Turnkey Rental Essentials

blocks From Lori Greymont, Rehabbing Adviser...

This is a continuation of our fascinating conversation with turnkey rentals guru Lori Greymont.

Lori’s experience in real estate is varied and diverse. Since 1987 she’s been involved in all matter of traditional and creative deal making – rehabs, wholesale, lease options, sub-2, land contracts, bulk REO, etc...

At the moment Lori’s modus operandi is buying and rehabbing distressed properties across the country, then reselling them in tip-top shape to passive cash flow investors as turnkey rentals.

Not long ago we had the chance to corner Lori for an extended, unscripted dialogue about her operation and how she does what she does. We're in the process of sharing some of the key lessons from our in-depth conversation for anyone in Mogul who may want to learn how one of the greats does it, or maybe even follow in her footsteps.

So here’s another slice of awesomeness from our little chat. And keep an eye out for more from Lori to come!

{Mogul Elite: Download and listen to our conversation in the Power Pack Tools for this lesson.}

What Lori Shares in This Lesson

In this lesson Lori’s going to examine the five essential components of successful turnkey investing. By the time you finish this lesson you’ll have a better understanding of exactly how to approach this line of business, and which common pitfalls to avoid.

question JP: If someone is interested in owning turnkey rental properties, then what are some of the biggest things they need to take into consideration? What are the biggest, most important things that they need to keep in mind or be aware of?

Lori: Back before the last economic downturn, everybody was a real estate investor. They would follow the advice of their brother or their best friend and just go into the market, and they invested for the goal of appreciation – thereby missing one of the key fundamentals: cash flow.

So when people are interested in turnkey investments today, I think it is because they have wisely reverted back to understanding that cash flow is key to keeping a property and wealth is built by the appreciation. So when I'm working with investors who are passive investors, wanting to add turnkey properties into their portfolio, I point out that there are five fundamental keys to their success:

Timing. The first thing is to understand the timing of the market. Is this the time to be buying, or selling? Obviously, a lot of people didn't understand the timing when we were heading over the economic cliff, back in 2008. There's a lot of pain around that.
Plan. You need to have your own individual plan. You must know (i) why you're investing in a market and (ii) what you plan to get out of it.
Location. Then you pick a location – and there are many markets in the United States that provide cash flow. But you must decide if you are looking for price appreciation and cash flow, or just the cash flow. Or, perhaps, are you only looking for price appreciation (which we still hear from California investors)? In any case, be sure to pick a location that fits your plan. Don't invest in a market simply because somebody else is doing it.
Team. The team that you work with is the most critical and important component of all. If you have purchased a property and your property manager is not managing that property well for you, then the whole investment won’t make sense. So you need to have a team that understands (i) investors in general and (ii) you in particular.
Numbers. The last thing is numbers; only invest if the numbers make sense. I've seen so many new investors try to tweak a deal’s numbers – to make it look like the investment is going to work – because they're so anxious to get into a deal. Then they wonder why they failed. (It's because the numbers didn't work in the beginning!)

JP: Can you elaborate a bit more on each of those turnkey rental essentials?

Lori: Gladly.

JP: Let's start with Key #1 – market timing. From a cash flow investor's perspective, what are some of the most important things to understand about correct market timing?

Lori: Well, first of all, you need to understand that all markets are local, not national. So if someone tells you, "The Atlanta market is improving," you need to understand that Atlanta’s market is too big for anyone to say that. You need to analyze the individual neighborhoods and know what's happening on that granular level.

And rather than asking if a neighborhood is “improving” at any certain time, you will want to know more specific information: Are the prices going up? Is the inventory going down? What other specific trends are occurring in that market? These timing-related variables will help you determine if it's a buyer's market or a seller's market, and whether you should be buying or selling.

JP: How does a market’s timing factor into somebody’s decision to “buy and hold”?

Lori: Right now, we know that we are in a buyer's market for buying and holding properties long-term. One of the things we know with certainty is that prices have fallen. Additionally, we know that it costs more today to rebuild than it does to buy, and we know that inflation is coming. We also know that interest rates are currently low. All of these indicators tell us that if you can buy right now, then you should be buying. You should be buying properties like it's going out of style.

The reason people are not buying is simple: fear.

It's funny. When the prices are soaring high and everybody is running to buy properties, it’s tempting to think you’re missing out. Now, though, everybody is sitting on the sidelines, and it’s tempting to think you should be sitting on the sidelines too – but this is when you should be buying.

The truth of the matter is this: Nobody is going to be investing in your future for you; only you can do that. So, you must stand up and take a different action than everyone else. Start buying now so you can protect your future wealth.

plan JP: Let's talk about Key #2 – having your own individual plan. Can you provide a synopsis of what this plan might look like? Perhaps sample plans for people who would be buying turnkey properties?

Lori: The first thing I tell people is that you must determine whether you're going to be an active investor or a passive investor – and most people are passive, because they work other non-investing jobs for their active income. There are two general plans for passive investors to earn income on real estate: (i) a “buy and hold” strategy, where you buy the actual property and hold it for at least a couple of years, and (ii) a “notes” strategy, where you can earn income without actually owning the real estate itself.

Here’s an example of a good plan to buy and hold: I coach an investor whose goal is to acquire ten properties in five years. To achieve this goal, they have created a plan to purchase two properties each year, and they have insisted on earning a monthly net cash flow of at least $500 per property. They also insisted on targeting a growing market, so they are going into the Atlanta area.

Now, if somebody proposes a “fix and flip” investment opportunity in Las Vegas, with near-term cash outflows and eventual price appreciation, my student can evaluate that investment against her plan and quickly determine that it doesn’t fit. With a good plan, you know to stick to your guns and say “no” to that sort of thing.

