MAKE YOUR INVESTMENT

Sam was a super-sharp investor out of San Francisco with a clear plan. He wanted to invest in five turnkey properties in Memphis that would give him consistent income. Sam was entrenched in the high-tech world of Silicon Valley, but he wanted out. He was married with two children, but real estate was his true passion, and he was searching for a way to transition into real estate full-time. Sam followed the path I have laid out so far with one important adjustment.

He bought his first property from us in 2011 at almost retail value for $85,000. Everything went well, and Sam enjoyed working with our team. At the same time as he was purchasing his property, Sam was also attending his local real estate investors club and learning about actively investing in real estate. Other companies were marketing themselves to him. “We can sell you Memphis properties at lower prices,” they promised, and eventually Sam altered the execution of his plan.

He bought his second and third properties with two different companies. On paper, the properties were less expensive (they were cheap properties) and the returns they promised looked very promising. The properties themselves fit into his plan, and the companies had very slick marketing. To Sam, it looked like he was making sound decisions.

Then Sam purchased two more properties on his own, spending a lot of time and effort building a team to help him manage his properties remotely on his own. He reasoned that with the discounted prices he could get buying and hiring directly, he could earn a better return. Again, on paper, his investments looked great.

Sam made all five of his investments in 2011. Then in 2014, he came to Memphis to visit his properties, and he came to our offices for a chance to sit down and meet once again.

“I bought five properties in Memphis,” he said. “One of them was the most expensive—yours. And that expensive property is the one that gives me the best return to this day.”

The other four properties Sam bought were cheaper at first, but their profitability fluctuated up and down constantly. He struggled to get good communication with his other management companies and found remote management didn’t translate into real savings. Without the ability to negotiate savings based on volume and face-to-face interaction, Sam had ended up paying more than he anticipated for everything.

Meanwhile, the investment he made with us was steady. In four years, he managed to break even with the other four investment properties. With Memphis Invest, Sam earned a consistent return.

Sam had a great plan for his turnkey investments. But the way he made those investments was not the best strategy for him in the long term. In the end, he had spent greater effort for less return.

The great thing about Sam’s story is that he still has his small portfolio with the addition of a few more properties from our company. Most importantly, he has progressed as a real estate investor. He found his niche in Memphis and soon began buying properties remotely, selling them back to larger investors like our company for a small, quick profit. Sam even started a short-term lending company that lends to smaller real estate investors. He got a little off track along the way, but his early mistakes taught him the value of treating his passive investments as more than just pieces of paper that would magically perform.

Sam learned to calculate the value of his investments on more than just the price he paid or the return he thought he would receive. He learned to calculate the value based on how much time, effort, and energy he had to spend. He learned just how valuable great communication and customer service were to his overall satisfaction with his portfolio.

He also learned that he liked being an active investor and really wanted to leave the heavy lifting on his passive investments to better turnkey companies with the systems and processes in place to make his investments perform. Last, he learned that saving a few dollars by buying cheaper investments never works out the way you think it will. Cheaper does not equate to higher returns on the bottom line!

STEADY AND SYSTEMATIC

When I talk about making your investment, I’m not just talking about signing your name on the dotted line.

In the last chapter, you worked with your turnkey partner to make a plan for your investments. Now it’s time to execute that plan. The right way to do this is steadily and systematically.

The first thing to remember during this process is that you are in control. The numbers are really important, and you need to understand what they are. Even though you trust your team members and allow them to advise you on decisions, you need to know the specifics of exactly what you’re getting yourself into.

If you just jump into an investment with both feet, you’ll find yourself blindsided: the homes are not what you thought they’d be, expenses come up that you didn’t think about, the attorneys your company works with are atrocious—the list goes on and on.

There are so many moving parts in this puzzle, and to become aware of them as an investor, you really just have to experience them. Again, the best way to experience them is steadily and systematically. If you handle the investing process this way, you will always feel like you’re in control, even when unexpected things come up. You will keep moving forward in the direction of your vision with as few headaches to deal with as possible.

This step of the Turnkey Safely System will walk you through the process of making your investment and show you why pacing yourself is in your best interest.

MAKE YOUR INVESTMENT

The best thing you can do when making an investment is to create a spreadsheet of the numbers, and then analyze the data.

Some key data points to keep in mind are your hard costs and soft costs. Hard costs are defined as costs that are going to occur on a set and defined basis. Taxes, insurance, principal and interest payments, property management fees, and homeowners’ association fees are all examples of hard costs. Examples of soft costs include maintenance allocation, vacancy allocation, and capital expenditures (large-ticket items such as roof replacement and a water heater). These are costs that occur on an infrequent basis, but you still need to account for them, as they will definitely occur over the life of your investment.

