Posted on: August 30, 2021
WI 764 | Turnkey Properties

 

If you want to generate long-term cash flow quickly and with little effort, you should look into turnkey properties. Turnkey rental companies provide fully renovated homes or apartments in good locations that investors can purchase and immediately rent out. This model also works well for virtual investors because turnkey services provide inspections to ensure that the property is exactly as described by the owner.

In this episode, Freedom Property Group owner Erik Hitzelberger will discuss everything you need to know about turnkey rentals—how it works, the different property classes, and the price range of these classes. Tune in to learn more!

Why Turn-key Rental Providers Make the Best Cash Buyers and How to Find Them

I want to welcome Erik Hitzelberger to the show. Erik is going to teach us all about the turnkey rental business. The reason that you need to know about this as wholesalers, is because you will often be wholesaling to these types of end-users. I’m so excited to pick your brain, Erik. Welcome to the show.

Thanks, Lauren.

I’m excited to have you because I have a lot of questions about turnkey rental companies. You are the owner of Freedom Property Group. You are based in Louisville, Kentucky. Erik, tell us a little bit about your company. What is a turnkey rental company?

Turnkey, the word gets used a lot in the industry. For us, what that means is that we are providing passive income for our clients. That passive income comes in the form of a rental property. They don’t have to do anything with it. We manage it entirely. Oftentimes, we buy the property. We fix it up, place the resident in there so that there’s rental income from day one, and then we sell it to an end buyer and most of them aren’t located here. They are located around the country.

We manage it for them and they receive a monthly check like they would if they owned some dividend stock. They get a payment every month from the rental income, and then they get the benefit of owning the house and the appreciation that comes along with that. We take care of everything for them, all the issues with contractors, tenants, and toilets, those types of things.

What are the type of buyers or investors that you work with? For the sake of this episode, when I say the word investor, we mean that the people that give Erik money for these homes.

They ultimately own the property. That’s an accurate description because this is an investment like paper assets, stocks or bonds. They are buy-and-hold investors trying to earn income or appreciation, wealth or some combination of the two. If they are looking for how to do that, they have the option of going out and contributing to an IRA that buys stocks or bonds, cryptocurrency, gold or whatever. They have the option to buy a house from us. They are concerned about the return on their investment in real estate, in the same manner, they are in the other asset class.

What do these people do for a living? Are they interested in real estate? Are they real estate investors themselves or are they passive?

Some of them are real estate investors but most aren’t. Most of them are high net income individuals. They have jobs they enjoy like doctors, lawyers, engineers or other medical professionals. We also have teachers and some other people who have jobs they enjoy. They don’t want to leave their job to go into the real estate world. They don’t want to be active wholesalers, rehabbers or anything of that line. They want returns on their investment. We try to make this as passive for them as we can.

It’s the high-net-worth individual who wants to diversify their money. They probably do have stocks. They probably have other investments, maybe cryptocurrency. Real estate is also an excellent investment. It also comes with a lot of tax benefits as well that they are looking for. They are probably looking for some write-offs. Real estate takes management. Even finding the deals is hard. A high-net-worth individual can come to a company like you and say, “I’ve got $300,000 to invest. Let me check out what you have.” Then you handle the rest.

That’s exactly what we do.

How did you get into the turnkey business?

I started investing personally several years ago doing rehabbing primarily. I became a buy-and-hold investor myself and started growing. As I did, I found some private lenders who were interested in investing in our company and what we were doing. That snowballed into, “Can you show us how to do real estate? Would you do this for us?”

WI 764 | Turnkey Properties

Turnkey Properties: Make sure you get an inspection on the property so that you understand what it is that you’re buying.

 

We had enough interest. We looked around, saw some other turnkey companies around the country and what they were doing and said, “It makes sense for us to do this. There are enough buyers out there and interested investors. This is something we can do to contribute to someone’s financial security so that they don’t have to worry about passive income later in life. They can go contribute to the world in whatever manner suits them best.”

It’s an amazing concept. I know so many people that come to me all the time are not in real estate. They have other professions and are like, “I want to invest with you.” I’m not set up to do that for them. I usually will point them to a turnkey company like yours. Turnkey rental companies, this model works well for the virtual investor.

