Turnkey Real Estate First Steps

Turnkey Real Estate Investing: First Steps

Turnkey Real Estate First StepsThe Turnkey Real Estate Investing series follows my journey through purchasing my second turnkey property, start to finish – the good, the bad, the ugly. I hope to give clarity to the overall process of turnkey real estate investing in cities other than the one you live in.

It was about two months ago that I reached out to my contact at the turnkey real estate company that I used for my first property.

I was ready for investment property #2.

Patience and Research

For my first property, I was sent a list of about 7 or 8 properties to look at. Now, I was only sent one at a time. I’m sure there are MANY options at any given time, but there’s a psychological trick where if you only give some one a single choice and an expiring timeframe, they are more likely to close quickly. I understand this approach and as long as the numbers work out for me, I am fine with their tactics. If the numbers DON’T work out, I say no.

In this particular case. I said “no” to the first 2 properties that were sent my way. The first one was sent months ago, and I wasn’t ready for property #2 yet. I did a Google Street View search on the second one and wasn’t impressed with the neighborhood.

When I bought property #1, I actually flew out to Indianapolis and met with the turnkey company, saw a number of houses in various stages of rehab, and visited the particular house I ended up purchasing. For property #2, I felt good about the rehab standards of the turnkey company and decided that Google Street View would suffice. Perhaps this was a mistake and I should take a trip for every property that I purchase, but personally, I feel confident that I have seen enough of the acquisition and rehab side of the operation to trust it (the property management side is another story, but I will get to that).

Finally, the third property I found was a winner. I liked the numbers, the neighborhood, etc. In terms of research, when I find an apartment, I usually take the following steps:

  • Find the property on Google Street View
    • I do a “virtual walk” around the neighborhood as well, looking for:
      • Junk in neighboring lawns
      • Poorly maintained houses in the neighborhood
      • Clunker cars (A little hypocritical since if I owned a car, it would be a clunker, but better to be safe)
      • Anything that looks sketchy/like a potential problem
  • Find the property on Zillow* and read their description and price points
  • Search for information about the neighborhood

That’s really it. This part is where most people get stuck in what people call “analysis paralysis”. They keep going. Keep researching. Hoping to find some piece of info that will make them 100% confident one way or the other. That piece of info doesn’t exist. At some point, making the decision is a little bit of a leap.

More Patience and Flexibility

So, I emailed my contact and let him know that I was ready to move forward on the house. Time passed. I figured something was up because this turnkey company HATES letting time pass. They want to rehab a place and sell it as quickly as possible to avoid the holding costs (paying taxes, insurance, etc). Plus, the faster they do deals, the more deals they can do, and the more money they can make.

After only a couple of weeks, my contact told me that they were having trouble closing on the property. The seller (the person that THEY were buying the house from in the first place) was just being slow and dragging out the process. He wanted to know if I would be interested in a different property that he had lined up. Of course, I said yes. Worst case scenario, I would just wait for my current target to be ready. Best case scenario, I would see an even better deal.

He sent through the pro forma (this is just jargon for a document that breaks down how much you will pay and how much they expect you to receive in rent) and I looked it over. Guess what? It was definitely a better deal. Plus, I liked the neighborhood even more! It was a neighborhood that had one of those community entry signs made out of stone. The surrounding houses looked nice! Normally, my rule of thumb is not to view properties through the eyes of a consumer. These houses are not at the level where I would want to live, so as long as they aren’t in dangerous neighborhoods, I shouldn’t imagine trying to live there. However, I could see myself living in this house, honestly.

The turnkey company was asking for $97,000 for the property. I put in my offer for $93,000 and they accepted (accepting my first offer makes me think I should have gone even lower, but my numbers worked out at that level, so I am happy either way).

Meanwhile, Back at Property #1

Here’s where I was almost derailed. A few weeks ago, I learned that the property management arm of the turnkey company was dissolving and all properties purchased through them were going to be handled by a new, supposedly very reputable property management company. No problems there. Then, my statement came for Property #1. It was around $54. I assumed this was just clearing my account up and the rest of the rent should be coming through the new property management.

Nope.

I contacted the new property managers and confirmed that October 1 is the date that all accounts were transferred (at the time, it was still the end of September). I went back and called the original property manager. Apparently, my tenant hadn’t paid and the eviction process had started! How was I not informed about this? I was furious. The lady I was speaking to apologized, but she was losing her job at the dissolving property manager, so she wasn’t inclined to help too much. All of a sudden, the following questions ran through my mind.

  • Is turnkey investing a bad idea?
  • Did I make a mistake?
  • Should I shut down the purchase of Property #2?
  • Am I financially screwed?

After a while, I calmed down and tried to think a bit more rationally. The facts remain that Property #1 cash flows. The rent I bring in covers the mortgage, property management fees, vacancy contingency, and maintenance, while still providing almost $300/month cash flow on top of that. I had planned for this and I even had a rent guarantee agreement in place with the turnkey company. My questions going forward remained. What if this happens again? I eventually decided that I did make a mistake the first time around. I properly vetted the company I was buying the house from, but I DIDN’T properly vet their property management arm. They are the ones who placed a tenant that ended up not being able to pay rent. They are the ones that failed to communicate with me. The house itself is still solid and still commands appropriate rent. I just need a property management company that places better tenants!

The good news? I don’t even have to fire the property management. They are doing that themselves. I am in the process now of setting up an interview with the new property management to make sure they are a better fit, and if not, I will look elsewhere. Property #1 may have a bit of a bumpy ride for the next couple of months since the eviction is happening DURING the changeover, but I am hopeful it will come out better for it on the other side.

Onward

So in the end, I still trusted my research about Property #2 and still expect it to cash flow, so I am going forward with the deal. After property #2, I think I am going to press pause on turnkey properties for the next year while I make sure my current properties are stable, though. No need to rush.

My next post in the series will talk a little about how I run the numbers to determine if a property is right for me. Math is always a little dry, but it should be a short and sweet post as the math really isn’t too difficult!

 

*Be careful. When you find your property on Zillow, it will be estimated much lower than what the turnkey company is asking. That’s because it was usually picked up as a foreclosure and the turnkey company is putting time and money into rehabbing it. Don’t let the disparity in prices dissuade you, but it is still important


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3 thoughts on “Turnkey Real Estate Investing: First Steps

  1. Andrew@LivingRichCheaply October 2, 2014 at 2:16 pm

    Thanks for going through the process step by step…I’m sure it will be very valuable for me when I decide to jump in. I’m not sure if you’ve done taxes yet, but is it complicated by the fact that it’s out of state? Also, I’m guessing you don’t have to attend the closing…that would have been 2 trips out there. I think the eviction that early in my investment would have soured me to it…how fast was the eviction process in Indy. It drags on and on in NYC, but I’m sure it wasn’t as tenant friendly there.
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    • Mr NYBudget October 2, 2014 at 3:05 pm

      Are taxes complicated by it being out of state? Yes, a little. Basically, I made the choice this year that I would have someone else do my taxes for the first time in my life.

      I will also go over the closing, but no, I sat down with a notary here in NYC in a Starbucks and went through, line by line, all the closing documents and signed.

      The eviction process is very landlord friendly in Indianapolis. That’s one of the main reasons I decided to invest there. You have to give the tenant 3 days notice for late payments and then 15 day notice of the eviction. There are some more steps including the summons (5 business days), but the upshot is that the whole process can be done in a month, whereas places like Chicago can take up to 6 months!

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