e. big ticket items that cost $1-5K or more such as roof, HVAC, hot water heater, furnace, etc. with useful life less than 5 years).

BENEFITS

As mentioned in my previous post, if you work with a TurnKey Company, you will eliminate 3 (acquisition, rehab, maintenance/management) of the 4 steps of the investment property process. These are very beneficial for people who do not have time to conduct the research, oversee the rehab, and manage their properties.

Acquisition: 
The TurnKey provider identifies the distressed property (REO, foreclosure, etc.) and purchases the property. They own the title. If they do not own the title, you are working with a middleman/marketer!

Rehab: 
The TurnKey provider will perform the rehab and replace CapEx items and make them "rent ready". Be very wary of "lip stick on a pig" where bad turnkeys will purchase a property, apply some paint, clean the floors, and sell them as "turnkey". These properties may look nice and show good returns on paper, but they will cause maintenance problems down the road and bleed you out slowly. Make sure you talk to other investors, ask for the Statement of Work (SOW) of what was replaced/seller disclosures, and ask about the warranties on the rehab (most places give 90 days, good turnkeys give up to 1 year).

The last thing you want is to buy a lipstick on a pig thinking you have great numbers and a beautiful property during year 1, only to find out that there are thousands of dollars worth of work needed in years 2-5 that will put you in the red.

Simple illustration (Bad Turnkey): if you have purchased a property for $100,000, downpayment and closing costs of $24,000 and rent is $1,100 (1.1% rent to value ratio), now take into account mortgage estimated $400, insurance $70, management $110, taxes $70, vacancy $88 and maintenance $88 for total expenses of $826. Your Gross rental income of $1,100 - total expenses $826 = $276 which is a 13.8% cash on cash - awesome, right? 

Not so fast. $276 a month will equate to $3,312/year, but a lipstick on a pig may result in replacement of the HVAC $5K, roof $5-10K, hot water heater $1.2K, furnace $3-5K. In addition to these major repairs, the $88 reserve/month for maintenance not be enough to cover  routine maintenance calls on plumbing, toilets, etc. if they were not properly reviewed/rehabbed from the beginning. Hope I didn't scare you as this is an extreme example and one to ensure that you do your due diligence before working with TurnKey providers.

Management/Maintenance: 
The Turnkey providers will typically charge 8-12% of the monthly rental income in fees as well as have other fees such as lease up fees (marketing/placing a new tenant), lease renewal fees, and other fees. In exchange for their fees, they provide services such as finding a tenant, periodic check up on your property, proper bookkeeping, and answering maintenance calls, to name a few. I feel that these services alone are well worth the fee. Its less headache for you and more time for you to enjoy doing things you love and spend time with loved ones.

Maintenance calls vary by property management company, as they may have an in-house handyman or outsourced contractor. They may charge only cost of the repair + markup, or cost + standard $40/hr (example). Typically, property managers will maintain a $500 reserve for each rental property and will approve repairs below this threshold, anything above this amount is communicated to you (owner) for approval of the repair.

DRAWBACKS

Now that we have covered some of the benefits of turn-key providers, let's dive into some of the cons of using a turn-key company.

1. You are paying market price: 
If you work with a turn-key provider, the fact is that you will be purchasing the property at market price (little to no equity). There is a saying that money is made in real estate when you buy (low) or sell (high). When you are buying at market value, you are technically going in knowing that your transaction costs alone will keep you from selling the property before 5 years at break even (exit plans are limited). You will need to hold the property for at least 10-15 years for you to break even (unless there is crazy market appreciation - this will not be true for linear markets in the midwest). However, not to fear, if you have analyzed the property carefully, it should cash flow, and that is what buy & hold investors, like myself care about.

You will notice that the appraisal of the property will come in at or slightly above purchase price. In situations where the appraisal comes in lower than the purchase price, I highly recommend you re-evaluate the deal to negotiate with the seller to reduce the price, or walk away/find another deal. There are simply too many deals for you to bring cash to the table to close, simply because the property is not appraising for the asking price.

2. Requires large capital: 
As mentioned in the previous post, there are many ways to obtain financing for your rental properties. The most common approach is conventional financing through a portfolio lender. Portfolio lenders are lenders who specialize in working with investors and offer conventional products such as the Freddie Mac/Fannie Mae loans. Portfolio lenders typically have rates 1% above the current interest rates that you may be able to obtain for your primary residence (i.e. 4.25% + 1% = 5.25%). However, these lenders are well versed in working with investors, turnkey companies, and market realtors and can provide guidance in financing your first 10 properties with Fannie Mae.

Note: your first 4 properties require 20% down payment, but properties 5-10 require 25% down payment. This is something you may want to think about when strategizing the purchase price of the first 4 homes. For example, if you buy low end homes at 50K for your first 4, its a 10K downpayment per home. However, if you planned to acquire homes in the 100-150K range, that could result in an additional 5-7.5K downpayment per property.

I believe that scaling your rental portfolio carefully and quickly is critical in your success. I like to use the Pareto principle/Law of Averages and assume that at any given time, 20% of my portfolio may losers and 80% may be winners. That is, 20% may have bad/trouble tenants, high turnover, maintenance, etc. However, if I am careful, the income from the other 8 (out of 10) should be more than enough to cover the issues found in the 2.

3. Lipstick on a pig: (sub-par rehab)

I hope this helps you understand the key pros and cons of using a turn-key company (I used one for my first rental). Some questions that you might want to ask yourself before choosing to go the turn-key route are:

  • Does it make financial sense (rent to value, cash flow) to invest in my local market

  • Do I have the right team and knowledge to do this on my own?

  • Am I willing to manage my own property in a local market?

  • How passive do I want to be (Note: Turn-Key does not mean its fully passive, however, a good turnkey company does mean you have the support of an experienced provider at your fingertips to provide guidance)

  • What are my exit strategies? (Sell on MLS, sell to an investor, re-sell to a turn-key, owner finance sell to a tenant)

Whatever you decide to do, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Advisor before making any investment decision.  Work with people who have vested interest in your success! 

Good Luck!