After you make your plan with your turnkey company, the company should be able to recommend a few properties that fit your needs. This is your chance to get the details you need for your spreadsheet.

What numbers are you looking for?

To begin with, you need the price you’re going to pay for the investment, as well as the appraisal of the property’s value. You need the amount that the property rents for each month and the average vacancy rate or length of stay. If there’s a 60-day vacancy every two years, factor that into the equation. If your company keeps the first month’s rent on each new lease, take that into consideration as well.

This is where asking the right questions at the beginning really comes in handy. If you know that a company has an average length of occupancy of over four years for each property, then there is no need to account for a new lease fee each year. If you run your numbers expecting to lose a month’s rent each year to a lease fee, then your numbers are never going to work and you are never going to get started.

Taxes, insurance, financing, and your company’s maintenance or management costs also need to be included. You already asked your turnkey partner what percentage of collected rent its owners pay for maintenance each year, and whether it includes the maintenance markup. So, now you know exactly how much to plug into your calculations.

Now, prepare a spreadsheet—or take a sheet of paper if you’re not a big fan of spreadsheets—and prepare your basic calculations.

Here are how your calculations should look:

Once you’ve plugged all of this data into your spreadsheet, you analyze the numbers to calculate your return on investment. What percentage return can you expect to get on your property after your costs have been factored in? Does the return meet your personal criteria? Does the annual gross income move you closer to what you need to make passively per month in order to reach your vision?

As long as the investment meets those requirements, you move forward with it. Emotional factors such as whether the house faces north or backs up to a shopping center do not play a part in this. The decision is 100 percent practical and based on facts—not emotions.

When it comes to turnkey real estate, you have to rely on the expert, your turnkey partner, to help guide you to make good investments. You have chosen a good company, now you have to rely on its expertise. If its logic seems faulty, such as trying to sell a two-bedroom home in a three-bedroom neighborhood or a home with no parking in a neighborhood where every home has a two-car garage, always bring your concerns to team members’ attention.

I have seen many investors miss out on high-quality properties because of a “feeling” they have about a property. They don’t like the interior paint colors. They prefer having flowers around the mailbox. They don’t like the proximity to a mobile home park or a highway. This is where you really have to decide as an investor if you are wanting a passive or active investment.

There may be multiple times in your journey when you have to ask this question. There is nothing wrong with that. The time to make sure you want to be passive and are comfortable trusting your turnkey partner is right now—not after you have purchased a property. Your number one concern as a passive investor is not the color of the paint. Your number one concern is this: “Can my turnkey partner make this property perform the way I expect it to perform?”

These are the questions you should be answering for yourself:

•  Am I comfortable that the company knows how to pick good properties?

•  Does it perform high-quality renovations and eliminate deferred maintenance?

•  Does it have systems and processes in place to manage my portfolio so it performs at its best?

If you can answer yes to those questions, then you can proceed.

After you give the okay to start the contract, there are a few things you should expect, and a few pitfalls you need to watch out for.

WHAT TO EXPECT

You should expect to put down earnest money. Earnest money is almost always a part of the equation, including if you are paying all cash for the property. There should be a waiting period between the time you sign a contract to purchase a property and the time you close. That is the purpose of the earnest money—to keep the property under contract while you do your proper due diligence.

When you are getting to know your turnkey team members, they should encourage you to handle the few due diligence items you need to handle, but they should also handle a smooth contract closing. That includes communicating with your lender, the title company or closing attorney, and the property inspector and property appraiser.

You should expect to be able to choose your services such as insurance, closing attorney, and inspector. Your lender will choose an appraiser to value the property. Remember, in many cases you are buying property sight unseen and far from home. You need to exercise that “letting go” muscle and trust the professionals to do their jobs. Your turnkey partner should provide you with a list of inspectors to choose from and feel free to solicit other companies yourself. This is the person that is going to be looking out for your best interest and confirming the level of renovation done to the property.

This is important. Let the inspector do her job and pay attention to the report you receive back. If there are any issues with the inspection report, listen to the response. Again, you must always pay attention to your new turnkey partner to see if there are any red flags or trouble signs. If the partner refuses to fix issues that come up on an inspection report, and we mean major issues, that is an indication that maybe it is not as good a company as you had thought. If there are minor issues like small cracks in caulk at the sink that have no bearing on the value or structural stability of the house, I wouldn’t let those bother me.

You should also expect a very good, reliable attorney to handle the closing transaction, and you should be able to hire your own attorney if that’s what you want to do. If for any reason your company doesn’t allow you to do these things and it makes you uncomfortable, that may be a red flag—and a deal breaker.

