Jean and Sofia had immigrated to the United States from Europe—and as passive real estate investors, they had been through every turnkey nightmare under the sun. No one they worked with had been reliable, so they had received unexpected cash calls on multiple occasions. They had replaced roofs, plumbing, and appliances, and sometimes they were replacing these items over and over. Tenants had moved out on them in the middle of the night. They’d purchased “super-cheap” properties in multiple cities across the country from different companies and individuals. These properties and the lack of a plan had cost them an arm and a leg to this point.
They made a slight adjustment to their plan and started purchasing more expensive properties, thinking the cheap price point was the issue. There again, they were wrong. It wasn’t the price point that was the issue. It was their choice of teams to work with in the different markets that was causing their nightmare.
Once a property of theirs was damaged by a tornado, and they didn’t know about it for two whole months. By the time their management company sent someone out to collect rent, the tenants were gone and the house was gathering dust. A lack of communication and failure to manage expectations was seriously draining their bank account as well as their enthusiasm for passive real estate investing.
Yet in spite of all that, they knew that turnkey real estate was still the right investment for them. They just had to find a partner responsible enough to make it work the way they knew it should.
As Sofia tells the story, she had attended real estate investor association events and had somehow ended up on the mailing list of a real estate magazine based in California. She had never paid much attention to it, but one particular issue had the words “turnkey real estate” on the cover, and it caught her attention. She read the articles and saw an announcement for a talk I was giving in Los Angeles, where they lived, called “How to Safely Buy Turnkey.”
She attended the event. She liked what she heard.
Two weeks later, she and Jean were sitting in my office in Memphis. We took our time, and I worked through their goals and investments with them. For the first time, the speech they heard wasn’t “buy, buy, buy.” It was “investigate, learn, get to know us, make sure we’re a good fit.”
Jean and Sofia knew that they were finally hearing what they needed to hear, and they didn’t mess around. A week later, they bought five properties from us. Things went so well that, eventually, they sold all their other investments and bought more houses from our company instead. Then they referred other members of their family to do the same thing.
A few years later, several generations of their family were investing in turnkey headache free, and they were well on their way to achieving their visions.
Before they found us, Jean and Sofia were not investing in turnkey. They were just buying houses from people and companies who didn’t know how to manage them. The properties were in pretty good markets overall, but that may have been more luck than anything. Jean and Sofia had made a big mistake at the beginning. They were investing in cheap properties—cheap by their standards because they lived in California—and not paying enough attention to the market or who they were doing business with.
That’s not turnkey—that’s a headache. And it’s also the reason that the team you choose to work with is what really puts the “key” in turnkey real estate.
A true turnkey partner is a real estate company that purchases an investment property, renovates that property to a high level of quality, places a tenant in the house, manages the occupied property—and only then sells it to you, the investor, as a performing asset. There really is no other definition that works if you are going to buy a turnkey property.
The problem is that turnkey has become a marketing term. It hasn’t been mainstream long enough for people to have clear standards for it. Anybody out there can say, “I’m a turnkey company.” But the reality is that some of these companies may not own their maintenance services. In some instances, they don’t even own the houses they sell you. They just don’t do the things that need to be done to protect the investor.
A quality turnkey company will own everything it sells, and the renovations will be completed on each property before it is marketed to an investor. Anything short of that brings risk. Anything short of that is not really turnkey. You should never be asked to pay for renovations after you purchase a property. That’s not turnkey. That’s a recipe for getting ripped off. And yet there are companies that use the word turnkey to market their properties, and they ask investors to buy the property and then pay for the renovation while it’s being completed. That is simply too much risk.
Don’t let that deter you though. That doesn’t mean you shouldn’t invest in turnkey. What it means is that you need to do a great job choosing an outstanding turnkey partner before you invest.
A bad turnkey company can destroy a great investment. If you don’t take the time to handle this part of the process right, you stand to lose every dollar that you put into your venture. Worse, a bad turnkey experience can derail the vision of where you want to go. However, if you make the effort to sort through the false advertising and find a high-quality turnkey partner, the path to your vision will be much smoother than you thought it would be—and you’ll reach your goals much more quickly.
