On today’s episode I share my journey investing in rental real estate from my early start at the age of 18, through my trials and tribulations, to where I am today. We should all learn from our past experiences, good and bad, because they provide us knowledge and the wisdom to improve and do better as we go.
Regardless of where you are in your investing journey, I encourage you to listen in, and feel free to share your story with us.
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Investing in Turnkey Properties — My Journey, Setbacks and Advice
Today, I wanted to talk about the concept of investing in turnkey properties. Investors sometimes ask me, “If I had to go back and do it all over again, what would I do different? What did I learn?” Really, it’s just about the journey of where I started and how I got to where I am. People just want to know where I started and how I got to where I’m at. If I was to just rewind the clock and tell you where I started, I was only eighteen years old when I bought my first investment property. I have to tell you, at that time, it was an exciting time and a scary time. In fact, I had never read a book or taken a course on real estate up to that point. I only really had experience in rental properties through helping my parents, aunts and uncles renovate a single property they bought as a group when I was in my early teens. It really was a family project, and it really was the only rental property that they ever bought and fixed up. It was more daunting and more work than they anticipated, so it ended up taking weeks to get done. It was a job that was done in evenings and on weekends because everybody had a full-time job, we were in school so it was really a side project, if you will.
My first investment property was a rundown, two-story townhome that needed a decent amount of work and upgrading. I was able to purchase it with financing because the lender considered the property to be livable and I qualified for the financing because I was employed for over two years with a good paying job and it was a part time job. I then hired my uncle who was a general contractor. With the help of my immediate family for some of the demolition, we jumped in to get the property cleaned, upgraded and prepared to lease. That project probably took a couple of weeks.
I recall running an ad in the local paper. Remember back then, there were no iPhones and there was no internet so it was the newspaper or you stuck a sign in the yard. I would have people come by the property to fill out applications while we continue working on the property inside. I had absolutely no experience in screening tenants. I’m sure I relied on my gut feeling at least as much what they wrote on their applications. I kept that property and managed it for probably a few years before I decided to sell it. I made a nice profit on it. All in all, it was a very good experience and one that I can look back and reflect on. The property was local to me. The price was right and I was ambitious enough to literally jump in and just do it. My biggest regret though with that first property was selling it. Over time, the market value exceeded ten times the price I originally paid for it. I can’t imagine what the cashflow would be like today if I had kept it. It probably would be free and clear. I would be raking in, who knows? I would have to imagine that that property rents for $2,500 to $3,000 a month right now. Anyway, I had a lack of strategy. Fast forward to 2003, I had bought and sold several properties up to this point. I was getting the itch to start investing again. Real estate was booming all across the country and it seemed that you couldn’t lose regardless of where you chose to invest. I just knew I had to get back in the game.
Before buying my next property, I had signed up for a very expensive set of boot camps offered by a well-known real estate author and guru, and someone who I actually respected because he walked his talk. As I traveled from city to city taking on these boot camps and spending time with wannabe real estate investors, I came to the realization that most new and wannabe investors lack the clear investment strategy. At the time, this also included myself. I wanted to literally do it all. I quickly started implementing every strategy and was being shown everything under the sun. This was just overwhelming at the time because I just figured, I had to just put my finger in every area and do everything that I was being shown. It’s not that I was a green or newbie real estate investor, it’s just that everything looked good and sounded good. That was really the problem.
When you look at wholesaling and rehabbing, using general contractors, you get involved in buy and hold residential properties, you start buying a few small apartment buildings like I did. Even the creation of an apartment syndication, which I eventually decided to stop pursuing. You get spread too thin. Being spread so thin was problematic and stressful, but what I learned was invaluable. The biggest lesson that I learned through that experience was that it is best to really focus on one strategy you enjoy the most and you can do the best at. Only after you’ve created systems and you’ve mastered that first strategy should you consider branching out into new and additional strategies. I have to admit that I was never a big fan of wholesaling or rehabbing properties. That’s not to say that they are not good strategies for someone else, but for me, I quickly fell in love with the rent ready, passive investment properties, what you might turnkey properties.
What is a turnkey “investment property?” Most of the early properties I had bought came from the multiple listing service or what we just referred as the MLS. The MLS was not my favorite source to find properties, but it made it somewhat easy because I could filter and sort by using any criteria I wanted. It was like finding the proverbial needle in a haystack, but the deals were definitely out there. Of course, anytime you’re buying property off the MLS, there’s always some level of negotiation expected by the sellers. Often, you end up creating your own good deals. Depending on what the market conditions are, you may have to look at 10, 20, 30, 50, even maybe 100 properties before you find that one, two or three that you could write an offer on and get some response back or an acceptance on your contract. I was doing that back in 2004, 2005. I was writing a lot of offers.
