Paula Pant of Afford Anything returns to dive deeper into real estate investing. In this second conversation, Paula covers turnkey, deal syndication, and building a team.
Turnkey Real Estate Investing
In traditional real estate investing, the investor would buy a house and rent it to tenants after any necessary repairs.
In turnkey real estate investing, you no longer have to go through the process of getting a property “rent ready.” Instead, you would buy a property from a company that is ready to rent. Theoretically, you don’t have to do any upfront work in getting that place rent ready for the first tenants.
The stated value add for a turnkey company is that they find good deals to purchase, do all of the required renovations, and in some cases even place tenants. Finally, they sell that property to you.
The purported value add for a turnkey company that sells houses is that they are selling you, as an individual or as a family, they are selling you a specific house that you would own; wherein they do all that upfront legwork.
If you take a look at the bigger picture, this can seem to be a way to speed up passive income streams. Real estate is passive income. However, passive income is not a euphemism for free money. Finding a good deal and getting it “rent ready” is usually the trade you make for the subsequent passive income.
Rental properties are a source of passive income, but passive income is not an euphemism for free money. Passive income is front-loading the workload so that you can enjoy the rewards down the road.
If the turnkey company does all of the upfront work, are you still front-loading work for this passive income? Yes, the work they are doing is not free. You will pay a premium for turnkey real estate properties. However, the issue comes years down the road because the initial work was done to someone else’s standards.
It can be easy to find yourself in a situation in which, even if both parties are acting honestly, your definition of what is considered to be an acceptable rehab, your definition of what is considered to be good standards, your definition of what is considered to be clean and habitable might be different from theirs.
Additionally, the materials chosen during the rehab of the house are important. There are many opportunities for decision making to be not aligned. If one investor has a one-year timeline and the other has a 20-year timeline, their approaches are going to be different.
Wholesaler: Importantly, wholesalers work differently than turnkey properties. A wholesaler finds distressed properties, gets them under contract, and flips them to a new owner at the point of sale. It is an entirely secondary marketplace outside of the public marketplace or MLS (Multiple Listing Service).
Fintech Companies: Financial technology companies are starting to redesign the way people buy and sell homes. Within this new space, there are many approaches. Some create a website that serves as a matchmaker between buyers and sellers. Others purchase homes directly from the seller with the added value of allowing the seller to choose the closing date. Others are using the internet to buy properties sight unseen and then rehab the properties. Many of these companies facilitate the home purchase but have nothing to do with the rehabilitation of the house.
If you are working with these companies, then you need to do your due diligence. Although these technologies can be useful, they do not eliminate the need to do your due diligence. If you were to buy a property sight unseen, you need to take the time to do your own research on a property.
First, do not direct your questions to the seller. Seek out third party information. Hire an independent licensed home inspector to inspect the property. Also, hire a separate licensed general contractor to do a redundant walkthrough. With those two sets of independent eyes, you’ll have a better idea about the property.
First Turnkey Property
When people get started in real estate, the performance of their first property often shapes their opinion of rental property investing forever. That single data point is given an unduly high amount of influence on how you feel about real estate in general.
While I understand that it can be comforting to feel as though you have, essentially, a parent figure who’s taken care of everything for you and wrapping this up in a nice tidy package with a bow on top and putting it under the Christmas tree for you. It’s also the case that you might be, even when both parties are transacting with total honesty, it might simply be the case that your expectations are mismatched. Remember, happiness is when expectations match reality and when there is a delta between expectations and reality that is the source of disappointment.
For turnkey properties, Paula would be concerned that the materials chosen could fall apart easily or that a major repair is skipped in the initial rehab. If you are running the project yourself, then you have the ability to get it done to your standards.
Additionally, if the turnkey property comes with a tenant, that is not necessarily a good thing. You might want to place tenants with a high standard in your homes. The turnkey investor may not have the same criteria as you. For some, this has become a marketing focus and it might seem like the easy way to go, but having a pre-existing tenant may not be in your best interest.
If you have a bad experience with house one, then your future investing might be hindered by that one experience.
Paula likened deal syndication to buying an actively managed mutual fund. If you are buying one particular house, then you are choosing an individual stock.
If you are buying a mutual fund, then you can’t just throw your money blindly at any actively managed mutual fund. You would need to find a good fund manager. Essentially, that is a similar framework to deal syndication. With deal syndication, what you’re doing is choosing a professional manager who manages an individual deal. Paula doesn’t recommend actively managed mutual funds, but it fits the example well.
For example, you might be one of many investors in an apartment complex in Fort Myers. Although you feel safety in numbers, that is not real safety. You need to choose these deals with great care.
Going into a deal syndication type of platform is not a “get out of due diligence free card.” In the same way that buying an actively managed mutual fund, if you are actually going to do that correctly, which I don’t recommend doing, does not absolve you from the same level of due diligence that you would have to do if you were buying an individual stock.
How To Build Your Team
If you want to scale a real estate operation smoothly, then you are going to need a good team. Here’s who you are going to need:
Paula had an excellent property manager that charged 10% of gross rent, plus one month’s rent when they placed a tenant. However, Paula switched to a property manager that charged only 9% but they turned out to be a bad decision. Luckily, she’s learned how to spot a good property manager.
Qualities For A Property Manager:
- Well-crafted Listing
- Quality Photos
- Fills Listings in a timely manner
- Attention to details
- Responds in a timely manner
The first thing to look at is the MLS or Craigslist listings for their apartments. Take a close look at their photos and descriptions. Good listings with well-crafted copy and polished photos indicate good property managers. Find the best-written listings in your neighborhood.
An unprofessional property manager can let problems fester into expensive repairs. Plus, tenants that don’t like the management company turnover more quickly. If they are a little sloppy here or there, don’t continue to give them the benefit of the doubt.
You can find a good property manager by looking around the particular neighborhood your property is in. Look at who has the bulk of the listings. Go to their website and make a note of what listings they have. Check back in two weeks to see which listings they have been able to fill.
A general contractor, or GC, is the next team member to find. You’ll need to find a licensed GC that you can hire for major repairs or rehabilitation. They serve as the project manager for large repairs. You’ll want to find GCs that work specifically with investors.
You’ll need to find these through word of mouth from other investors. If you are local, then go to a meetup with local investors. If you aren’t local, then find online forums and find other investors there with recommendations.
When you are deciding who to use for a repair, have more than one GC walkthrough. They will each give you an estimate for repairs that will be broken down into line items. Some of the items will seem reasonable, others will seem high. Just compare these estimates and start negotiating.
A handyman is great for minor repairs. You can often find one through your property manager.
Once you have these three team members in place, you will be more prepared to scale your real estate investments.
Regardless of the medium through which you buy, the level of due diligence is the same. Like, no platform is ever going to get you a “get out of due diligence free card”, and so ensuring that you are getting the deal that you think you are getting is your responsibility.
How To Connect
If you’d like to learn more from Paula, then check out her podcast Afford Anything.
Also, Paula’s Real Estate Investing Course will be open from September 23 – 27, 2019. You can only enroll twice a year, so take advantage of this opportunity. Enroll at AffordAnything.com/enroll.
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New to FI? Be sure to check out Episode 100: Welcome To The FI Community!