Jorge and Rafi discuss 4 Reasons to Never Invest in Turnkey Real Estate.

They discuss the downfalls of investing in turnkey real estate, including the risk of buying a bad house in a poor location, overpaying for the property and more.

Related:

• How to Finance Real Estate Investments

Video Transcript

Rafi:  Good afternoon and welcome to another edition of the Greystone Brownback session and Rafi C [?] Chief Operating Officer of Greystone Investment Group. Soon we’ll be joined by Jorge doing a live broadcast. Yes, we’re finally going to do a live broadcast from different part. Jorge is having some back issues so, Jorge hope you feel better and I hope you join soon. As always, we have our beautiful Stephany in the background. “Hi Stephany!”

Stephany: Hi guys!

Rafi: You saw her before. So, if you’re a part of my thing, you saw her before. And as always, you can find us in homes4income.com. That’s homes, the number four, income dot com. Don’t forget to subscribe to our you tube channel. It’s in the description of the video and again did we give out the gift card? We haven’t? And we got 200 subscribers so we’ll do it tonight, later today, that’s what I meant. So we’ll announce the winner later. Is Jorge joining? Jorge is still waiting to join on the broadcast. Today we have a very relevant topic in this kind of market. Right now we’re going– Yeah, you have to invite him, so. No, no, go to– Swipe left and you will find him. We’re trying to come up with how to invite people and– left, and then you hit his name and then he has to accept. We have a relevant topic today, it’s– Oh, Jorge is here.

Jorge: Hey, can you guys hear me okay?

Rafi: Jorge, how are you? Can you hear me?

Jorge: Can you hear me my friend?  Yes.

Rafi: I’m not sure if I can hear him?

Jorge: Can you guys hear me?

Rafi: Ah, we will find out if this works because I’m not sure I can hear him. Maybe we have to take the microphone off. Let’s do that. Let’s unplug and see what happens. Let’s see. And the volume’s up. I’ve got some technical difficulties here. Jorge, can you hear me?

Jorge: Yes.

Rafi: Awesome, awesome. How’re you doing, sir?

Jorge: Good, pretty good man. Hanging in there. Working from home.

Rafi: How are you feeling?

Jorge: So, so. Getting to the– Be going to the doctor in a few. Once we’re done.

Rafi: Well, hope you get better. I already did the part with the four. So let’s– I know you’re feeling pain, so let’s get right into the topic. Today’s topic, four reasons why you should not invest in turnkey real estate. And by turnkey, what do we mean by turnkey? Jorge, what do you mean by turnkey?

Jorge: That’s a good question. Turnkey is a property that is already been rehabbed and rented. So it’s been purchased, rehabbed and rented, and that’s pretty much a turnkey property.

Rafi: I think mostly purchases of retail for example are turnkey. You want to move into your own house and most people they buy them from builders, developers, stuff like that and their house is turnkey. For example, when I bought my house, it was turnkey. They built it to my specifications and it was turnkey. So turnkey is just that, you’re going to turn the key and live, okay? So that’s where the term turnkey comes up. Now, for investment that’s what we’re talking about. So,four reasons to never invest in turnkey real estate. Let’s go right into the first one. The first one is someone else does the work and someone else does, someone else takes the profits. Jorge, expand a little bit on that.

Jorge: Let me correct you Rafi. It’s not that we don’t want you to ever buy a turnkey property. It’s four reasons why you should avoid investing in turnkey real estate for the most part. All those leader’s teams out there that do an awesome job but for the most part we’re talking about the number one reason, someone else does the work and they take the profit.

Rafi: Of course!

Jorge: Somebody else is going to do–

Rafi: That’s right. If you’re the one putting the sweat, the one investing in, you want the profits. And actually, that’s what we do most of the time. We buy these properties, we rehab them, we sell them and we make the profit. We make the investment, we make the investment in work our money, of course we make the profits– A lot of sense from that perspective. Now, the number two reason why you should avoid investing in turnkey properties. You might land a crappy property in a crappy location. Expand on that Jorge.

Jorge: Well, going back to anytime you let somebody else do the stuff for you, they’re not going to do it the same way you do it. So in other words, they don’t care about you as a buyer, they only care about is to making a 5-5 margin profit. So obviously, they’re going to try to do the repairs as cheap as possible.Try to sell you the asset the highest possible. It’s just a bad formula. It’s a formula for disaster because there’s no incentive, specially those companies that do not provide the in-house property management. Those don’t care, the day after closing you never hear from them again. So you could get a crappy property in a crappy location if you don’t do your due diligence first and really look into it first.

Rafi: I think it’s very important that we mention something and– Don’t fall in love with a property. Remember these are investments, so you’re not going to live in it, okay. Yes you like the beautiful marble floors. Well, guess what? Very high maintenance, very expensive. So, you have to take a way what you normally look for in a house and think of it as an investment. Strictly as numbers. Mostly what we do, we just look at numbers first and then look at the household. We have actually probably 80% of the house that we get, we don’t even look at them because the numbers don’t make sense. Again, crappy property, crappy location, most of the time if you run the numbers on them, you wouldn’t even go there. Let alone buy them. Again, that’s very important because you said it Jorge, where people fall in love with a property and it’s a disaster like you said.