In the territory that I’m in that I wholesale in, there are a couple of turnkey companies and their investors are based in Seattle or the expensive areas, explain that. There’s this other idea that you can buy properties in other areas that maybe you couldn’t wrap your head around getting the management in place and everything. How do you help someone virtually?

Probably 70% to 80% of our clients invest from a distance. Many of them are in California. We’ve got some in Texas, New York, DC and different places as well. Most of them make that investment. We do all of the legwork, evaluate the property and all those other things, and handle all the day-to-day operations.

We try to make a study and we will have to know a whole lot. All of our properties ultimately have an inspection done so they can see and understand what they are buying. Most people get a loan so they get an appraisal, can assess the worth or someone else independently assesses the value of the property and those things. They are looking for that return that maybe either they can’t get in paper assets. It gives them those other benefits of depreciation, mortgage interest deductions and stuff like that.

It’s very easy to invest virtually with a turnkey company. The biggest challenge is that boots on the ground element. If you are doing wholesaling as a virtual wholesaler, you are trying to make sure that what you are buying is what the seller describes. If you are going to have a buy and hold property, you need a good company that knows how to manage it, can check on your residence when things go wrong, and have a context to fix things and all those other things that come with buy and hold as well.

Let’s talk about how things could go wrong investing with a turnkey company. What horror stories have you heard? Have you heard anything that some turnkey companies aren’t good to work with?

There are a couple of things that people should watch out for when you are buying. The first is to make sure you get an inspection on the property so that you understand what it is that you are buying. There’s a lot of ways to put a property on the market. From our perspective, our company believes that we shouldn’t have deferred maintenance, we should understand and try to minimize capital expenses within the first few years.

We spend that money upfront to do that. When we are buying the property, we know what we are going to sell it for because it’s what the market and investment dictate. We wait, go out, look and say, “This furnace is 35 years old. It’s duct-taped together in every way it can be. We are going to go ahead and replace that even though it did put out heat.”

Those are things that we do to try to ensure that our investors get a solid and consistent return, especially at the beginning when they are first getting started. In inspection, we will uncover that. If you are dealing with a different company, a simple question to ask is, “What’s the average rehab that you do to a property?”

That’s a good point, asking that question. What I have heard is people will end up buying a property and it has a bunch of problems with it. They didn’t fix it much, and then the turnkey companies sold it for the absolute highest price they could. The investor ends up getting it and it wasn’t that great. The numbers don’t put up because it had all these repairs that are still needed.

The other questions you might want to ask are, “What’s your average turnover rate? What are your turnover vacancy and maintenance costs on average? What is that to each buyer?” That will give you an indication of both the type of property and area you are buying it in, as well as the quality of the management company.

Some people have jobs they enjoy and don’t want to necessarily leave their job to go into the real estate world. They just want returns on their investment.

Those numbers are high and high would be on a combination of maybe 12% to 15%, certainly any higher that might give you pause to think about it. If they are 10%, over some time, that’s fairly reasonable. This is a physical asset so there’s certainly going to be a cost in notion budgeted for and if they are less than that, especially over the first few years, that’s an indication that you are getting a good property. The management company knows what they are doing. You shouldn’t expect a lot of problems.

In what percent?

It’s 10% of the rental income. It would be someone doing their job fairly well in most markets.

If they have an answer for you that is under 10% and they look like they know what they are doing, then they probably can be trusted. A lot of our readers are aspiring real estate investors. A lot of them are wholesalers or they are getting into wholesaling specifically. I felt like it would be important to have you because I know as a wholesaler myself, the game changed when I started understanding my end buyer.

When I was a little JV wholesaler, I didn’t understand my end buyer. I was trying to move deals. When you don’t have that level of understanding, you don’t even know how to price deals out very well. This episode was more for you to increase your skills and learn the different types of end buyers. One of your end buyers is going to be a turnkey company. If you are in any Metro in the US, you are going to come across a turnkey buyer from time to time. We sold to turnkey buyers all the time.

It’s important that you understand what Erik does, how the business operates, what he’s thinking about when he’s looking at the deal and looking at the numbers, and who he has to answer to because he has to answer to investors as well. If you can understand that, you can work better together and do more deals. That’s the goal. How do you work with wholesalers? How are you getting these deals and properties?

We get them any way that we can. We have historically purchased from wholesalers who purchased foreclosure auctions. There was a day and time that you can buy off the MLS. We do some direct marketing on our own, so any way that we can for the properties that we like, we will try to acquire them.

