What to Expect from Your Turnkey Rental Property Ownership
John Larson and the Real Estate Cowboys talk passive income real estate investing.
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Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys’ Don’t Quit Your Daydream.
Robert Helms: Hey everyone. It’s Robert Helms, host of the Real Estate Guys radio show and you are listening to the Real Estate Cowboys.
Announcer: Have you thought about becoming financially free through real estate investing but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.
John Larson: All right, welcome back to the Real Estate Cowboys. This is your host, John Larson. This is my birthday week, my birthday week episode. On this week’s episode, we are going to talk about turnkey rental property ownership again. It’s been a while. We’ve been talking a lot about CBD. I’ve been talking a lot about private money lending. I myself kind of feel like the market is a little hot right now and it’s very, very tough to find good deals. Cap rates are compressed on single-family homes, especially out here in DFW. And then if you listen to my show, and you know my philosophy, I don’t buy properties in lower-income neighborhoods because of the fact that they just come with such a far greater risk in my opinion. And with single-family homes, things can really go bad quickly when you’re talking about evictions and vacant properties in bad neighborhoods that can easily get broken into, things of that nature.
So I really like to avoid those types of opportunities, even though maybe on paper they look good. In actuality, in real life, they really never pan out. So that being said, I like to buy a high B to A class property. So that means I like to buy a high B I would consider right at that entry-level, middle-income neighborhood with still solid schools. And then all the way up into A-class properties where you’re talking about true middle income earning tenants in better neighborhoods with better schools where those properties are going to appreciate and when you decide to exit from that property, you should easily be able to sell it on the retail market and sell for market value. That’s how you’re going to capture that equity in that property. All investors buy on cap rate usually. They do like to buy at market value as well.
Typically, if you’re going to try and sell to an investor, they’re going to try and beat you up on price a little bit to where it makes sense for the numbers. Whereas if you own a property in a, what I like to call retail neighborhood, the tenant moves out, you could go in and just clean it up really quick and flip it back on the MLS. Hire an agent if you’d like. Just get that property sold. And that new owner would be willing to pay you market value or maybe even above market value. In some markets across America, you see people are, there’s multiple offers on homes, and things like that, if it’s in the right neighborhood. So you could potentially even get a little bit over market if you see these retail buyers getting into a bidding war. So that’s only been my philosophy with single-family homes.
I don’t really hold longterm. I like to buy, and this is only happened once in my life, that being 33, but I like to buy coming out of a recession where values are low, place a tenant in there, hold that property five, six, seven years. Let the market rebound. Then look to go sell that property and cash in on the equity that it’s earned over those years coming out of the, basically, the slums all the way back up to a healthy market. That’s where you’re going be able to ride that equity wave.
And so this week’s episode, I want to talk about what you should expect from your turnkey rental property. And if you’ve never owned a turnkey rental property before, you may not be sure what to expect. Okay, and I think there’s a lot of misconceptions out there. When people hear turnkey, they just think it’s completely hands-off. I think some of these education companies out there and such, they give investors kind of unrealistic expectations in terms of what it is to own a turnkey rental. If you want completely passive and hands-off then I recommend private lending for you.
If you are looking for something that’s going to be able to pay you in six different ways, like a turnkey rental, and you want to take advantage of tax benefits, and the appreciation that I just talked about, the cash flow from the rental income, hedging your bet on inflation by locking in a 30 year fixed rates on a 30 year loan, so on and so forth. Then a turnkey rental is probably more for you, or maybe a mixture of both, but just understand that the turnkey rental is not going to come completely hands-off. You’re going to have calls with your property manager. There is going to be maintenance. There are going to be issues down the road.
Sometimes tenants can be a little troublesome. Some people are a little bit more troublesome than others. So you have to keep those things in mind. If you want completely, completely passive income and income that you know you’re going to generate each month to the penny, then I definitely recommend looking into private lending, for sure. If cash flow is important, building a cash flow stream and being completely hands-off passive income, definitely go for the private lending option. But like I said if you can handle a little bit of time each month to kind of monitor your turnkey rental, if you don’t mind getting on the phone or having an email exchange with your property manager, then a turnkey rental wouldn’t be bad for you. Okay. But there are a lot of horror stories about being a landlord and I will tell you that. But when you own a turnkey rental property, it isn’t like being a regular landlord at all. Okay.
