BiggerPockets Real Estate Podcast Summary: "Is This the Most Beginner-Friendly Way to Start Investing?"

Release Date: November 27, 2024

The latest episode of the BiggerPockets Real Estate Podcast delves into the nuances of turnkey investing, presenting it as a potentially beginner-friendly avenue for aspiring real estate investors. Hosted by Dave Meyer, the episode features a seasoned guest, Chris Clothier, a veteran in the real estate investment community and founder of REI Nation. This comprehensive discussion uncovers the mechanics, benefits, risks, and strategic considerations essential for anyone contemplating turnkey investments in today's dynamic market.

Introduction and Guest Background

Dave Meyer kicks off the episode by introducing Chris Clothier, highlighting his extensive experience and significant contributions to the BiggerPockets community over the past two decades. Chris operates REI Nation, a business model centered around purchasing, renovating, tenanting, and selling properties to investors seeking passive investment opportunities.

[00:00] Chris Clothier: "Turnkey investing could be right for you if you want all the benefits of owning rental properties without having to do a lot of the work yourself."

This introduction sets the stage for an in-depth exploration of turnkey investing, leveraging Chris's expertise and practical insights.

Defining Turnkey Investing

Chris begins by providing a clear definition of turnkey investing, emphasizing the comprehensive nature of the process:

[03:54] Chris Clothier: "Turnkey means that there's one point of contact, there's one source of truth. So in the end, it's nothing more than just passive real estate, but all the heavy lifting is done for you on the front end."

He explains that turnkey investing involves a company handling the procurement, renovation, and management of a property, thereby offering investors a stabilized asset with minimal involvement required.

Benefits and Ideal Investor Profiles

The conversation transitions to the benefits of turnkey investing, particularly its appeal to two primary investor types:

1. New Investors: Those who lack an existing portfolio and are pressed for time due to active careers or family commitments.
2. Experienced Investors: Individuals seeking to scale their portfolios efficiently without the added operational burden.

[07:27] Chris Clothier: "For us, it's a mix of two types of investors... new investors that don't have a lot of time or built-in expertise, and very experienced investors looking for a return on their time."

Chris underscores that turnkey investments allow these investors to build their rent rolls and balance sheets without being bogged down by day-to-day management tasks.

Risks and Misconceptions of Turnkey Investing

Despite its advantages, Chris cautions against the widespread misuse of the "turnkey" label within the industry:

[10:25] Chris Clothier: "The word turnkey is neither a noun nor a verb, and unfortunately, it's been used as both... Most turnkey investors are going to lose."

He highlights that many companies erroneously claim to offer turnkey solutions, leading to investor losses due to fragmented responsibilities and lack of accountability. Chris stresses the importance of understanding that true turnkey investing should simplify the investment process by providing a single, reliable point of contact.

[11:39] Chris Clothier: "Turnkey is meant, in my world, it's meant to lessen the stress for the investor because there's one point of contact, there's one source of truth."

Characteristics of a Good Turnkey Deal

Transitioning to the criteria for a successful turnkey investment, Chris emphasizes the significance of targeting median-priced properties:

[23:22] Chris Clothier: "I would invest as close to median value as possible because the majority of renters in any market are going to be in that middle section."

By focusing on properties near the median price point, investors increase the likelihood of maintaining high occupancy rates and ensuring flexible exit strategies, whether selling to owner-occupants or other investors.

[24:11] Chris Clothier: "A majority of the renters in a market are going to be renting homes that are at median value and just below."

Incentive Alignment Between Investors and Companies

A pivotal part of the discussion centers on the alignment of incentives between investors and turnkey companies. Chris illustrates this by describing his company's integrated approach, where REI Nation not only manages properties but also retains the capability to repurchase them from investors when needed.

[31:45] Chris Clothier: "If they own the management company, then they no longer have to rely on turnovers. They are able to provide the best services."

This circular transaction model ensures that both parties have aligned interests, fostering a mutually beneficial relationship where the turnkey company thrives as investors continue to expand their portfolios through REI Nation.

Expected Returns and Strategic Advice

When addressing return expectations, Chris outlines what constitutes a favorable return in the current market:

[35:44] Chris Clothier: "If you can get a consistent and reliable cash on cash of six and a half to eight, that's hitting home runs."

He acknowledges that returns around 5.5% are acceptable for highly reliable properties, especially in a market characterized by fluctuating borrowing costs and variable demand.

Furthermore, Chris advises investors to prioritize low vacancy rates over rent increases, emphasizing that consistent cash flow from occupied properties is more valuable and sustainable in the long term.

[36:55] Chris Clothier: "You care about vacancy 100%. It's reliable, consistent revenue and it's better for the tenant."

Conclusion and Final Insights

In wrapping up, Chris reinforces the importance of due diligence, patience, and partnership with reputable turnkey companies. He advises against rushing into investments without thoroughly understanding the turnkey provider's capabilities and track record.

[38:06] Chris Clothier: "Work with companies directly. There are no shortcuts to this."

Dave Meyer echoes these sentiments, highlighting the necessity of aligning incentives and ensuring that both the investor and the turnkey company benefit from the arrangement.

[39:00] Chris Clothier: "If you look up and you say, how is this person making money? And they're making money off of me instead of making money with me, then you don't need that person."

Key Takeaways

• Turnkey investing offers a passive investment model, ideal for both novice investors with limited time and seasoned investors seeking portfolio growth without operational hassles.
• Authentic turnkey companies provide a single point of contact, managing all aspects from acquisition to property management, thereby reducing investor stress and simplifying the investment process.
• Due diligence is paramount. Investors should vet turnkey providers thoroughly, ensuring they have a proven track record, transparent operations, and aligned incentives.
• Focusing on median-priced properties enhances occupancy rates and resale flexibility, crucial for maintaining consistent cash flow and achieving reliable returns.
• Aligned incentives between investors and turnkey companies foster sustainable, long-term partnerships, ensuring mutual growth and success.

Notable Quotes

• Chris Clothier on Turnkey Definition:

  "[...] there’s one point of contact, there’s one source of truth. So in the end, it’s nothing more than just passive real estate."

• Chris Clothier on Misuse of "Turnkey":

  "Turnkey is meant, in my world, it's meant to lessen the stress for the investor because there's one point of contact, there's one source of truth."

• Chris Clothier on Investment Strategy:

  "I would invest as close to median value as possible because the majority of renters in any market are going to be in that middle section."

• Chris Clothier on Returns:

  "If you can get a consistent and reliable cash on cash of six and a half to eight, that’s hitting home runs."

• Chris Clothier on Incentive Alignment:

  "If you look up and you say, how is this person making money? And they're making money off of me instead of making money with me, then you don't need that person."

This episode serves as a valuable resource for anyone considering turnkey investing, providing clarity on what to look for, potential pitfalls, and strategies to maximize returns while minimizing operational burdens. Chris Clothier's expertise offers listeners a roadmap to navigate the complexities of real estate investment with confidence and informed decision-making.

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