The turnkey companies are on my buyers’ list. The turnkey guys and I are tight. We have done lots of deals together. They are my preferred buyers. You know what you are doing. You come in with all cash. You don’t mess around. You know how to make the deal seamless so it doesn’t blow up. Some of our hardest deals are when we are working with new house flippers. Those are harder. When I’m with a hedge fund or a turnkey company, it’s super smooth and easy. I imagine you would love to talk to a bunch of wholesalers.

We have a lot of buyers and interested investors who are constantly looking for properties. As long as that property will ultimately meet our criteria and perform for them in the way that we advertise, we are willing to buy it. We have a lot of money behind what we can do. We are as easy to work with from a wholesaler perspective as I know how to make it. We have never backed out of a deal. We close when we say we are going to and we’ve got a lot of resources behind us in our capabilities.

Can you get specific? I want the readers to understand it. I want you to grow as an investor. We are not just wholesalers. What are your buy or investment criteria?

The end game for all of our buyers is a buy-and-hold house. With buy and hold, we do primarily single-family but we do have some multifamily as well. The thing that’s going to determine your success as a buy-and-hold investor is vacancy rate, vacancy and turnover. You are going to have a fixed mortgage, taxes and insurance. Your repairs are somewhat predictable. Sooner or later, your furnace is going to die. That’s a one-time expense over maybe 20, 30 years.

We can predict that stuff, where things get sideways is vacancy and turnover. We want to try to make sure that we are providing property to buy and hold investors that don’t increase the turnover rate. By that, I mean, the property shouldn’t be on a business street because sooner or later, that’s going to be annoying to people. If it’s a B Class home, it shouldn’t back up to the trailer park, an industrial building or something like that because there are a lot of noise disturbance and things like that. We don’t necessarily like homes that back up to the interstate.

We would like and prefer homes that maybe have 4 bedrooms instead of 3, and 2 bathrooms instead of 1, a basement or garage because that allows the family unit, whether it’s an individual or multiple people to expand and stay there for a long time. These are the things that we think about as buyers. “Will this house support somebody living there for the next 30 years?” That’s the ideal tenant for any property. What is it that we can do? How can we avoid things that might cause them to leave earlier?

WI 764 | Turnkey Properties

Turnkey Properties: The end game for all of our buyers is a buy and hold house.

 

I did not think that you would say this. I was thinking rent to price ratio but you raised such a good point. The ones who are reading this, you might have heard of the rent to price ratio. A 1% rent-to-price ratio is a gold standard. It depends on what areas you are in. You can get better if you are in. In some areas, you can get worse if you are in others. In California, I don’t even want to know what the rent price ratio is. It’s 0.3%.

In Oklahoma, investors want more of 1.25%, 1.5% if it’s not as an ideal of an area. What that means is if the house went for $100,000, it would generate $1,250 in rent, which would be 1.25%. If there was 1.5%, $1,500 in rent, 1% would be $1,000 in rent. I was thinking you were going to go right into numbers. What is funny about the rent to price ratio is you can get areas that are 2%, where the house costs $25,000 and it rents for $500. It’s constantly going through evictions and getting vandalized. It’s vacant every year.

My background is in engineering. I do not like that ratio because outside of it, it has little context. The $25,000 property that rents for $500 versus the $100,000 property that might rent the $900, most of the time, I will argue that the one that has the 0.9% ratio there is the better investment. Some people want cashflow in there and are going to throw the property away when they are done. Maybe the first one works but low-income housing has low-income housing problems. That sometimes can cost significant amounts of money.

It’s such a good point. I did not realize how vacancy and turnover eat up your profit anyways if you are in a 1.5% price to rent ratio area. If you are vacant every year, you are 0.5%. It looks great on paper. I have heard you say an E Class property. People do this all the time. You hear people go, “It’s a B Class property, a C Class property.” What is the standard of these classes? Is there a legend somewhere online of these classes? I want to know because I hear this in the commercial space and multifamily all the time, explain.

To my knowledge, it’s like turnkey. It’s a nebulous thing. Our definition of A-Class is a property that you primarily buy for appreciation. It’s going to be in a better neighborhood, who’s going to maybe buy this because it has some wealth-building characteristics but wants and expects it to grow in value. A little bit better neighborhood, probably more owner-occupants than rentals. Your cashflow as a percentage of your investment is going to be a little bit lower but the overall return when we combine the appreciation and the cashflow is pretty good.