JP: Well, that is one of the hugest missing pieces for many investors. I think many investors approach the planning process with the basic idea that "I want to make money", or "I want to buy low and sell high", or "I want to buy low and just get a check every month." That's not a plan. Although an investor may experience some level of success with that approach, a plan is much more specific.

If I understand you correctly, a true investment plan includes specific intended results, and it also acts as a Litmus test for any potential deals. So the investor is not simply being an opportunist who expects to make money on every deal that comes his way. Instead, the strategic investor should be comparing all potential deals to his plan and asking, "How does (or doesn't) this deal fit into my plan?"

Lori: Absolutely.

map JP: You mentioned that Key #3 involves picking the right location. In light of everything we've discussed so far, what are the most important things for investors to understand about picking the right location(s), in order to filter specific deals through their investment plans?

Lori: Once you know your personal investment plan, you need to assess certain markets and see what different types of opportunities those markets offer. If your plan is simply to obtain cash flow, and if you really don't care much about price appreciation, then you will need to pick a different market than if you want a mixture of both cash flow and price appreciation. Additionally, if your plan places a primary emphasis on price appreciation, then you will need to pick yet another market for that.

There are specific questions that you should ask about a market, in order to determine if it is the right “fit” for your investment plan:

Are people moving in?
Are jobs being created?
Is it a diverse economy with different sectors of the economy?
Are there infrastructure improvements?
Is it affordable?
What's happening with the opportunity for price appreciation here? (Is it high for rental demand?)
Is there a lower-than-normal sales inventory* or a moderate sales inventory?

*Note: Generally speaking, U.S. housing markets currently represent an abundance of inventory. But investors should investigate what is happening with the inventory in their targeted markets. This is another important variable to consider, because if there is a flood of homes coming into a specific market, those homes are coming out for sale. The flood of homes for sale may actually give you more opportunity to buy and rent, because the people who have lost the homes are now renters. Essentially, there are some good sides and some bad sides to the sales inventory story, and strategic investors should be aware of these nuances.

handshake JP: Key #4 involves having the right team. How does that factor into all of this?

Lori: Well, the easiest thing to do on a property is buy it; the hardest thing to do is manage it. It is the management process that will make or break your investment.

Nobody loses at real estate unless they are forced to sell. So if you're forced to sell a property because it's not performing, or because you can't make the mortgage, then you're going to lose. But if you can hold your investment for the long term, then we all know that prices are eventually going rise.

So you want to partner with somebody who has investing experience. You want a property manager who understands investors. What I mean by that is that they're going to get you the best pricing when something needs to get fixed, rather than sending out the first person they find or using their own team. They're not going to “over fix” anything, or overcharge you for the fixes.

Additionally, a good property manager is going to push some repair costs back to the tenants. One of my common examples is that anytime a toilet is broken at a property we manage, we automatically assume it is the tenant’s fault – because the toilet wasn't broken when they moved in.

JP: It's usually stopped-up with a baby doll head or a stick.

Lori: Or a toy truck! So we make sure the tenant understands they're paying for that. That's the benefit of partnering with somebody who is an investor and who understands the importance of each month’s bottom line. So you want to work with a team that has the right type of experience.

math JP: Well said. Lastly, you mentioned that Key #5 is to only invest if the numbers make sense. I know you sell a lot of turnkey properties to people who are looking for good cash flow, where the numbers make sense, so that's certainly something important for you to provide for your customers. So what does that really look like, tangibly? Please don’t hesitate to be as specific as possible.

Lori: People sometimes bring flyers to me from other turnkey sales, and the flyers will sometimes promise an "18% ROI” (return on investment), or something in that ballpark. I always cringe at such flyers, because having been in this business for a while, I know that the real numbers are going to be between 9% and 12%. When an advertisement promises more than that, the true story is typically not being told.

Yes, for the first six months you're probably going to get an 18% return on that investment. But what if your tenant moves out? Then you have to do $3,000 worth of turnover costs. What if the property remains vacant for 90 days? Then you're back down to a 9% return.

So if a deal looks too good to be true, it probably is. Be sure that your estimates and projections include a vacancy factor. Also, be sure that you're including a maintenance factor, and that you're not manipulating the numbers to make a deal look good, simply because you want it so badly. I see that over and over again. People want an investment so badly that they will manipulate the numbers to fit a "Yes" answer.

JP: As a rule of thumb for vacancy and repairs, what should the numbers be taking into consideration there?

Lori: Well, if you're working with a turnkey provider who has taken care of most of the deferred maintenance for you, then I think that your vacancy should be about 8%. Also, I think that you can expect maybe 1% or 2% for your maintenance costs, depending on how much work was done to the house.

JP: Regarding an investment’s return, do you think investors should typically be more concerned with the true ROI percentage, or a certain monthly dollar amount per property?

Lori: It should definitely be the ROI percentage, because you can always scale that for your dollars per month. So if you're only earning a 4% return on your investment, versus a 12% return, obviously you want to move your money to the 12% opportunity, even if that 12% is only $300 a month. You definitely need to be looking at what your real cash-on-cash ROI is. And if you add leverage into the mix, then it's even better.

JP: All right. Thank you, Lori.

Lori: Thank you.

That's It for Now

Lori shared some pretty amazing nuggets of information here that you can easily use in your own turnkey rentals. Thanks for tuning into this lesson, and watch out for more coming from Lori soon!

Timing – Consider the timing of your investment strategy. Is this the time to be buying, or selling?

Plan – Craft your own personalized investment plan in order to document (i) why you're investing in a market and (ii) what you plan to get out of it.

Location – Choose to invest only in a location (or locations) that fits your plan.

Team – Assemble a team that understands (i) investors in general and (ii) you in particular.

Numbers – Only invest if the numbers make sense!