[Update] 10 Ways To Protect Yourself from Dangerous Turnkey Rental Property Companies
[Update] 10 Ways To Protect Yourself from Dangerous Turnkey Rental Property Companies
More and more investors are fleeing the volatile stock market in search of safety, which they find in hard assets like real estate. But many wish to remain passive investors, and don’t want to be knocking on doors to find foreclosures or fixing toilets as a landlord. So they Google around for passive real estate. And often then fall victim to online advertisers who market quote unquote “turnkey rental property.” But what does that really mean?
I just got back from Phoenix, where I was invited to speak on this topic by a friend of mine, who has actually grown his company to be really large and impressive. I had the opportunity to really explain to them the difference between R.E.A.L. turnkey and just the word turnkey that’s been thrown around rather loosely by (often) brand new companies who have no real definition of what it means.
Some companies just slap on a little paint, market it a bit, and then flip it to unsuspecting out of town investors. While other companies offer fully renovated property in like-new condition, with excellent property management in place – experienced property management. So that even a local experienced investor would buy it. Because – again – it is so turnkey.
What Does Turn-key Really Mean?
More and more sellers are throwing out the term “turn-key rental property” in hopes they can attract out-of-state buyers. But what do they really mean by ‘turn-key’?
I heard a fellow podcaster state recently that all you have to do to provide turn-key property is buy a home, get it rented, put it under management and voila! You can flip “turn-key” property at retail pricing to eager out-of-state investors! This is certainly not our definition of turn-key. Unfortunately, turn-key means absolutely nothing anymore.
Uneducated buyers assume turn-key means that you don’t have to do a thing. The belief (or false hope) is that someone else does the buying, renovating, leasing and management of your rental property, and all you have to do is deposit rent checks.
The problem is that most people trust what other people tell them. They believe the marketing message.
An example is Fiji Water. The power of great advertising. I mean their bottles are beautiful, they have flowers on them and a beautiful blue ocean behind it that everybody would love to go visit. So you just have this impression that Fiji Water is as pure as a waterfall in the mountains of some exotic island.
And at one time, as part of their advertising – Fiji actually said, “This isn’t your Cleveland water.” Well the Cleveland Water Department took a little offense to that. So they ran some tests comparing their tap water in Cleveland to Fiji Water. And what they found was pretty shocking I think to everyone.
The Fiji Water actually had arsenic, human feces and other contaminants in their water. Now I’m sure they have fixed that problem since then. So if you’ve had a Fiji lately, don’t freak out. But they actually found that the Cleveland water was cleaner. Which is just amazing.
What I care about is that you don’t fall for this kind of marketing. And unfortunately, there are so many good marketers out there that can really get you to – they can basically manipulate you into anything, because they know psychology. But don’t fall for it. Always, always, always do your due diligence – which is what I’m going to talk about now.
Turn-key Property Marketing Scams
To be clear, there is nothing wrong with good marketing, as long as the product backs it up. Here’s an example of what happens when the product doesn’t line up…
There were a couple of young turnkey guys in their early 20’s who were really good marketers. They had the whole email marketing thing down.
They took beautiful pictures of properties, without showing any of the dilapidation in the neighborhoods next to them. They somehow managed to not get the bars on the windows, the graffiti next door or any of the other bad signs in their shots. They would market these properties as if they were just beautiful. They used language like, “this is turnkey, you don’t have to do anything.”
So we thought, yeah, let’s go out and check it out. I like the city, good market, good area. And when I got there, I had to ask the guys, “This is not your turnkey property, right?” I thought it must be right of of foreclosure and they hadn’t fixed it yet. But then they said, “No, no, this one’s sold already.”
“But nothing works, the doors don’t open. I mean it doesn’t even look like you did anything. It’s an outdated kitchen.” I’m not exaggerating here. When I say outdated I mean extremely outdated, and essentially non-usable.
And they said, “Oh,” he said, “We have a long list of investors who buy this stuff, and they never come out and see it.”
And then he basically just pushed me out the door, because I was going to be too much trouble for him. Because of course, our standards are much, MUCH higher for turnkey property. This is why, at Real Wealth Network, we came up with R.E.A.L Turnkey Property Standards™.
The bottom line: if property is a good price, but is going to have a lot of work that needs to be done, it’s important to make sure it’s actually a good price for what you’re getting. If you’re paying a price for what should be a renovated property, well then you’re paying too much.
For example, properties available through Real Wealth Network partners are often more expensive than similar market properties. This is because they have been fixed up to our real turnkey standards. In this case it’s okay to pay more, because you’re not going to get nickel and dimed later on repairs.
To reiterate, if you’re buying a property that hasn’t been repaired, but you’re paying inflated prices as if it had been – you’re going to not only get nickeled and dimed, but you’re not going to make any money. More likely, you’ll end up losing money when all your cash flow gets eaten up right away from all the repairs. And that’s no fun.