So there are some things in place to make the experience easier on you and we’re going to get into that. But like I said, it’s definitely easier to go through a turnkey provider than you hiring an agent, or going and trying to bird dog properties and find one yourself. The stress, and then manage the whole rehab and deal with the general contractors and all that sort of stuff. And then try and manage the property yourself, and you have tenants calling you late at night for some sort of repair, whatever it may be. So there’s definitely some benefits of working with a turnkey provider. So I just want to talk about exactly what you can expect from this experience. And typically if you’re working with a good turnkey provider, you’re going to be working with some sort of an investment coordinator, some sort of role like that, right?
And so when you purchase a rental property through a turnkey provider, you’ll be working with somebody at that company that’s advising you on what properties are maybe best for you and your goals, and what you should expect from this property, and what you should expect from this neighborhood and the type of tenants. They should be giving you the truth and the facts based on where the property is located, so on and so forth, like I said. What type of schools are there although you want to do your own due diligence, of course. You look up the address, do your own due diligence.
I definitely will tell you going to Zillow and Redfin and some of these different websites, and trying to come up with valuations on your own, it may not be the best way to identify how much the property is actually worth. When you get a loan on the property, obviously you have to go through an appraisal process anyway. And I know when we were selling a lot of turnkey homes, if the appraisal came in low we would go back and negotiate with the purchaser and sometimes we would be able to agree on a price. If not, I would usually refund their appraisal fee, and then we would go and try and put them into another property. Appraisals are never guaranteed. And if you lined up four different appraisers, and send them to the same house, you’re going to come back with four different valuations. Trust me. So they’re kind of all over the board. But definitely you’re gonna expect to work with some sort of coordinator who’s going to advise you on specific properties that are available. And if they’re a good turnkey company, they’re going to line those properties up with your goals.
So that’s very, very important. And then this process helps ensure that your turnkey property investment experience meets your expectations. Okay. Also what to expect, an investment of at least 20 K, although I would say that that’s more of like a low B property, high C, a hundred thousand dollar home, it’s 20% down. You’re going to be investing 20 K, up to 50 K for the investment, which would be a $250,000 home. Which is, we are selling a lot of those in the state of Texas, in Dallas Fort Worth specifically. But turnkey rental investments usually require only between 20 to $50,000 for the down payment on the property. And this may be in stark contrast to the amount of money you might have needed for your own personal residence, but it’s more than good enough to get you quality turnkey property in a decent neighborhood.
You should expect to see some property appreciation. I mean, that’s what I go for when I’m investing in single-family homes. I’m not really just looking for the cash flow. Because really the way that you’re gonna make the most money unless you really are planning on holding longterm, forever or as long as possible. The equity play is great. You might, I talk about my grandmother bought some rental properties coming out of the recession, and they’re in a C class neighborhood. And she brought them with her IRA, but they were in a neighborhood where I wouldn’t say is great, so she didn’t have the best experience with the tenants really. There was a lot of evictions in one of the houses that she had. And she had to make some, she had some high cost turns throughout the duration of the ownership. But both properties went up $40,000 in value during that time that she bought the homes, which I believe was in somewhere in like 2011, 2012, up until she just sold them this year.
So she held them for about seven, eight years. So in my opinion, it was the perfect time for her to exit out of those homes and I advised her done on doing so. And so she captured some pretty solid equity. So she goes back and runs her numbers. I would say those are pretty solid investments for her IRA. Right. Property appreciation is definitely something that you’re going to want to look for and it’s tougher. It’s a lot tougher to get that in today’s market because I believe we’re kind of right back where we were before the last recession. Pricing is just back up to where you know it’s, you’re buying properties at the top of market value. There’s really no room for a deal, right?