A good company is going to have close working relationships with services that you are going to need to have a smooth closing. You may still choose to hire your own companies outside of any that your turnkey partner recommends. It should not have a problem with you doing that, but remember, it is your partner for a reason. A little earned faith goes a long way. As long as the company is earning that faith, give it some latitude, and let it help make your closing a smooth one.

PITFALLS TO AVOID

As far as pitfalls, you should not be expected to close on a property before the renovation is complete. You as an investor should want to see the finished product before you close. If you are not going to travel to see the house in person, and for many investors, seeing the house in person is not necessary, then you should expect to receive a Scope of Work on the property.

This will be a detailed list including pictures inside and outside, room by room, listing all the work completed on the property. It should include pictures of a new roof, new AC unit, new water heater and other systems, new tile, fixtures, flooring, paint, and detailed exterior work. If your turnkey partner spent time working on a property, it needs to be able to document that work for you.

You should also be prepared for costs to change. The insurance may come in slightly more than you thought it was, or the house may appraise slightly low. When these things happen, don’t immediately jump to the conclusion that you’re being hoodwinked. You should have such a high level of comfort with your turnkey partner at this point that changes like these should be easy conversations. And if you’re not comfortable with the solutions to the changes, then don’t close on the property.

Things will happen when you close on a property. A good turnkey partner will help you solve the problems that come up. This is why I advised you early on to be patient and spend your time getting to know the partner or partners you choose. Some investors will look at little challenges that come up as major problems. If you take your time and get to know the turnkey partner you are choosing to work with, then these conversations are easy. Even if you are not satisfied and choose to go in a different direction, the conversation is easy. Address any issues steadily and systematically, and keep moving forward. Either the property is a right fit for your portfolio or it is not.

PACE YOURSELF

Investing steadily and systematically is a process you go through with each investment. But more than that, it’s a principle that applies to the execution of your larger plan as well.

Your plan can and should involve purchasing multiple properties. A complete portfolio includes a minimum of four houses, and eventually you need a portfolio to minimize your risk and keep your investments growing steadily. However, that doesn’t mean you need to buy them all at once. Most of the time, it’s in your best interest to build your portfolio two or three houses at a time. If you need four houses, then you buy two or three up front, and if all goes well, you complete your portfolio within a year or two.

Give your turnkey partner a chance to earn your additional business by hitting your expectations. Make it earn your trust, and then reward yourself by building out your portfolio.

You do this to make the company you’re doing business with earn its reputation with you. If you’ve done your due diligence, you have a high level of comfort with the company before you start, and that’s fine. But buying your investments at a planned pace rather than all at once is an extra safety mechanism for you as the investor. If you purchase a property and it turns out that your company isn’t as great as you thought it was, you’re going to be glad you have only two or three houses with it and not five.

On the other hand, don’t let your turnkey partner pressure you into buying too many properties at once. Less reputable partners may say something like, “You really have to buy these houses now, because these great deals are going to be gone later.” A quality turnkey company will never say something like that to you. The truth is that there is no perfect time to invest. You simply have to get started. You should absolutely start by building a portfolio, but don’t get fooled into thinking you have to buy the first five properties you are shown before all the good deals are gone. You can find good turnkey investments that pay you consistent returns in almost any market around the country at any given time. Anyone who tells you otherwise is using a scare tactic.

Most investors don’t need to buy all their properties at once in order to reach their goals. Turnkey is a long-term investment, and that means you have time to execute your larger plan. So exercise patience.

Pick up properties at a pace you’re comfortable with. Figure out how the system works. Get comfortable with the processes your turnkey partner uses, and make it earn your trust. Remember, you are in control. Instead of risking everything before you’ve gathered some experience, give yourself time.

The more you invest, the more you learn. And the better you pace yourself with your investments, the better those investments will become over time.

SAFETY IN NUMBERS

A steady and systematic mindset is your safest bet as a turnkey real estate investor. Remember that this is a long-term investment. It’s about the numbers and the fundamentals, and about how your turnkey partner shows you that it can make those fundamentals perform over time. Never lose sight of the long game. Don’t invest in properties based on what they’re doing right now. Look at how they’re going to help you 20 years from now. Be honest with yourself about your vision, and always keep your eye on your long-term plan.

When you make your investment with these cornerstones in mind, you will set yourself up for the success you’re looking for as a member of the turnkey revolution.

But you’re not done yet. Investing in passive real estate doesn’t mean being passive. In the next chapter, I’ll show you how to follow up with your investments so you can manage the most profitable portfolio possible with an eye to the long term.