As I invested in dozens of properties over the years, I found that the quickest, easiest and least stressful properties I bought were the “rent ready ones.” More specifically, I found that new construction properties were my favorite because aside from doing basic due diligence and hiring your professional property manager to lease up and manage the property, there was very little to do. That’s why I do like new construction a lot. But you don’t find new construction all the time. Markets and the real estate landscape changes. It goes through cycles. Depending on what supply and demand dynamics are, you’ll either see very few if any new construction or you’ll see a lot of new construction. It’s a matter of timing.
Of course, today, there are multiple sources to find yourself properties including Bird Dogs. Bird Dogs were those people that go out and look for distressed property situations, whether they’re distressed properties or distressed sellers. They may put those properties under contract or just let you know about them in exchange for a fee. Essentially, if they put it under contract, you are paying them a fee for that contract in order for them to assign it over to you. You can find properties through wholesalers, again, these are going to be distressed properties. You can purchase retail properties from retail sellers. Often, this will be off your MLS. Auctions, you can work with a local real estate agent. You could just get on the MLS yourself if you have access. If not, you could go to websites such as Zillow or Trulia and do a search. You can go directly to new home builders. Many of them work with real estate investors, a lot of them choose not to. That’s just a matter of choice, it’s their preference. Of course, there are turnkey property providers.
When I was getting started, I don’t think there was a definition of what a “turnkey property” or a “turnkey investing strategy” was. I think for the most part, people simply refer to turnkey property as “rent ready” property and turnkey investing as simply passive real estate investing. Today, there is no formal definition still of what a turnkey investment property really is. Now, there’s more and more talk about it and you’re starting to see it more often on forums and on podcasts and articles. Most people have a basic idea of what it might be or probably means. Judging from the questions I get from all of my investment clients, I can tell you that the definition is still somewhat nebulous. If you ask ten people what a turnkey property is, you’ll probably get ten slightly different answers.
I have two definitions for what a turnkey investment property is. My most basic definition is this: it’s simply a safe, clean and functional property that is completely rent-ready. That is a very clear, clean, simple definition. However, over the years and through my own personal experience, I’ve refined and expanded that basic definition to what I use today both personally and for our investor clients through Norada Real Estate Investments. When you talk to one of our investment counselors, this is basically the definition that we use today for a turnkey investment property. That is, a property in a stable or growth market, a property in a desirable neighborhood, a new or newly rehabbed property. Again, that means safe, clean and functional. A property that is leased or in the process of being leased, because ideally you want to have a tenant placed and a tenant in there paying rent every month. You want that occupancy up all that time. A property that is under professional property management. Last but not the least, a property that is cashflow positive.
If you’re a rehabber or someone who likes to buy fix and hold properties, then incorporating the above definition into your investment strategy is going to help lower your overall risk. This expanded in more detail definition has helped narrow down the markets and neighborhoods where I look for rent ready properties and that make sense from a location and a financial perspective. Often, that means investing out of state for many people and particularly me being here in California. Why invest out of state? Being a resident of Orange County, California, I’ve witnessed property values explode from 1998 through to about 2006, 2007. I live in a cyclical real estate market that is very expensive. Sometimes, I refer to our market as a bubble market.
As the years have gone by, my ability to find properties that have made sense locally decreased rapidly. Today, and this has been going on for many years, the rent to value ratio is so slow where I live that you’d have to buy most properties with all cash, meaning no financing or with a very large down payment to get that positive cashflow or any kind of return that is reasonable. Of course, there are always exceptions in every market. For example, a distressed seller or a distressed property with a low purchase price could make the numbers work favorably. I find those situations are actually far and few between though. The amount of time it takes to find them is not worth it, at least not for me. That’s a strategy better suited for wholesalers and flippers. The scenario in my local market is similar to those in my other markets around the country.