When you invest in turnkey real estate, you have to be confident in the company you choose to work with. You have researched the city and know the facts, but the company you work with is intimately familiar with the city. Its staff members have a deeper understanding, down to the subtleties of which side of the street to own a property on in a particular neighborhood. Those are the details you don’t need to know—but your turnkey partner does!
Choosing your turnkey partner is a critical part of the turnkey revolution, and the third step in the Turnkey Safely System. This chapter will give you a complete system for how to find and screen top-notch turnkey companies so you can invest in passive real estate with clarity and confidence.
Choosing an ideal turnkey company is a three-part process. You need to identify good options, put your finalists to the Turnkey Test™, and take stock of the investments they offer to see if they’re a match for you.
The first part of the process is identifying good options. This is where you learn what’s out there and strain the false advertising from the companies with real potential. Start with a simple Google search. Using the target markets you identified in the last chapter, type each city name plus “turnkey real estate” into the search bar. You can also try queries like “best turnkey real estate companies” and “largest turnkey real estate companies” for your target city. Then, take a look at the results that come up.
If nothing pops up at all, that’s not a good sign. It doesn’t necessarily mean that turnkey companies don’t exist in that area, but it does mean that they are probably not big enough to do business with. Companies that have the technology to keep you happy as an investor from 1,500 miles away almost always have a strong Internet presence.
Ideally, you want to see two or three turnkey companies when you do this search. That’s a sign that there’s some traction in the market. There’s a demand for the service in the first place. At that point, you do some basic due diligence.
Your goal here is just to identify the big players and strain out the mosquitoes. Don’t worry about the details of the company itself and how it’s run yet. Figure out who’s big enough to investigate further. Who appears multiple times in the search results? Who has a high-quality website? These are some early warning signs. You know off the bat that you don’t want to do business with a company that has a three-page website with no pictures on it. Forget the companies that use an obvious template with no mention of ownership, leadership team, the structure of the company, or their personal story.
On the other hand, when you find a company that turns up in 80 percent of the search results, has a well-done website, is quoted in major periodicals and newspapers, and is clearly active with things such as articles, videos, and press releases, you’ve hit on an option that has some meat on its bones. These are the companies that go on your short list to do more research on.
This stage of the process is also where you keep whittling down the two or three market options you found in the last chapter. If you get to the end of this step and you don’t see a company with potential in your target city, scratch that city off your list. It doesn’t matter how good the market itself looks. Without good turnkey company options, you don’t want to invest there, plain and simple.
Online presence is a start, but does it mean a turnkey company is up to scratch? No. Unfortunately, an online presence is not enough to say a company is quality. Many companies today are getting better and better at perfecting their marketing. It is slick, it is smooth, and what with turnkey’s growing popularity, there’s more and more of it out there. Since we know that not having an online presence is a deal killer, how do we separate the good from the bad? After you’ve narrowed your options down to a few finalists, you need to put them through a much more intense screening process to figure out who will be the best partner for you in the end.
I call this screening process the Turnkey Test. This is where you separate the people who have real companies from the people who are just selling houses.
How do you get started?
First, reach out to the company. From this alone, you will probably be able to tell whether you’re dealing with low, mid-level, or high quality. A low-level company will respond to your request for more information with something like “Sign up to get a list of all our houses sent to you.” Sometimes, low-level companies fail to respond at all.
The next step up from that is a company that gives you something closer to “Here’s a free report about how to invest in turnkey safely.” These are usually “stay small, keep it all” kinds of companies. You might get the impression that they’re not bad, when you talk to them, but they’re not quite as sharp and 100 percent on top of things as you’d like them to be.
The worst of the low-tier and middle-tier companies are the ones that have well-oiled sales machines that use the best of the psychological sales techniques to fool an investor. They may tell you that you have to wait for five to six weeks before you can get an appointment to speak with someone because they are “so backlogged with demand.” This gives the impression that the company must be exceptionally good if there is so much demand.