Jorge: Well, I’ve seen it so many times Rafi where shady whole sellers would take pictures of the property next door. Gem pick, cherry pick the properties that they want to show us, the neighbor properties. They show that the one in front of it it is a total disaster. So once again, they don’t have no incentive for performing. Therefore all they care is how can I put a piece of gum and glue this vanity and get the most for my money. So, that’s why we are 100% against turnkey properties.

Rafi: Excellent. Before we keep going, let’s say a shout out to Marta Rivera. Marta from Kabroan we’re friend [?]. Alexis Figueroa, also joined. Victor Flores. Victor, its turnkey not turkey. [speaks in Spanish] Este tipo come mucho y siempre está con eso. Turnkey. Okay, maybe I ate the N but it’s turnkey. Also, Alvin Dariel. hashtag enmayado. People will know. Saludos. Laura Rivera, within Puerto Rico. un abrazo. Ahora Soto Alexis as well. Y Carlos Baldo in Colorado, all the simba [?] guy. Peace out. Now, let’s go to number three. So, number two was you will land in crappy property. The number three. Man, this one happens so many times. You make over pay for a property because it’s already fixed, right. So expand a little bit on that.

Jorge: Going back, it’s the same thing Rafi. They’re going to want to get the biggest pockets for their money so they’re going to use cons of properties that are completely rehabbed, they’re going to use the best scenarios and they’re going to justify why these property is 200 thousand versus your neighbor property at 150. They’re going to justify by saying these property is the best, is rehabbed better and we had to spend all of these money to have these quality people rehab their property. Once again, their only incentive is to make a lot of money.That’s why here we are against turnkey properties. And by the way Rafi, I’ve always said this, if it’s an awesome turnkey property brother, if the property is heeling [?] 15%, 14%, 10%, 9%, will you ever sell it Rafi?

Rafi: Probably, not. Yes.

Jorge: Probably not. Everybody in the real estate investment arena market knows that the ultimate way to freedom is owning rental. So if any of these gurus are selling those rentals is because they’re not performing well.

Rafi: Well, we have situations where it looks great, the numbers are great and actually it happened once and we’re quote unquote experts on this and then suddenly a permit comes up, a lien comes up and that’s why they’re selling it for a turnkey, for so cheap.  And I want to point out something Jorge. We are in a market that is going up, okay? And I think these are the markets where you most of the time overpay. Don’t be– People go “Oh my God, the market is going 5% up, 8% up,” Don’t be afraid to negotiate. If you have a number in mind that says you know what, this property, you’re selling it for a hundred but it works for me at 95. Negotiate to 95 and if you don’t get it, guess what? You may have to say no to that property. So, in markets like this, I think more people overpay in markets like this that in down markets because of the psychology of saying you know what, the market is going up so I should pay more than what it is worth and stuff like that. When the market is going down, the psychology is different, the mindset is different. Oh it’s going down so I’m going to wait because I can pay probably lower or I’m going to negotiate hard. Negotiate hard now, regardless and do your number first before you buy the property.

Jorge: Yes Rafi. One thing I could add Rafi is that, if you still want to go for a turnkey property, make sure that you get a statement of repairs for the whole year. You want to know what are the repairs that have been done to the property. You want to know that the payments have been done on time. Maybe then if you have a tenant that has been in there for a year, no complains, no major repairs, then maybe you’re okay but I really doubt it that they want to sell that property, anyways. But if you see plumbing issue on January, plumbing issue in March, plumbing issue, roof issue in summer then you know that they’re just selling the problem to you. So you got to be careful with that.

Rafi: Yeah, absolutely, absolutely. Want to say hi to Joselyn Rivera, future doctor here in Tampa. Josie, hi to you. We have some comments here. So let me look at the comments. Victor Flores, I think from Syria, is he still in Syria? I hope so. That’s a good one Rafi, take the legal documents in case there is a loan or a lien on the property. Absolutely. We were just having this issue where– and mortgage was paid off but the satisfaction of the mortgage was not recorded in the county. so I was like– I paid off that mortgage, I paid it off. Well, their entitled company didn’t do their job and they didn’t record the satisfaction in account, that’s why is just used royalty title for you know, title needs. But for example– Say again?

Jorge: That’s why we talk about having the right team. I think it’s vital to have a title company you trust because there’s two types of Taro company. One that’s willing to build a business relationship with you and it actually looks out for you and the transitional ones. They’ll just transact for you, see you, cheaper. Maybe you’ll save a couple of hundred dollars but tell me something, what would we do without Alex?

Rafi: No.

Jorge: What would we have done if she hasn’t covered us? In the hundreds of transactions and issues that come up. Even professional, even mistakes that come from all the Taro companies, right?