A C-Class is a property that we are going to buy primarily for cashflow. Maybe we get some appreciation. We don’t worry about that as much. What I’m looking for is based on the amount of money that I put down, how much cash am I getting per month after all my other expenses are paid for? That is my primary focus on this investment. Sometimes people start there because they want to eventually replace their current income and need some cash. Whereas in the appreciation case, maybe you don’t need as much cash. You need it but you want the bigger number later on.

Can we contextualize it? I live in Southern California, Orange County. A-Class would be a place in Orange County. There’s no cashflow. Some foreign investors buy these things and there’s no cashflow in them. Just because they are buying it for appreciation and they don’t need the money, they are already wealthy.

Some of those people are paying cash to start with. When they are paid off, they produce a pretty good number as far as that cash income then. I’m going to bring this to a market that more people might relate to.

Let’s do an A-Class in Kentucky.

Let’s say $200,000 to $300,000 is the purchase price of the house. At a $200,000 investment, maybe your rent is $1,600, something like that. What you get is a couple of $100 a month but with that appreciation of 4% to 5% in normal times. It doesn’t count. Long-term, you would expect that type of appreciation. That’s the scenario that you are in.

As C Class, maybe it’s less than $100,000. We are probably $80,000 to $120,000 so I will use $100,000 there. Maybe you are getting $300 or $400 a month but your investment was half of what you did for the A-Class. Your cashflow rate return is going to look a lot better because you are getting the same or more cashflow on half the investment. You are expected to get both depreciation at a lower rate, maybe 2% to 3% per year, and then you are going to get cashflow, too.

I feel like B Class is the best. Everybody is in B Class.

It’s very easy to invest virtually with a turnkey company. The biggest challenges are the boots on the ground elements.

Personally, that’s where I invest my money. Most of our clients invest as well in that level. Over enough time, at least for the returns that I see, B Class tends to outperform the others.

What is the price range for a B Class in Kentucky?

Between $120,000 and $200,000.

That’s interesting because I always tell everybody I recommend the B Class. That’s my sweet spot for wholesaling.

There are a lot of other things that are important when you make any investment. Also think about, “How am I getting out of this? What’s my exit strategy in B Class property?” In most cities, B Class is probably around the median price for the city. If you are buying that median home price, you have the opportunity to sell it on the MLS to a first-time homebuyer, someone who’s downsizing, a younger family or to your residents. There are a lot of ways to get out of that property because it’s in the sweet spot of what lots of people want.

If you are buying a commercial property, it’s something else, a C Class or certainly even lower property, below C. In that case, you are selling to an investor. That’s your end game. If you were forced to sell for whatever reason, when your only buyer is an investor, whether they be another buy and hold investor, a wholesaler or something, you are not in the best position. You are not going to get the most out of that asset at that time. If I had to sell something and you came to my door, you are not giving me as much as I could have gotten if I could sell it on the open market.

It’s interesting because for wholesalers looking to market to sellers directly, go for the C and E-Class because those are people that have to sell to investors. They don’t have a lot of options. I also think the C and E-Class, depending on where you are located, the price points are so low. I don’t enjoy that. It’s hard because the sellers in that class don’t want to reduce the price low enough. It’s already low enough for them. It’s very hard to convince them to drop it low enough to make your wholesale fee that interesting.

This is a little tip. Historically, I have noticed that wholesale fees are about 10% of the sale price that the end buyer bought it for. I sold the subject property to Erik and he paid $100,000. On average, wholesale fees are around 10% of that. If you are doing better, that means you are probably in a market that’s a little less saturated, which is good for you. You are lucky. Don’t tell anyone your market. If you are doing worse, you are probably in a saturated market where you need help. You don’t have this big of a buyer base. You are still figuring out pricing but if you are at about 10%, you are in a standard Metro that has a healthy amount of competition.

When you are talking a $25,000 house and going 10% of that, your wholesale fee is $2,500, it’s hard to even get $5,000 out of that wholesale deal. It’s what we have noticed. A lot of our lower-end deals, we almost tried to avoid marketing to that price point because it’s hard to get the seller to go any lower in their brains. They are usually investors too so they were like, “I’m giving this thing away.” It’s interesting. You would think theoretically based on what you said that the C and E Class would be like, “Go for that,” because they know they have to sell to investors but they are usually investors as well. It’s hard to convince them to go any lower than the house already is priced for.