If you’re going to look at turnkey property, you can show the property provider our list of R.E.A.L Turnkey Property Standards™ to make sure they’re someone you want to work with.
On that note, let’s discuss what you can do to protect yourself. Here are the 10 most common signs of dangerous turnkey rental operators…
10 Signs of Dangerous Turnkey Rental Companies & How To Protect Yourself
1 – Inexperienced Operators
Probably the most important thing to consider before making an investment is the experience of the operator. You want to avoid those who do not have a solid track record, and those that don’t have real experience with whatever it is that they are selling you.
Inexperienced turnkey companies are essentially practicing and learning with YOUR money. And you don’t want that. So always, always check on the experience of the company that you’re working with – this can be the company that’s selling you the turnkey property, the turnkey property provider themselves, or both.
2 – Not Walking the Talk
If the company you’re working with doesn’t own a portfolio of rental property, they won’t really know firsthand what it takes to succeed. There’s a lot to it. It’s not as easy as many people think – there’s a lot more to this business than simply buying some property and renting it out.
You’ve got to make sure you’re investing in the right neighborhoods, at the right price point, and that tenants will be screened properly. It’s essential that you really checked out the quality of the property’s renovations. You want to make sure the renovations are in line with what renters in the area want in a home. So – again – not walking the talk is going to be a big problem, because people who don’t invest themselves often don’t understand what it actually takes to successfully own and manage rental property.
This is why I don’t recommend that people buy rental property from real estate agents. Because most real estate agents don’t own rental property. They specialize in selling primary residences, and many don’t even own their own primary residence. So always only get your advice from people who have done exactly what you want to do, over and over again…for many, many years.
3 – Lone Rangers
Lone rangers may be really good at what they do, but if they don’t have a team to support them, you won’t be supported either. Just imagine what would happen if anything were to happen to them… I learned this lesson the hard way.
Here’s what happened: So, we started working with this great guy in Cleveland. And he had a big portfolio. He had about 40 properties of his own. Maybe 60 all paid off. And he was just kind of helping us and our investors find investment property. Not because he needed the money. He had plenty of money with his rentals. But it was 2010, 2011 where there are just deals everywhere. And good investors, experienced investors, couldn’t just watch all these deals that go by. Many of them came out of retirement to jump in.
Anyways, this guy helped us find properties, and he oversaw renovations. But because the deals were so good, and he really wasn’t marking them up very much – at one point we ended up having about 90 people on the waitlist for properties. So he grew his company, hiring some people to help him out. BUT it turned out that, even though he was a good real estate investor, he was a terrible businessman. He didn’t know how to hire good people. He didn’t know how to oversee them.
What happened: one of the contractors he hired started taking the investor money, saying he was doing the renovations, but he wasn’t. He was just pocketing the money. Our guy in Cleveland – being a good guy – just ended up covering those costs, because he felt bad for us. Because our investors had their stuff not finished. Eventually he ended up liquidating his portfolio to cover the costs of what had not been done by his contractor. It was very sad. He ended up much worse off. Luckily he our investors were taken care of… And today he’s actually still working with a couple who probably bought stuff they never should have.
So again, beware of the lone ranger, because there’s just one of them and anything can happen to them.
4 – Lacking Systems
If they aren’t organized with the right software and systems, they will get overwhelmed and be unable to serve you over the long term. Now we’re starting to see this less and less, because there’s so much new software out there. Both for property managers and for renovation teams. However, it’s still something you should ask turnkey company before you begin a relationship. What software do you use, what systems do you use?
5 – They Operate in the Hood
Be careful if a potential company operates in a C or D neighborhood. Here’s why: C and D properties can look so good on paper. But reality is a different story. A perfect example is Kansas City. There’s the really, really nice part of Kansas City, and then just a mile away is the worst part of Kansas City. And the worst part of Kansas City photographs pretty well, during the day…But here’s what happens at night in the worst part of Kansas City: your properties get vandalized – it’s almost guaranteed. Or your tenant, if you can even find a local person willing to live there – is going to be terrified.
So stay away from these types of neighborhoods and properties. Make sure you understand the crime rate in the area. You should also note that properties under $50,000 are probably in high crime areas. Not always, but it’s pretty likely.
To clarify, you can invest in a low income area, but only if it’s a low crime area too. Rich and I have some properties like that in Pittsburg – we own a duplex in a fairly low income area, but it’s very low crime. It’s kind of a strange combo, but the cash flow is great, and it works for us. We’ve also got a great team in Pittsburgh, so we knew what we were buying from the get go.
6 – Shoddy Renovations
How do you know if a supposed turnkey company is not fully renovating the properties they sell? How can you tell if they’re just trying to make a profit, overcharging you and leaving you with the repairs?
