Looking into Texas: Turnkey Conversation (February 25, 2014)

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I recently had a phone consultation with a turnkey vendor from Memphis, Tennessee. Although this company is headquartered out in Memphis, they also operate in some key Texas markets — Dallas Fort Worth (DFW) and Houston. Currently, my rental portfolio is allocated across the following locations: San Francisco Bay Area, Chicago, and Indianapolis.

Before checking out of the corporate world for good, I would like to acquire some rentals into the aforementioned Texas markets. Right now, I am unsure if I will go with DFW, or Houston… Maybe when the time comes to make a decision, I’ll choose neither and elect to go with Austin instead. Who knows? Anything is possible. 🙂

Check out this latest Forbes article highlighting the ten fastest growing cities in America. Take it with a grain of salt, but it’s of no surprise to me to see Texas all over that list.

Since I plan on acquiring at least one more rental property this year, I decided now would be a good time to do some research. Here is what I learned about the turnkey company out in Memphis.

General Overview:

  • As mentioned above, this company operates in three markets: Memphis, DFW, and Houston. If you are interested in a few of those locations, working with this vendor could potentially be your “one-stop shop” to help you diversify.
  • Vertically integrated company. This is a huge plus in my book. They run everything in house. Most importantly, they own the property management company.
  • The representative told me that most of the properties they acquire were built between the 1960’s to 1980’s range. The Memphis properties are typically the oldest in age, followed by DFW, and then Houston. If you desire a newer construction property, like myself, your odds of finding one will probably be better if you start out in Houston.
  • Properties priced at $100,000 and under are the main target. Single family homes make up the bulk of their acquisitions but they do occasionally purchase duplexes, triplexes, and quads. Only residential properties, however. No commercial buildings.
  • At the $90,000 purchase price range, most SFHs will rent between $850/month to $950/month.
  • I asked about financing and the representative told me that most buyers put down 20% for properties 1-4. For properties 5-10, expect to put down 25%. These numbers are lower than what I would expect. In the other markets I invest in, you need to put down 25% for properties 1-4 and 30% for properties 5-10.

Property Management:

  • Property management fee is 9%. This rate is the same for all three markets. The 9% rate falls in line with what I would expect since Chicago charges me 8% and Indianapolis charges me 10%. Seems reasonable.
  • Owner distributions are made via ACH, so you can expect a direct deposit into your account each month.
  • They use a web portal to help make it easier for the investor to keep tabs on the property. You’ll be able to login, look at statements, maintenance work orders, lease agreements, etc.
  • I was told that most tenants sign 2-year leases. As a long-term buy and hold investor, this sounds great to me. I’m not the type of investor who believes in raising rents every year. In fact, one of the main reasons I invest in SFHs is because I want low tenant turnover. My own preference is to locate fabulous tenants who want to stay long-term. This model seems to align with my own philosophy.
  • The company targets blue collar working class individuals. They do not accept Section 8 tenants.

Here’s the impression I got:

  • Company seems to be very well run. I communicated with two people (one through e-mail, one through phone) and they were both very friendly and professional. Very willing to answer any questions I had and the replies were prompt.
  • Company appears to be very customer-centric. This is especially good for new investors who are buying for the first time. After purchasing, they will assign an agent to you who will follow-up and contact you once each week, for the first month. This phone call is intended to keep you updated on all happenings of the property (rent collection, maintenance items, etc.), and I guess to calm any nerves/fears you might be experiencing. You can think of it like hand-holding, which is something I would have wanted if I was buying real estate for the first time (and out of state!). After the first month, an agent will continue to phone you once each month, moving forward.
  • If you want to build a long-term portfolio, the company will also assign a strategic planner to help you chart out a gameplan. This is the first time I’ve ever heard of something like this. Most turnkey companies appear understaffed as is, so I was surprised to find a company that would allocate funding for resources such as this.
  • Company makes an effort to build a relationship with each individual tenant. They offer educational courses (not sure what this means, and I didn’t ask to go into details), and they provide a gift basket when the lease is signed (nice touch!). Once a lease expires, the company will make a strong attempt to retain the tenant, provided things went well. They might offer little things such as carpet cleaning coupons, or the like, to get the tenant to stay.
  • I only briefly glanced at a Pro Forma, but it is very obvious that you will be paying a premium for any property you purchase through this company. When working with a turnkey vendor, this kind of goes without saying. You pay for convenience and service. However, with rising interest rates and purchase prices, the returns may not work out for you. Don’t expect 15% cash-on-cash returns…

