Long Term Turnkey: More Landlord or Investor?

I distinctly remember perusing the BiggerPockets Forum a couple of years ago (my go-to site for real estate investing) and there was a topic asking people to elaborate on their long-term experiences owning TurnKey rentals. At the time the number of responses was low and the few people that did chime in had only owned their properties for a short amount of time. Likewise, I owned two properties at the time for barely a year and didn’t feel qualified to weigh in. A couple of years and a few properties later (8 total) I feel that I can provide some meaningful input.

First off, as a full-time practicing physician, I wanted to own income property in the least time-intensive way recognizing that I would sacrifice some degree of returns compared to a full-time real estate pro sourcing their own deals. After thoroughly researching the concept of TurnKey rentals I decided to take the plunge. As anyone that has followed this category of real estate investing can attest, your mileage may vary significantly depending on the provider, property condition, and location just to name a few key factors. I think the intrigue of turnkeys is the promise to turn the landlord experience into more of a passive investment. This is particularly appealing to the time-starved high-income professional like me.

With that being said I thought it would be an interesting exercise to show the email correspondences with my TurnKey provider for this calendar year dealing with any issue above and beyond the occasional late payment.

The first details a routine tenant turnover. Fortunately, we’ve averaged nearly two years of occupancy for my units so this has been a relatively infrequent occurrence. The expenses are in line with what I had been told to expect. As a testament to the quality of our units relative to the marketplace, we are able to bump up the rent and have had strong interest from rigorously screened applicants which result in a vacant period of just about 1 month.

I reviewed this email for approximately 5 minutes in between patients and responded in the affirmative to go ahead with the process. I honestly didn’t think very much about it until later in the month when reviewing the rent roll and noting the less than usual amount. A little over 4 weeks later and things were back to normal followed by several uneventful months until late August when the second email came through detailing issues at two separate properties.

In the first instance, the tenant, unfortunately, lost his job and fell behind on the rent. He had been rock solid for 18 months before his payment history began to get sporadic and ultimately stopped. The property management team attempted to find alternative lodging for him including exploring various social programs and charitable organizations. I think that in recognition of this he ultimately decided to make it easier on us and move out rather than trying to squeeze out more occupancy time through the eviction process. There was no undue damage to the property and this resulted in another routine turnover.

The 2nd half of the e-mail details a small section of the kitchen ceiling falling to the floor secondary to water damage from a roof leak. The leak was caused by squirrels damaging a roof vent boot ultimately resulting in a $700 repair bill. In my 3-1/2 years of ownership, this was the only instance that resulted in any sort of after-hours call in order to get authorization to move ahead with the repair as soon as possible.

So as we were coming to the end of the calendar year 2017 I would characterize the preceding emails as typical of both the frequency and scope of issues I have been confirmed with as a turnkey owner with an excellent provider. The communications are concise but detailed enough to take executive action and a thorough digital trail is documented via a robust online owner portal. And just for completeness sake, I received an additional 7 emails detailing either slight delays in rent payment or automatic authorization for minor (< $150) repairs.

While it is impossible to expect to be able to own income property as after effortlessly as a paper asset, with a good turnkey provider it can come pretty darn close. My experiences thus far have reassured my decision to slowly build my portfolio with the confidence that it will not be a significant time hindrance as I continue to enjoy practicing medicine full-time.

What has been your long-term experience owning Turn-Key rentals?

Hurricane Irma: The Importance of Reserves

I live in southeastern Georgia on the coast and we were certainly impacted by Hurricane Irma. This included a mandatory evacuation, temporary work closure, and scrambling for portable food and available hotel rooms. During the week-long ordeal, the constant barrage of images of torrential rain, flooding and downed trees created a sense of gloom of what I would find upon finally returning home. Likewise, I had similar concerns for the tenants and properties of my rental portfolio in Jacksonville Florida – further southward and therefore more exposed to the effects of the hurricane.

I feel very fortunate to report that, relatively speaking, we came out of this ordeal with manageable damage both to my own home and my rentals. I define manageable as no significant flooding, no direct hits from trees, and no need to file insurance claims. Nonetheless, the following communication from my TurnKey provider/ property manager attests to the fact that I will be facing some unusual financial challenges over the next couple of months and prompted me to write this blog.

When we screen our tenants we are very strict on verifying that their monthly income is three times the rent. With an average rental rate of approximately $1,000, this translates to a minimum requirement of $36,000 gross annually. In most cases, our tenant’s household income is in line with the national median household rate of approximately $57,000. Their jobs include bus drivers, dietician, and retirees working part-time. Good salt of the earth people, but also not the profile of someone easily able to withstand a significant short-term cash flow crunch.
When you factor in that many of the tenants have missed 5 days of work or more, and have extra hotel and food expenses, it can quickly exhaust their savings.

So not only am I faced with the dilemma of half of the tenants or more having payment issues over the next 2 months, but I also have elevated expenses related to tree pick up, and minor structural damages. Combining this with my debt service and this is likely to be the first time in over 3 years of ownership that I will have to feed my portfolio as opposed to receiving its usual cash flow. Given the relatively measured pace of my property acquisition and prudent use of leverage; it is a position I never thought that I would be in.

This underscores the often repeated mantra that I have read on this site and heard on the podcast: If you’re going to be in the landlord business and survive long term, you need to have adequate cash reserves. Roofs wear out, HVAC die, pipes burst, and yes…hurricanes happen.

The exact amount of reserves is a matter of debate as I have heard amounts advocated ranging from as little as $500 up to $10,000 per property. Personally, I allocate $1,000 per property which has always been more than sufficient in the past but will be tested during this whole ordeal. Obviously, I am hopeful that the disaster relief rent program will eventually help, but I certainly can’t count on it happening in a timely manner if at all.