The way to protect yourself is simple: you don’t pay them. Never send money upfront for renovations, until they’re done. More specifically, don’t pay anything until you can get inspections on a property – to make sure the renovations have been done. Especially if you don’t live there. You can have someone you know go in and check it out, get pictures taken. But never, never send money for repairs before the repairs have been done. Part of our real turnkey standards are that we demand all plumbing, roofing, HVAC, boilers, foundations and electrical all be upgraded to code, and get inspections to verify that that’s been done.
Now if you buy a turnkey property, you’d better get an inspection on the property to make sure all of that’s been done. Don’t just believe it because they have a good reputation… don’t believe it just because we referred you to them either. YOU always have to verify. Get an inspection.
7 – Rental and Vacancy Guarantees
There are no guarantees in real estate. And a rental guarantee isn’t necessary if you buy good investment property.
Most operators who make guarantees have padded the price of the property at the outset. Make sure you really understand market rents.
There are no guarantees in real estate, and a rental guarantee won’t – it’s really no guarantee at all. Because if somebody offers a rental guarantee, and then they go out of business, because they’re covering rents on vacant properties…then you no longer have a guarantee. I’ve seen this happen.
At Real Wealth Network, we’ve seen some providers who do it because they want to give investors a sense of calm and confidence. BUT this really shouldn’t be necessary. If you’re buying a property near jobs and a good market, you don’t need a guarantee. People are going to rent. We’re in a renters market for goodness sake!
In all honesty, there’s never been a better time to be a landlord. There’s so much demand out there that you don’t need a rental guarantee. So don’t fall for that. In fact, you should be even more cautious when a turnkey company offers a guarantee….Because most operators who make guarantees have padded the price, because if there’s a vacancy, they know they’ll have to cover it. So, you don’t save any money in the end anyways.
So just make sure you understand market rents, and understand that there’s always a rental range. A property manager can say that a property would rent around $900 a month, but you never know till you get the tenant in there. So always have like the low ball and the high estimate of what that rent might be.
8 – Over Market Pricing
Many turnkey operators sell their properties above market value, and out of state investors have no idea. Some companies do this by working with another company to purchase their own properties – this lift their comps. So, when you get an appraisal, you’re actually getting an inflated comp. Unfortunately, this type of thing happens a lot.
Another example, a lot of fraudulent appraisals were done in Atlanta during the housing boom, and when the markets crashed. This is why it’s so important that you really understand the area and the values.
This is especially true for people who live in California, and other expensive real estate markets. They think everything is cheap, which makes it really easy for less moral turnkey providers to take advantage. I remember when a lot of investors from California were going to Detroit, and paying $90,000 for properties, when they were probably worth about $5000. But at the time, nobody could believe that anything could be only $90,000….So, to reiterate, make sure you understand market values before you buy property.
Here’s an example of how you can easily find out: We run a tour in Cleveland, and the turnkey provider showed us a property. Afterwards a couple of our people on the tour walked down the street a little, and they saw some people walking by. One of them asked “Hey, do you live here.” And the people said, “Yeah, we live here.” Our member asked “Well we’re looking at this property, it’s $65,000, it’s totally renovated.” And the people were like, “Oh my gosh, great deal.”
So the locals will know. And always be sure to talk to the neighbors to find out also if they like the neighborhood, or if there’s anything to be aware of. If it’s dangerous or high crime, or there’s an annoying dog or whatever. Talk to the neighbors, they’ll tell you.
9 – Inexperienced property management
Many turnkey operators choose to do their own property management, because they had a bad experience with another property management company. And that’s nice of them. The problem is that if they don’t have at least two years’ experience as a property manager, they might not do a very good job.
A good way to know if a turnkey operator is a good property manager is to ask if they manage their own portfolio. And if they do, then they are probably experienced property managers – even if they’re opening up a new management company.
BUT if they’re brand new to the whole thing, I guarantee that you’re going to have problems – because there’s so much to learn in property management. Unless they bring in an experienced manager to manage it. Then that would work. So don’t let anyone use you as part of their learning curve. Again, I’ve learned this lesson the hard way. Now you don’t have to.
10 – A history of fraud
It’s amazing how many scam artists are attracted to the real estate business. I have probably met almost all of them. And they often seem like the nicest people in the world, so you become friends. But this doesn’t necessarily mean they have your best interests at heart. You’ve got to be really, really careful. So now at Real Wealth Network, we do background checks on everyone, plus credit checks. And that gives us a lot of helpful information.
It’s helpful because when we talk to them, we already know what we need to know. So when we ask them, “Is there anything we need to know?” And they don’t tell us… we know immediately not to trust them. But if they say, “Oh yeah, 10 years ago I had a bankruptcy.” And they explain why… then we know that they tell the truth, and they know how to pull through a difficult situation. This necessarily mean you should work with them, but if the only red flag you can find was a long time ago (5 years or more), and they’re honest about it… you’ll probably be okay.