Most turnkey property owners report very positive property appreciation after only a few years, especially in the right market. And obviously it’s also going to depend on timing and when you bought that property. Obviously this is dependent upon economic conditions where you invest. Like for example, Dallas Fort Worth, it’s home to the most corporate headquarters in America. We talk about that a lot. So there’s a lot of people moving here. A lot of jobs moving here, but you’ve got to understand too, with real estate investing there’s no chance that it ever goes to zero. With the stock market, you can lose all your money. With real estate investing, even private money lending, as long as you hold first lien on the property real estate never goes to zero. So always keep that in mind when you’re investing in real estate.
That’s why it’s really one of the safest investment options out there and has made the most regular people wealthy in America. Historically, real estate has proven to appreciate over time and time again. And a couple of rare cases, rental properties purchased in markets like Dallas even appraised higher, at a higher value, immediately giving our owners what I like to kind of call instant equity. So let’s say you buy a house for $200,000, and the appraisal comes back at 215 or 220, I’ve seen it happen. You already have some equity built into that property. Hypothetically, you could turn around and sell that property the next day and make $20,000. Now no lender’s going to let you do that. But when the property is worth more than you’re actually acquiring it for, that should be considered some instant equity in that property.
But that scenario is kind of, isn’t usual. It’s very unusual, especially in today’s market. But it’s reasonable to assume your turnkey property will appreciate over time if bought at the right time of the market. So I kind of worry about some neighborhoods right now. Some markets across America, if you buy today, I can’t really see the market going too hot for too much longer. So you may see a little steep, I won’t say steep, but a slight decline in property value and that’s okay. I wouldn’t worry about that because there’s a good chance, I mean after time, I mean even the last recession we were in, it lasted two or three years, and the market started bouncing right back. So don’t be wary about that. Especially if you plan on holding the property long-term.
I mean, if you’re a long, long term hold investor, there’s really no bad time to buy real estate I don’t think. If you’re just looking for it from a cash flow standpoint and maybe some savings on taxes and things of that nature, then I think there’s always good times to buy properties. It’s never a bad idea. So also turnkey properties will give you a little bit more time and freedom than if you’re trying to do this by yourself. The whole point of investing with a turnkey property is to improve your bottom line and gain a better quality of life, right? So you’re not actually going out and finding these homes, you’re not actually doing the renovations. You’re not actually monitoring the renovations. And you’re not actually managing these properties yourself. So it should provide you with a better quality of life, so to speak.
But the essential ingredients of that higher quality of life are more time and more freedom. And that’s why at the Real Estate Cowboys, we always bring up and we always ask, “What is your return on life?” Because if it’s just, you’re not going to have the best quality of life if you’re the one that’s constantly run around chasing down properties, working with contractors, so on and so forth. Trust me, I’ve done hundreds of flips in my life. I’ve done thousands of them if you consider all the rental properties that we’ve done. But it’s just very stressful, very time consuming, to actually deal with the day to day that’s involved with flipping these homes. A lot of travel, a lot of miles on the car, a lot of gas being spent, gas money being spent, and just dealing with the contractors, and holding them accountable, and keeping them on timelines. It’s just a lot to deal with. Which is also kind of why I’ve veered a little bit more out of turnkey properties, not doing as many as I was.
I mean there was a point where we were selling like 30 of them a month, for years there. It’s just the day to day operation of that and trying to manage teams all over the country, it was just very, very difficult and time-consuming. Whereas now with the private lending model that we’re doing, it’s even more passive for me. It’s more passive for you as the investor, but it’s more passive for me. Now I can just manage five to 10 projects at a time that are in my geographical location. They’re bigger projects, and they’re just a lot easier to control, in my opinion. With single-family homes, it’s just like every day there’s just something little that just pops up, some little problem to solve. So even with me doing private lending more and more, and our team over here doing private lending and focusing on that more and more, it’s really made our lives more passive as well.
And I think that it’s great to have a passive experience as an investor, but also as a passive experience as the sponsor or team that you’re working with. I want my life to be as passive as possible as well. Trust me. Turnkey properties have the potential to offer more time to spend with your loved ones and more freedom to do the things that matter most. When you purchase a turnkey property from us or any other turnkey provider, you can look forward to having a higher quality of life. Because, like I said, you’re not doing all those daily tasks that are associated with getting these properties from a distress state to a state where you can put a tenant in, and then start managing that property on a daily basis to collect that monthly income.