How much in reserves do you set aside?

Has anyone had their rental portfolio affected by Irma or other natural disasters in a significant way?

Hear my story on Bigger Pockets podcast episode 219

More User Questions…..We Love Them!

user question

I continue to get great engagement from readers and listeners. Andy recently finished reading Alternative Financial Medicine: High Yield Investing in a Low Yield World and had a few follow up questions in this thoughtful and appreciated email he left on the site. The reason I share it is because there may be some of you with the same concerns and hopefully you can benefit from my insights to help you be a better investor.

Message: Hi Doctor Meadows,

I just finished your book and wanted to thank you for writing it! You give some great direction to those of us who have been floundering. It’s comforting to hear someone else’s views on some of the things that I’ve been considering and looking for feedback on. I invest in PPR and was glad to hear that there’s another option out there. Realtyshares has been another consideration, and I’m curious now, do you prefer it over Realty Mogul, or others? Also, I just saw a troubling article in Business Insider about Lending Club, do you still look favorably at them? Here is the link: http://www.businessinsider.com/lending-club-may-have-hit-a-dead-end-2017-5

On turn-key investing, wow, right here near me in Phoenix, there are a number of companies offering opportunities! So, now the daunting task of sorting them all out!

Are you familiar with The Note Factory? I just pulled the trigger with them and really like their business model a lot. You might want to take a look. They don’t advertise and are strictly word-of-mouth.

So, thanks again for the great book. It was very timely for me finding it when I did since the decision process was well underway.

Kind Regards,
Andy

Andy,

Tons of points you bring up!

Realtyshares is my number one crowdfunding site in terms of money and number of projects. This is due to me getting to know the CEO to a degree through multiple conversations over the past few years including meeting him in person at an industry event. They seem to be very committed to maintaining strict underwriting standards which is the real key to long term success.

If you have not seen it, I would highly recommend you check out my video interview with the CEO HERE.

Full disclosure, I have a teensy position in the company having been invited to invest in one of their equity rounds of fundraising.

I have been on Lending Club for about 3 years now and have seen everything from extreme optimism to much more pessimistic articles like the one you pointed out. Around the time of their IPO in December 2014 there was talk they could emerge as a real rival to traditional banks and then they went through some turmoil and scandal with impropriety with their CEO.

Lending Club

It seems like things have been shaky both for the company and the industry overall since then. Personally, I have maintained my account, which is only a modest portion of my overall portfolio. From the beginning I have been a relatively conservative investor preferring “A” and “B” loans with a target return of about 7% which I have been able to achieve. I have not noticed a spike in defaults sticking to these types of notes despite the occasional bad news for the industry.

On the rental property front, I haven’t found any shortcuts to vetting a turnkey rental provider. The things I used included podcasts, reading forums, calling up current investors and some on the ground site visits. I would particularly focus on talking to the investors and finding out their experience in terms of actual rents/expenses vs the always rosy numbers on the proforma. Also ask how responsive the property management aspect of things has been. In the end, it took several weeks for me to get comfortable with a provider but it has paid off significantly as I have experienced great customer service and expected financial performance on my now multiple purchases.

Can’t say that I have heard of the Note Factory. I have been pretty pleased with PPR as my exposure to the world of distressed real estate notes but I will check out Note Factory as well. I like PPR’s fund structure as it greatly diminishes the default risk associated with holding individual mortgages.

Thanks for picking up the book and if you haven’t, please leave a review on Amazon and tell your friends!

To your Wealth,

Doc

Real Estate Crowdfunding Anyone Can Participate In

real estate crowdfunding

It has become fairly obvious to me that there are a lot more people that would like to be able to participate in real estate crowdfunding if they could. The #1 inquiry I received on the heels of my episode of the bigger pockets podcast has been– What are the options available for non-accredited investors to participate in this asset class?

As previously mentioned, Groundfloor.com represented the only site that I know of and have used that from its inception has been dedicated to non-accredited investors. Because of regulatory hurdles they have to go through a time consuming state by state approval process to allow new investors to participate. At the time of this writing they only operate in 10 states despite being around since 2013.

After some more research, there are some additional options although the overall landscape remains limited. I ran across a very informative blog posts on this topic over at Lendacademy.com. This has been one of my primary learning resources as they cover the full spectrum of online lending from consumer to business to real estate. The founder, Peter Renton, has an excellent podcast where he routinely interviews thought leaders and CEOs of many of the platforms I have invested on.

The blog posts was called Peer-to-peer and Marketplace lending opportunities for nonaccredited Investors. In it he spotlights the platforms Fundrise.com and Realtymogul.com who now offer nonpublicly treated REITS for non accredited investors.. REITS or real estate investment trusts are funds you can invest in that go out and buy a portfolio of properties. If this sounds familiar that is because there are several publicly treated REITS listed on the major stockings changes. Fundamentally, the crowdfunding sites are offering the same thing with the notable exceptions that the overall size of the funds will be much smaller and not subject to the potentially large price swings that can occur with the stock market.

In reviewing one of Realtymogul’s funds, the investment minimum is $1000 and to this point they have distributed returns to shareholders averaging 8% annually. Thus far it is acquired 5 different properties.

So while these do represent alternative options, if you one a more traditional crowdfunding experience where you are choosing the specific property, developer, and geography; it looks like groundfloor.com remains you’re only option – its significant geographic restrictions notwithstanding.

I would encourage any fellow potential investors to constantly checked back as new platforms are being added to the landscape every month and seems. I predict that eventually there will be ample opportunities for the non accredited investor as the profile of real estate crowdfunding continues to grow.

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