Another technique is to respond that you can have an appointment, but you need to be prepared to move quickly on the call and commit to properties immediately. Even waiting one hour can be enough to cause you to lose a property. This use of urgency and high pressure is a way of social-proofing their company and making you think that everyone else is investing and making fast decisions, so you need to as well.
I’m not saying that companies may not have high demand or packed schedules. I’m not saying that companies may not sell properties very quickly. What I am cautioning you as an investor to watch out for is the companies that are not interested in getting to know you. They are not interested in more than a few minutes of an introductory call and some cursory questions before they get right into selling you properties. Look for companies that make you feel comfortable and are obviously confident in their value. They will spend as much time as you need without any feeling of pressure.
The top-tier companies will offer you a full welcome package explaining how to get started with them. The extra time they spend and the effort they put into educating you as an investor on their company and their process will go a long way in building the trust you need to buy from across the country or world. The difference will be obvious and well worth the effort, and so will the results.
However, just because a company’s team members spend time talking with you and don’t rush straight into trying to sell properties doesn’t necessarily mean it’s the right fit for you. Top-tier companies are more likely to have the manpower and experience to handle your investment with the most service and the lowest risk.
Whatever the case, request a conversation with the turnkey companies you find. Just say, “I need to get some details about your company. Can we spend 30 minutes on the phone?” If they tell you no, that’s a red flag to cross them off your list. If they say yes, you get on the phone and ask them this series of questions—the Turnkey Test:
We are not quite done with our Turnkey Test yet. The following three questions are critical. Beyond our first list, here are the three most important questions you can ask to learn a little about your potential company’s mindset as business owners and how they are going to treat your investments:
If the company’s answers to the Turnkey Test are satisfactory, that’s a great sign that you’re dealing with trustworthy, responsible people who know what they’re doing. But you still have one more thing to discuss with them before you sign on: the housing itself.
Just because a company passes the Turnkey Test doesn’t mean it will have the right kinds of investments for you. This is where you communicate your vision and goals to your potential turnkey partner and see if they match what the company has to offer.
At this stage, a good turnkey team will turn the tables and begin to interview you instead. Team members will ask what you’re looking for specifically, and why you want what you want. Then they’ll help you find a way to meet your goals if they can.
For example, you could say, “I love duplexes, and I only want to invest in those.” A good company might reply, “You know, we don’t do duplexes because they’re in the wrong part of town. But tell me why you only want duplexes.” If you can achieve your goal with single-family homes just as well as duplexes in that particular city, the company will let you know, and you might keep that company on your list as a possible company to move forward with after all.
What is more likely to happen at this point is a discussion about age of the houses and types of neighborhoods. A common way to score properties is to assign them a letter grade. Homes may be assigned a grade of “A,” which implies that these are excellent assets where most if not all of the homes are of high retail quality and the homes in the neighborhood will be mostly filled with owner-occupants.
There will not be a lot of rental properties in these neighborhoods, and those that do exist will tend to be more expensive. While that may sound like a negative since the higher they are priced, the more it costs to invest and the harder it is to see a positive return, these properties also tend to have the best opportunity for appreciation and fewer turnovers. Residents tend to stay longer.
Next come the “B” properties, which tend to be nicer homes, newer neighborhoods, above median home value for an area, and while there are rental properties in these neighborhoods, most homes will tend to be owned by owner-occupants. These make really good turnkey rental properties.
Properties that are rated “C” and “D” you want be cautious with as a turnkey investor, and to be direct, stay away from the “D” properties altogether. Houses that are rated so poorly are in bad neighborhoods and work best for active investors managing their own portfolios.
I am not a fan of labeling properties with the “A, B, C, D” method, but it is a common practice. You will run into it as you are interviewing turnkey companies. As an investor, remember that the method is very subjective, and what rates as a “B” property in a “B” neighborhood to a company selling a property may be very different from what an investor trying to add a property to her portfolio would consider a “B” property.