Rafi: Well, this one was perfect example. This guy closed on this property and had a satisfactional recorded, had on paid taxes, had liens on the property that were paid off, okay. Yet, it was not recorded and so again it’s very important that the entire company is part of your team. But again, back to the item of our paying, you need to make sure that even on up markets you negotiate hard and fair. I understand that if the property’s worth a hundred, then guess what? You can try a good 98, but you’re not going to get 90 or 85, okay? So, do your homework before and you will have a very good investment there. And the last one is one that surprised me. When I read this one I was like hmmm? What Jorge means by this? And the fourth one is, property management may not care about your investment. What do you mean by that?

Jorge: Well Rafi, that’s a good question. That’s the reason why we like, we love the fact that we have an in-house property manager because they care about it. They care, they’re part of our team. Most property managers, they’re there for– to make their profit, to make their 10% a month and there’s repairs that need to be made, they make the 10% of those repairs, the tenant leaves, they’ll get their renewal fee. They really don’t care. As a matter of fact, we have cases where property managers from clients that have both properties elsewhere sent us the management to us because they don’t want to deal with it, they don’t want to deal with the problems and stuff like that so, it’s very naive to think that the property manager, unless he’s part of the company that got you the acquisition are really going to care about the performance of that property.

Rafi: And there’s another point Jorge. Make sure you involve the property management company in the rehab decisions, okay. Because they know what ranks in that area, okay? They know that hey, you don’t need to put granite, okay? You can put formica or porch. You don’t need to put taws, [inaudible] in itself ranks better in this area. So make them part– If you have– Again, they need to be part of your team, well, make them part of the repairs process, right?

Jorge: Absolutely Rafi, you hit it on the nail. That’s the most important thing. From day one. Actually, your property manager should be part of your acquisition team and if he says no, he should be the one really saying, “No, don’t buy in that neighborhood.” “Don’t buy that property.” He should be the one approving the repairs. He should be part of the whole process. Right point Rafi, that’s very important.

Rafi: And again, if you have a property company that you don’t have that relationship, guess what? You’re going to see tenants come in and out. And every time you have a tenants come in and out, there’s a turn expense that you have to incur, there is– Now you have to get some times a month, a month and a half of the rent and when the new tentant comes in– So, there’s a lot of expenses that kind of rack up pretty quickly. If you have a property company that you don’t have that relationship that is not part of your team, and again they won’t care for you. From their perspective, I didn’t tell you to buy a house there. I didn’t tell you to put that type of bathroom there. So, they may say: “You know what, this property is hard to rent because you didn’t do the repairs the way I would’ve done it.” So there’s nothing invested from their perspective, it’s what we’re saying.

Jorge: Like I said Rafi, if the property manager is not part of the acquisition team, he could care less. He actually gets incentivized for every time you fail in your property, any time you have to put a new tenants, he gets incentivized. If there’s repairs, he gets incentivized. The only way like our case, when they’re part of the acquisition, part of the same company, understand that if we don’t perform. This client is not going to buy more properties. The only thing they really care, otherwise they could care less.

Rafi: Right, right, right. So, again, let’s go over– Oh, more people joined? Yeah, let’s see. Matt Nagy of course, from Graceton acquisitions. So that’s great Matt. So, let’s go over the four reasons why you should avoid investing in turnkey real estate. The number one, someone else does the work, which means someone else takes the profit. Number two, you might land in a crappy house in a crappy neighborhood. Number three, now that you landed in a crappy house in a crappy neighborhood, you overpaid for it and number four, property management may not care about your property was never not invested in it from the get-go. So again, those are four reasons to avoid investing in turnkey real estate. Jorge, where can they follow us?

Jorge: Rafi, they can always find us at homes4income.com. That is homes the number four, income dot com. Rafi, and I want to finish with something. We’re not saying that there’s people out there providing good services when it comes to turnkey houses. But we prefer this service, I will hold hands, buy the property with you, you get a better view, if we have the property together you get a better view. By the way you know, the issues of the property from day one and then we rent the property together to make sure it’s not somebody’s uncle that was placed there and was paid a thousand dollars to stay quiet for thirty days? Do it– And it use the same result, doing the turnkey service it’s going to take a little longer but at the end it’s going to give you a property with more equity and a property that you know intimately. I hope that makes sense.

Rafi: Yeah, yeah. So again, don’t forget to subscribe to our you tube channel. Hey, Jorge we got to a hundred and we forgot to give the gift card? What the heck? We’ll do it– I’m going to announce it on our next Groundback session. Let’s announce the winner on our next Groundback session, we’ll do that. So again, you can find us at homes4incomes.com. That’s homes, the number four, incomes dot com. Jorge, hope you feel better and next time you’re here with me sit up over there. And again, join us next week hopefully in our next Greystone Groundback session. Thank you Stephany.

Stephany: See you guys.

Jorge: Thank you guys.

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