This phone consultation was very brief, so I didn’t get to go into too many details. I still have a ton of questions to ask, but I will save those for when I make the trip out to Memphis. At this time, the plans are still up in the air as my schedule is somewhat tight right now. If I don’t make a trip out there by April, I may decide to just postpone it until later this year, most likely after my round-the-world expedition in August. So, maybe September will be a more realistic date. We shall see…

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Brandon
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Brandon

I think my new goal is to have rental property #1 before you get to #7!

Sundeep
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Sundeep

Haha, seriously. I’m in the same boat.

Talk about taking action though, very inspiring…

Brandon
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Brandon

Jay is a good example to follow though. I’m definitely several years behind but he’s paving the way and sharing the knowledge!

writing2reality
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Wow, great summary of your phone interview. Certainly prompts me to come up with a ton of follow up questions, but I will wait and see what you find out down the road.

Given the higher possibility for appreciation, you won’t see as high of cash on cash return projections in general. They are generally inversely related from a home pricing standpoint (that I’ve seen).

JC @ Passive-Income-Pursuit
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I agree with Brandon. Get my #1 before you get #7. Im hoping to make some progress this time that im home since ill be home during the middle of the week.

Eric
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Eric

Why would anyone pay a premium for any property, purchased from anyone?

You are buying a property. And then you are having it managed. These are two transactions, coincidently through the same company. Do not get hung up on “turnkey”; get hung up on profits, a solid cash flow and a big ROI.

Negotiate a better deal if you have to. Every property I have bought came with a 25% buyers commission rebate. That is, 25% of the buyer side of the commission went back to me. On a 300K property, this is almost $2K.

Focus on the return that the type of property should bring in. This is likely a ‘C’ class property, so look for 10%+. Skip a class ‘D’ unless you get even more. Do not factor in any property appreciation – that is a bonus, if it happens at all. Remember, you can get a guaranteed 5% return by just paying down mortgages. Higher risk in RE demands higher returns.

Do you have to do any work in approving tenants? It may make a difference in taxes, and whether or not you “Materially participate”. You should ask what tenant criteria they use to select tenants. A professional company will have a solid list of criteria, or will ask you for a list, of what criteria in terms of credit score, income, rental history and criminal activity are allowed to accept a tenant.
Ask how many tenants they manage, and what their eviction rate is, or their percent of rent collected every month.

I manage 25 tenants myself, and nearly always have 100% rent collected by the 5th of the month. If not, a late charge is added and eviction begins by the 10th.

Just a few thoughts…

The First Million is the Hardest
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Sounds like a good way to diversify into other cities. How hands on do you have to be with these turnkey companies? It sounds like you don’t have to do much of anything after the purchase. Do they just take the 9%, or are there other fees & charges for things other than the property management?

Done by Forty
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Sounds like a good company. I’d love to hear more, and wonder if something like a 10% cash on cash return is possible.

DM
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DM

FI Fighter,

I have been following your blog for few months and am impressed with your achievement.
I have two rental properties and am considering getting another one in the future. What would you think about TX property tax which is not cheap (around 3-4%)? A $120K single house is Dallas translates to at least $3.6K of property tax, therefore I was wondering if you can still achieve your 10% return.

Jason
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Jason

Hi FI, you’re blog is always very encouraging.

I bought a few homes from the turnkey company you mentioned and I have to say that I’m very impressed with them. If you’d like to discuss any details, drop me an email.

Mark
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Mark

Hi FI, great blog! I may be missing something, but did you list the name of the turnkey vendor somewhere?

Thank you!

Scott
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Scott

Hey FI, would you mind sharing the name of the turnkey company? I’m interested in the Memphis and Texas areas as well. If you don’t feel comfortable putting it on the website, maybe you could email it to me? Thanks for your blog!

Aldi
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Aldi

Hi,

I would appreciate the name of that turnkey company. I in the process of investigating those markets as well.

Much appreciated
Thanks

Kris
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Kris

Hi fifighter
Impressed with the info on rental properties. Thanks for sharing it .
Do you mind sending me turnkey company and things
I need to check before I pull the trigger as I am a newbie

Thanks
Kris

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