If in the discussion it becomes apparent that a company is not able to offer what you need for your portfolio, then you’re looking for a good referral or a point in the right direction. It could be that the company’s price points are too high. Possibly it specializes in one type of property and you are comfortable with another. It could be the company simply doesn’t spend enough time and attention on the renovation. Either way, this is your portfolio, and the properties themselves need to match your needs.
If you can’t afford an investment with the company you like, but you can afford a less expensive one with a questionable company, don’t buy either one of them. The former costs too much, but the latter delivers no value. Just keep looking for another place to do business. This alone can save you thousands of dollars in bad decisions.
When a high-quality company’s properties match your needs, then it’s safe to sign on with your new turnkey partner. You don’t need to meet the team in person first, though you can do that later for confirmation if you want to. As long as you follow this process correctly, by the time you reach this point, you shouldn’t have anything to worry about.
You’re in good hands.
Yes, I am back to this point. Why? Because it is the one rule you should never break when investing in turnkey: don’t buy cheap houses.
Turnkey is not the kind of investment you should ever make by searching for the cheapest option. When you choose a turnkey vendor, the price point of the homes it sells reflects the value of what you’re getting.
Why?
Because there’s a lot more to good property management than putting up a sign in a yard, taking a phone call, showing a house to somebody, and collecting the rent. Turnkey companies that stop there are giving you a lower level of service, connectivity, and satisfaction. These are companies that often sell houses for less than $50,000 and charge a 5 or 6 percent fee on the rent collected. They tend to cut corners that put you at risk as an investor.
Meanwhile, good turnkey companies have a high level of two things: service and renovation work. They don’t sell bad properties that have issues. They don’t delay work that needs to be done right away, and they don’t go cheap on their value. You can expect a good turnkey company to charge between 9 and 10 percent of the rent, and you can expect it to be able to tell you why.
The reality is that your property manager is the factor that makes or breaks your success. When you’re looking at potential turnkey companies, remember: more expensive doesn’t always mean better, but cheaper almost always means worse.
The biggest trap that investors fall into when searching for turnkey companies is what I like to call Shiny Object Syndrome. Shiny Object Syndrome refers to the marketing gimmicks companies throw at you that don’t have any added value—in particular, guarantees.
I’m a big opponent of guarantees. In my years of experience, guarantees are offered for only one reason: to attract the buyer. It doesn’t matter how a company frames it. Luring you in is the bottom line. Two of the most common guarantees are that you will not miss rent or pay any maintenance costs for the first 12 months.
But if you’re working with a quality turnkey company, you shouldn’t have to deal with vacancy or maintenance in the first year, period. That should never happen. And if it does, the company shouldn’t charge it to the investor anyway, because that company failed. A really high-quality turnkey company that knows it’s the best can prove it to you without gimmicks such as guarantees.
If the idea of a guarantee appeals to you, I suggest you tell that company that you want the guarantee the third year instead of the first 12 months. See if it’s good enough to stand by its product that far down the road as much as it will in years one and two. The last thing you want is to buy a bunch of properties in year one under the protection of a guarantee and then be stuck with investments that perform terribly every year after that.
Shiny Object Syndrome doesn’t stay shiny for long. It will have you sending out an S.O.S. before you know it.
Benjamin Graham, investor and mentor to Warren Buffet, once said, “Price is what you pay. Value is what you get.” This is absolutely true of turnkey companies.
What matters at the end of the day is the value you’re getting for every dollar that you put into your investment. That’s where the payoff comes from. That’s where the ability to achieve your vision really comes into play. And that’s why the team you choose is so much more important than everything else in the turnkey revolution.
The value of a good turnkey company is immeasurable. It will give you a level of comfort and peace in an investment that you’re making thousands of miles away. Once you’ve found a partner that’s a good fit for you, you’re ready to move forward to the next step in the Turnkey Safely System.
Now it’s time to create your plan.
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