And I think one of the most important things to is the hands-off “landlording.” So what is hands-off “landlording”? It’s the landlord experience without the hassle of being directly involved with the day to day minutia that other landlords have to deal with. Okay. For example, a traditional landlord has to field calls or emails from tenants for every little thing. Like a bent window blind or loose doorknob. I mean, can you only imagine your tenants are calling you about those things, but a turnkey property landlord doesn’t deal with these phone calls and emails.
When you have a property manager in place for your turnkey property, they get the emails, they get the late-night phone calls. The tenant doesn’t even have your contact information, which is great. You don’t want the tenant to have your contact information. Trust me. What’s more the hassle of going out to the property to fix that loose doorknob, or just taking the calls themselves, this isn’t going fall on your shoulders. You’re not going to have to go out and make that repair either. The property manager’s responsible for going out to the property and responding to the tenant’s calls and communications. And that’s the beauty of hands-off “landlording.”
You should also expect a fully renovated property, and when I say fully renovated, I don’t mean that everything is being changed out in the property, right? But you should expect something that’s gone through a really solid cosmetic overhaul and something a home that has solid mechanicals in there. If not brand new, then they have a really solid amount of life left on them. Because you don’t want to be buying a turnkey property and then replacing an AC unit in the next year. So the turnkey provider, if you’re working with them, you got to make sure that the mechanicals that are left in the home, because it’s easy to go in and just spice it up, paint the outside, clean up the outside, put up some new shutters, make it look really pretty. And then go on the inside, change the flooring, do the kitchen, do the cosmetic stuff. And then will leave the mechanicals, the bones of the home untouched.
You don’t want to work with a provider like that. And you also want to make sure that these providers are giving you some sort of warranty to protect you. I would say most, but not all turnkey properties, are fully renovated when you purchase them from the provider. But any solid turnkey providers should take great pride in their quality renovations. And I know we did and we still do. You, as an investor should be proud to own, number one, and your tenant should be proud to live in. That’s really should be what the providers is striving for. Okay. Turnkey properties are ready for tenant move-in. They have all the necessary building permits for the rehab work that were completed on the property. When you buy a turnkey property, it’s unlikely you’ll be in a situation where you’d have to buy a new roof or furnace a month down the line or even a year or years down the line.
I mean, if you’re working with a good provider like I said, you shouldn’t have to be worrying about replacing a roof. We would always make sure we had like 10 years left of life on that roof. And the same thing with the AC units, the HVAC, all that, furnace, it was all really, that’s high ticket item replacements. So we want to make sure that that stuff either was new or had a solid amount of life left on it.
So be careful, and maybe talk to your inspector, and have them really pay attention to what the age of those mechanicals are. So you can decide if that’s a good investment for you or not. Maybe you can go back to the provider and say, “Hey, I’ll buy it. But man, the furnace is really old. What do you think about replacing that for me before I purchased? Or giving me a discount on the home due to the age of that mechanical.” Okay. So keep that in your back pocket when it comes to negotiating. A quality turnkey rental property provider though would’ve taken care of anything that needs fixing or replacing before selling you the property. That’s the truth. I mean a quality provider wouldn’t try and sneak that old furnace past you. Okay.
And another thing that you should expect is full reporting. Property manager of your turnkey property will provide you with reports regarding your turnkey property. These will be auto-generated and available, in most cases, via an online portal. Any good property manager that you’re working with should have an online portal for you to go in and track this sort of data. And really all you have to do is just log into the property managers site with your username and password, and you get full reporting on all the activity of your property.