I imagine and from our own experience, it is tougher to get those B and A properties. There are fewer but the fees are bigger. For a B property or an A property, certainly here and in most places in the country, there are a lot of demands. You can probably get even higher wholesale fees because there are a lot of people out there flipping. Retail buyers are almost wholesale clients at this point. Companies like us want as many as we can get, a hedge fund or a turnkey company can provide. You don’t have to go out and market to a whole lot of buyers. Send us the leads and we will buy them. We can make it that easy.

How would a wholesaler find the turnkey guys in town or hedge funds? I could go to Indianapolis and figure out, “Who are the turnkey and hedge funds guys? I want to talk to them.” How do we do that?

The hedge funds are a little trickier. Somewhere they have somebody on the ground. They are probably networking in there somewhere because they are motivated to find properties. They will tend to self-identify. Turnkey companies are advertising as turnkey providers online or something like that. Our contact information is out there and readily available in most places.

I happen to know multiple companies. You can contact the 3, 4 or 5 of them and ask what their criteria are or what ranges they prefer. Some of those are target C properties and other is a little bit more A and B type stuff. As the wholesaler, figure out what they want, go out and try to provide it because like us, they are going to have capital and investors who are willing and able to perform quickly.

WI 764 | Turnkey Properties

Turnkey Properties: Make sure that you’re providing a property to buy and hold investors that doesn’t increase the turnover rate. That means the property shouldn’t be on a busy street because sooner or later, that’s going to be annoying people.

 

I never thought to google turnkey. It’s the most obvious thing. I was going to say, “Get on PropStream, pull the list, and then look at who bought them.” Google turnkey property local because you have websites. You are right. The hedge funds are harder to find. What I have done to find hedge funds other than some word of mouth because sometimes it’s like, “Call so and so. He works here,” I will pull a list on PropStream and see who’s buying.

I look at who’s bought more than five and you can usually tell they have funny names. They usually have some weird initials, numbers and names. You know that’s a hedge fund when it’s a weird name and you saw they bought ten in the area. I will then google that name. If I can’t find it, I will look at the Secretary of State website and see if I can pull the LLC and the representative of the LLC.

Usually, if you google the name, something will come up that tells you what that company is or where they are. You can google their tax bill mailing address. You will figure out what company it is from there. Call their office and then say, “Who’s in charge of acquisitions for subject territory?” That’s how I have done it. The hedge funds are a little bit harder to find. The turnkey guys are a little bit easier. I’m going to go to all markets and google that.

We want people to find us.

Erik, I’ve got so much out of this. I thought I knew a little bit about turnkey companies but I feel like I know a lot. If you guys are a wholesaler, you need to know who the turnkey companies are. These are your best friends. You are best buddies. Trust me. If you happen to be in Louisville, we’ve got Erik right here. Erik, how would you like someone to get ahold of you if they have a deal?

They can email us. It’s probably the easiest way. You can email it to Invest@FPG-KY.com.

I have learned a lot, Erik. Thank you so much for coming. I hope that you have a prosperous year buying lots and lots of deals and helping people make money.

Thanks for having me. I enjoyed and appreciate it.

Thank you so much for reading. I hope you’ve got a lot. It was my goal with this episode to make you better investors. I want to open up to your brains and expand your horizons. I want you to learn about the more technical aspects of wholesaling, not just assigning your contracts. I want you to understand all the players in this business. Turnkey companies are major players.

I’m super excited that you read this whole thing. If you want to learn more about wholesaling, you want some coaching or some virtual coaching, I urge you to check out my coaching program at www.VirtualInvestingMastery.com. We are accepting students. Go ahead and apply. Thank you so much for reading and I will see you next time.

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About Lauren Hardy

WI 734 | Cash Buyers ListLauren Hardy is a Virtual Investing expert and Real Estate influencer who owns multiple companies in the real estate industry including real estate investment, coaching, and software companies. She is also a Wholesaling Inc coach and co-host of the Wholesaling Inc Podcast.

Her experience in the last decade has been focused on real estate investing and creating products and services to serve the real estate investing community. If you are interested in investing in real estate virtually, house flipping, or virtual landlording, Lauren’s your girl.

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