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