Every property manager’s site is going to be a little bit different. But in general, you can expect to see things like tenant communications, a record of service calls to the property, receipts, and photos, of course, financial reports. You can then download that information if you want or leave it on the portal for later viewing. I’ve seen some really, really good portals. I think our portal is pretty solid at American Real PM. Yeah, that information should all be available to you. So right at your fingertips. And that makes it nice, especially when you’re investing in properties out of the state, to just be able to jump on your portal and kind of see what’s going on with the home. The expense reports can be downloaded so you can give them to your accountant for tax reporting at the end of the year. As far as reporting your income, all you have to do is send your deposit receipts to your accountant so they can match them up with the property manager’s records.
But we give you a full a statement at the end of the year that’s easy for your CPA to read and will be able to take advantage of all the tax savings that are available to you. We spelled that out pretty good in this report. Any good property manager should be providing you with that at the end of the year as well. But basically with this kind of full reporting, you don’t have to be business-minded, or even good at math, to be a successful turnkey property owner. That’s the idea.
You should also expect some monthly income. Good tenants will pay their rent on time every month. Since part of your property managers job is to vet tenants, it’s likely you’ll be able to rely on monthly income from your turnkey property. Although we’ve managed properties down in the C realm, all the way to the A realm. We see delinquent rents more so in the C, low B realm. As you start to get higher, into the higher B, and then in A, you’re just dealing with better quality tenants it seems like. Who have better jobs, who pay more consistently, pay on time?
But when you start to buy well below the median home value in any market, you’re just going to start to run into a little bit more trouble and missed and late rent pay payments are going to become more frequent. There’s also more risk for evictions and things like that, so make sure you take note of that. But the property manager will offer you the option to have your rental income deposited into a bank account automatically or to receive a check in the mail. Most people just like to have the money deposited via ACH.
One thing to note is that rental income is less dependable than some of other, some other passive income options like private lending. We kind of touched on that already, right? If your tenant pays late or always takes advantage of the grace period, the rent could be coming into your account a little bit later. And so you want to make sure that you have your mortgage payment set aside. Don’t rely on your rent to come in before you make your mortgage payment because, especially if you’re buying in those C and D properties, the tenants are going to be late sometimes. I mean, if not habitually late. Trust me, I’ve ran in those same situations with homes that I’ve owned. So it seems like the tenants that pay late always pay late and as a property manager, we do the best we can to try and educate that tenant and train that tenant to start paying on time. But it just seems like if they’re late once it just starts to become a continuous thing. That’s why I said I’d advise putting money aside to cover your own mortgage payment in case something like that happens.
So whether you decide to purchase a turnkey rental property from a group like ours, or from any other turnkey provider across the country that you’ve heard good things about, these are the many things that you can expect from your ownership experience. So if there’s any questions you have about these opportunities, about turnkey rentals, feel free to put your information in. Go to AREIUSA.com, RealEstateCowboysDFW.com, put your info in, and a member of our team will reach out. We’ll talk. We’re not doing a ton of turnkey rentals at this point. We still have some, but you can see what we have available, or you could just pick our brains. Or you can go to our websites and we have tons of information, free information, blogs and articles and reports on markets and on investment opportunities like this.
Or if you want to get my book from Amazon, The Passive Income Guide, What’s Your Return on Life? That’s just a 50 page read that really briefly talks about, “Hey, here’s some turnkey investment options for you.” Here’s how you can get passive income in real estate through vacation rentals, through private lending, through turnkey rental properties, single-family homes or multifamily. We discuss all that in the book so. And like I said, it’s a quick read. You can read it in one night and it’ll give you a good baseline for, “Hey, what type of investor am I? What options do I want to get involved in? How does this work?” This book answers those questions.
Also, if you’re a little confused about, “Hey, what option’s best for me?” You can go to RealEstateCowboysDFW.com and take our investor quiz. I think it’s just a 10 question quiz that based on your answers will kind of guide you in the right direction of what type of investor you are. So check out that fun little quiz on RealEstateCowboysDFW.com. But that’s all we have for this week. This is your host, John Larson. I hope everybody had a great Labor Day weekend or is still having a great Labor Day weekend. I know I will be. Always remember, what’s your return on life? Have a great week. Everybody be safe.
Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advise heard on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information seek advice from your financial, Caps, mortgage or real estate advisor as the information is not guaranteed and investment strategies have the potential for profit or loss.