MARKET BREAKDOWN
TURNKEY RENTALS
Think Realty’s Guidebook to Turnkey Rental Real Estate THE TRUTH ABOUT TURNKEY INVESTORS AND “HAVING IT ALL”
Not all turnkey deals look the same, nor do all turnkey providers. The key to success is being on the same page with a provider you trust.
by Carole VanSickle Ellis
technologies, more reliable management companies, and more visibility to investments made in other markets [outside of an investor’s local market] than ever before,” said Hambright. Not surprisingly, with the increased attraction and accessibility of turnkey rental real estate, the population of service providers in the sector also is on the rise and has been growing and evolving for some time. The shift began in earnest about a year after Buffett made his famous pronouncement. Investors already running fix-and-flip operations began offering their services to passive real estate investors: locating properties, renovating them, and installing tenants before passing them off to property management and selling the entire package. Some com- panies debuted their own property management services to buyers, thereby keeping a nice, healthy stake in the property after it was sold in the form of management fees and offering attractive continuity to the purchasing investor. Real estate and investment education providers also got in on the action. Established educators in the industry hired analysts and economists to comment on market conditions, identify the best locations for turnkey real estate purchases, and even make recommendations about where to buy and from whom. As the marketing initiatives expanded, so did the broad appeal of the turnkey investing concept. Real estate, still reeling from the housing bust after years of being viewed as the “safest asset” available, was a water-cooler topic of conversation once again. This time, however, the topic was ownership of rentals as investments rather than simply owning your own home. “People love the idea of owning real estate. They always have. But a lot of people who want to invest don’t do so because after the housing crash it was just too overwhelming and scary,” observed Marco Santarelli, CEO and founder of Norada Real Estate Investments. Norada provides turnkey real estate opportunities in markets across the country. Turnkey investing solved the “overwhelming and scary” factor for a lot of investors with the capital to buy investment TAKING THE FEAR FACTOR OUT OF THE EQUATION
A NEWNATION OF RENTERS AND LANDLORDS In the years following the housing and financial crises, buy- ing a home was far less expensive than renting one in most areas of the country. However, with much of the population still recovering from the trauma of foreclosure, financial duress, and the Great Recession, even households that could afford to make a hefty down payment and qualify to get a mortgage often opted simply to rent rather than own. According to the U.S. Census Bureau, homeownership hov- ered just under 70 percent between 2003 and the end of 2006, at which point most economists agree that the housing crash, while not yet fully blown, was well underway. By the time Buffett made his pronouncement in February 2012, homeownership rates had fallen to 64.8 percent. Today, they hover around 63.5 percent after hitting a historical low of 62.9 percent in mid-2016. Regardless of why homeowners are not reentering the housing market (and the hypotheses are many and varied, see sidebar on p. 88), today’s reality is that far more Americans than ever are renting. The real estate industry has positively leveraged what many consider to be a terribly negative aspect of today’s housing market thanks to turnkey rental properties. This has expanded the investing popula- tion substantially because those who do not wish to actively invest are able to allocate a certain amount of funding to having someone else manage the entire process for them, although the majority still handle a certain level of due diligence on their own. THE BIRTH OF AN INDUSTRY While the idea of hiring someone else to manage your invest- ments in any asset category is not a particularly novel one, turnkey rental real estate did not truly enter the vernacular until after Buffett made his famous pronouncement and, shortly thereafter, founded HomeServices of America, Berkshire Hathaway’s real estate brokerage firm. However, as the idea of owning cash-flow- ing, turnkey rental properties entered the investing mainstream, all sorts of providers of turnkey properties emerged. “I believe that more and more investors and would-be investors are waking up to the benefits of passively investing in rental properties. This has been and still is ushering in new
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ive years ago, in early 2012, billionaire investor and “Oracle of Omaha” Warren Buffett now-famously said on CNBC’s Squawk Box, “If I had a way of buying a couple hundred thousand single-family homes and had a way of managing [them]…I would load up.” While at the time Buf- fett added that he felt owning that kind of rental real estate portfolio would be too huge of an undertaking even for him (“The management is enormous”) the sentiment resonated. Shortly thereafter, individual and institutional investors alike entered the turnkey real estate market en masse as industry players happily began broadly marketing and providing what is now a real estate investing byword: turnkey rental proper- ties. Buyers of those turnkey properties often purchased them sight-unseen and left their management entirely to the proper- ty company that accompanied the rentals at time of purchase. They simply collected their rent checks and left everything from acquisition to renovations and maintenance to manage- ment to the turnkey experts and their service providers. It was not a new investment strategy, but it certainly had new life. “The phrase ‘turnkey rentals’ has evolved over time and gen- erally means done-for-you rental properties where someone else has found the deal, rehabbed the property, placed a tenant, and is going to manage the property for you,” explained Mike Hambright, the self-proclaimed “chief nerd” at FlipNerd.com, where he has interviewed dozens of turnkey real estate invest- ment providers on his podcast by the same name. “It may not be all the same company that is doing every activity, but the key to turnkey investments is that they are done without your efforts,” Hambright said. When purchas- ing a turnkey rental, investors often focus on monthly income rather than appreciation. “Cash flow is everything, [but] most importantly, the asset needs to be properly managed to min- imize vacancy and repairs,” he added. “If you find the right turnkey provider, financing, and property management, the turnkey route is a great opportunity.” Mike Jordan, CEO and founder of turnkey rental provider Strategy Properties, agreed. “We pride ourselves on providing quality rental homes to our tenants and homes that meet all the criteria to produce strong returns for our investors…[but] our
TURNKEYPROPERTY: A turnkey property has historically been defined as a piece of real estate that can be purchased as-is and immediately rented out. Turnkey has expanded in recent years to include anything that can be conducted from a distance (i.e. a turnkey fix and flip) but generally refers to rental properties that are purchased, often with a tenant in place, by an investor who will not be interacting directly with the property. TURNKEYRENTAL PROPERTY: A property purchased for the express purpose of renting it out. A turnkey investment may already have a tenant in place, or a turnkey provider may sell a property with the promise of an appropriate rehab and then leasing the property. TURNKEYPROVIDER: An investment company that offers turnkey properties or transactions to other “passive” investors. Turnkey providers locate properties, renovate them, usually place tenants, and may provide property management after the purchase. PASSIVE INVESTING: Passive real estate investors power real estate investing transactions by providing funding for deals and allowing active investors to manage the actual investing process, be it leasing a property, renovating it, or selling it.
main goal is to shrink the window between tenants,” he said. “If we shrink that window, then we don’t interrupt cash flow for the owners, and that is a turnkey provider’s main job.”
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