In general terms, the same situation exists in other local markets around the US. This is particularly true along the coastal markets in states like New York, New Jersey, Hawaii, Connecticut, of course, California and up the west coast. The fact is this: every market is unique and has its own local economy and other factors that affect its housing market. Therefore, while one market is experiencing economic growth like jobs and population growth, another geographically different market can be experiencing an overall economic decline. Again, I use Detroit as an example not to pick on it, but if you look at Detroit, it has been in decline for many decades. There may be some changes there recently and a little bit of turnaround or turnover in some of these areas within the Detroit metro area, but I use it just as an example to show you the differences between a market experiences economic decline versus something that is completely different, like a market that experiences growth in jobs and population. Maybe the poster child for that are the Texas markets like Dallas, Houston, San Antonio, etc.
Where would you rather invest? Although I place cashflow at the top of the list when it comes to any investment, the health of the market is the make or break factor for me in real estate. Investing in a stable or growing market reduces your risk and it increases your long-term growth potential. It’s amazing to me that you can purchase a three-bedroom property in Southern California for more than ten times the price of a three-bedroom property in many other good markets in the Midwest, in Texas, in Tennessee, Alabama, states and areas that we are active in and have been for many years. Those are some of the markets that we recommend to our clients. That property in California will not likely cashflow, while the property in other states will cashflow well and produce very good rates of return.
Another benefit to out-of-state investing is this: it’s the ability to leverage your investment capital. If I had $100,000 to invest in my local market, I might be able to purchase one $500,000 property using 20% down. In other words, my $100,000. I would be lucky if that property produced a good positive cashflow. I would be very lucky, but it’s highly unlikely. Taking my same $100,000 of investment capital, I could purchase five properties priced at $100,000 each in another prudent market where it makes financial sense to do so. Your cashflow would be higher and you now control five properties instead of just one here in California.
Most of the risk in real estate lies in the land value of the properties. This is an important concept to understand. In markets where land values are very high, there is increased risk of those land values coming down. When they do come down, they often come down very far and sometimes fairly rapidly compared to the rise. Contrast that to the less expensive markets where land values are low. In those markets, your risk is mitigated by the fact that land values cannot drop below zero. It’s just impossible. Land could go down, but it’s never worth less than zero. Your exposure in land value price changes are far, far lower. To me, this is true risk mitigation.
Related to fluctuations in land values, there is another major benefit to out-of-state investing. That is this, it’s diversification. Because every market is local and they move independently with one another, it really just make sense to invest across multiple markets. That is through diversification within this asset class of real estate or rental real estate, if you want to call it that. I believe it makes the most sense to focus on one market at a time and accumulate from let’s say, three to five properties in that one market, income properties. Then once you’ve added those three to five properties to your portfolio, what you can do is diversify into another, a second prudent market that is geographically different than that first one. Typically, that means focusing on another state.
I made the mistake back in 2004 of investing in too many properties in the same market. Then a few years later, that market turned down. This was in 2006 timeframe, maybe early 2007. That market turned down and the value of my properties dropped. They dropped altogether. I could’ve limited my exposure in that market by simply buying my other properties in other markets, in different markets. I would’ve diversified in three, four, five different markets. They may have gone down too and maybe not as much as that particular market I was in at the time. It just lowers the exposure and softens the impact should there be a downturn in one market more so than in another market.
Am I suggesting that you invest out of state? Not necessarily. I’m simply suggesting that you invest where the numbers make sense. If I had to start all over again, I get asked this question from time-to-time. I guess you don’t know what you don’t know. You learn what you don’t know by educating yourself, learning from others, taking action, learning from your experiences. That’s simply how it works. I really wish I knew what I know today back when I got started. That knowledge would have accelerated my wealth creation. Fortunately, that knowledge is not wasted because it’s just as valuable today as it would’ve been for me back then. I can also use it and share that valuable knowledge with my family and my friends and our clients. That’s exactly what we do today.
Knowing what I know today, I would focus on acquiring as many turnkey properties as possible in multiple growth markets around the United States. Again, I’m using my expanded definition of turnkey here. I would also purchase a mixture of single-family, duplex and fourplex properties with probably a heavy focus on the single-family properties in the beginning. Finally, if I was starting all over again today, there is absolutely no question that I would begin by doing research to find the best real estate markets to be investing my cash. It is very clear to me that it’s the best way to lower your risk, maximize your returns and diversify your portfolio as best as you possibly can.
Anyway, that’s a quick overview. I hope that has been helpful. If you have any questions about any of these topics I talked about or if you want me to expand on any of them, please do let me know. You can always send me an email, send it directly to Marco@NoradaRealEstate.com or you can fill out the contact form at PassiveRealEstateInvesting.com.
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Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)