I’ve heard it enough now, I’ll answer it. I’m hearing… “Bryan, you’ve said you don’t like turnkey rental properties… but isn’t rental property a fundamentally good investment? Why do you dislike it so much?” I’m Bryan Ellis. I’ll answer that for you RIGHT NOW in Episode #94.
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So… turnkey rental properties. You guys think I don’t approve of a turnkey approach to real estate investing, right?
WRONG!
Nothing could be further from the truth. We offer a turnkey real estate FLIPPING opportunity… and turnkey rental property investing can be a really valuable tool as well… IF some things are there to protect YOU!
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So… turnkey rental properties…
My friends, real estate investing isn’t simple like stock investing. Setting aside the selection and usage of real estate to generate profit – which are themselves very complicated – the TRANSACTIONAL side of real estate (like financing, closing, titling, legal considerations, etc.) is both very complicated and very expensive. It’s also not a simple thing to find tenants, and even harder to find a reliable property manager. So, to have a service that does all of that for you is a GREAT thing. I do not deny that at all.
And I’ll be honest with you: I’m on the hunt for a company who can provide great rental property investment opportunities to YOU, my valued listeners to Self Directed Investor Radio. But here’s the thing: Because I truly DO value you, there’s no way I’m going to recommend an investment opportunity that I don’t believe meets the S3 standard of SIMPLE and SAFE and STRONG.
Can single-family rental property investments ever meet that standard? I think absolutely, yes. So let’s look at how that could be true… and then I’ll tell you precisely why you should steer clear of the vast majority of the “turnkey” rental property companies out there.
Rental property investing is conceptually simple, to be sure… particularly when being handled by a professional and experienced property manager. It can be safe as well, if buying at the right price and right terms and right property and market conditions. And the returns can be strong if you buy in the right place at the right time.
But my friends, I’d like for you to understand something. There’s a big, big difference between the historical understanding of rental property investing versus what the turnkey operators offer to you. The conventional understanding of rental investing goes like this:
You buy a house in a suitable geographic market. You must buy the house inexpensively enough so that you have equity from the start. After bringing the property up to rent-ready condition, a good objective is to have at least 20% equity still in the property at that point. You then rent the property to a tenant, putting away most of the income, knowing that certain expenses will absolutely happen. One of those expenses is property maintenance, which is invariably far more expensive that you think, and can easily average 40%+ of your income. Another of those expenses is vacancies, and the wisest standard for vacancy planning is to assume 75% occupancy. Another of those expenses is mortgage payment, if you financed the property. And some more of those expenses are property managers – well worth it, but still expensive – along with taxes on your rental income and on the property itself. But if you view the rental income to be a cushion that’s primarily designed to absorb some of those expenses, then over time… probably 3-5 years down the road… you’ll have built up enough cash savings on this property that, if all is well with the property, maybe you can begin to enjoy some of the cash flow at that time. And at some point in the future – probably 15-30 years down the road – you’ll sell the property, which will be free of debt and will hopefully have appreciated very well.
So, that’s the traditional view of rental property investing, and it’s a very responsible view of it. Entering into rental property investing with an approach like that makes a lot of sense.
How’s that different from what turnkey rental company properties are selling?
Folks, it pains me to point this out again because the reality is that I have many, many good friends in that business. But here’s the basic pitch of most of the turnkey companies:
You should buy this house – and several more after it – because doing so will yield a large cash flow for you. You can expect a cap rate of about 10 on this deal, so it will be very profitable for you. I’ll also have my own property manager – who I’ve vetted and confirmed will do a great job for you – to handle the entire thing for you so that you never have to worry about tenants or toilets. My property manager has a 97% occupancy rate, so vacancies shouldn’t be a problem, and you’ll definitely have a paying tenant in place on the day you buy the house. Plus, you’ll get great tax benefits along the way, so this is a win from any perspective.
Here’s the thing: All of that sounds great, and technically COULD be true. But to assume that a 97% occupancy rate will always apply to you… or that the cap rate of 10 actually factors in the expenses and risks that they’re hoping you’ll ignore – such as real vacancies – well, that’s not just irresponsible, it’s financially dangerous.
And here’s one more thing: You’ll never hear turnkey companies talking about how you’re getting a good value on the property versus the retail value in today’s market. In other words, if you have the property appraised before you buy it, what you’ll quite certainly find is that the price you’re paying is the same as, or above, the ACTUAL value of the property in today’s market.
That is a travesty, my friends. I’m not aware of any turnkey rental property companies that insist that their clients have properties appraised ahead of time, because virtually all of them sell these “investment” properties at or above market prices. Folks, have you ever heard of it being smart to buy an “investment” above its actual value? That could make sense if you have the ability to turn a piece of property into something much grander, greater and more valuable. But that’s not the plan. You want to buy the property to rent it out.
And… my friends in California… you should be particularly careful. You’re a great target for this type of pitch because your real estate values are so extreme and crazy that, for many of you, you’ve had the experience of making an offer on a property above the market price, and a few years later, selling for a huge profit. So you’re less likely to be sensitive to purchase price. And that’s a terrible thing because
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