Is This the Most Beginner-Friendly Way to Start Investing?

Summary

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

Release Date: November 27, 2024

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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.

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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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Transcript

[Dave Meyer]

Do you want all the benefits of owning rental properties without having to do a lot of the work yourself? If so, turnkey investing could be right for you. Everyone, it's Dave. And if you've been around the BiggerPockets community for a while, you may have heard of a guy named Chris Clothier. He's been on this podcast a couple of times, or you might have seen him in the BiggerPockets forums where he's posted more than 10,000 times. Kris has done a lot of stuff in real estate. Right now he operates a business called REI Nation, where they buy properties, fix them up, find tenants, and then sell them to investors as sort of a nice complete package for people who want to operate on the more passive side of the real estate investing spectrum. In addition to this business, Kris just happens to be one of the most savvy investors that I know and has really seen everything and done most strategies, having been in real estate investing for over two decades. So today I'm going to pick his brain about some topics that sure apply to turnkey investing, but also apply to anyone who wants to operate an efficient real estate investing business or portfolio. So let's bring on Kris. Kris, welcome Back to the BiggerPockets podcast. It's good to see you.

[Chris Clothier]

Yeah, you too. Thank you for having me.

[Dave Meyer]

Oh, it's a pleasure. How many times have you been on the podcast, do you know?

[Chris Clothier]

Yeah, this will be number five.

[Dave Meyer]

You might be one of the top returning guests then. 5. I don't know anyone else who's been on five times, you know, but.

[Chris Clothier]

But the crazy thing is, is it's been a while. It's. So I was on four times, but I've been, you know, I've been on BiggerPockets since 09, so I was on four times from the very early stages and then as we kept evolving in business topics. But it's been since COVID Covid was the last time that I was on here. So. Glad to be back.

[Dave Meyer]

Yeah, well, I'm really excited to have you back because I really like these types of shows where we talk to someone who's been in real estate and been a part of the BiggerPockets community for such a long time and figured out a way to evolve and adapt to the many, many different real estate climates that we've seen since 2009. So let's maybe before we jump into that, can you just tell us a little bit about how you got started back in 2009 and just like an overview of what you've Been up to, up until the last couple years because that's where we're going to really dig in today.

[Chris Clothier]

Yeah, so you know, we had, we got started well before that. I've been doing in real estate, specifically on the business side since 03. And I got started by watching Carlton Sheets. I bought the Carlton Sheets how to be a Real Estate Investor program from late night tv. Some people may not even know what that is at this point.

[Dave Meyer]

Was it, oh wait, I'm just curious, what format was it? Is it books or VHS tapes or what were we talking about?

[Chris Clothier]

It was nine DVDs and okay, probably a dozen little workbooks printed out, you know, like softback workbooks printed out. It was, plus another 12 CDs, you know, back when it probably cost 3 cents to produce it. It's just a box full of junk. It was, you know, like overwhelming. It was the pre days when, you know, you would pay $100 to get all of this education. It would take you months to actually get through. And a week later it's a call of, you know, would you like to join our exclusive program and we'll hold your hand kind of thing. But hey, it got me started and I still give it credit because I learned something.

[Dave Meyer]

It sounds like you've come a long way in the last 20 years. And if you do want to hear about the rest of Chris's journey, make sure to go check out some of the other episodes he's been on and we'll put those in the show below. But today, Chris, I really want to focus on turnkey investing. This is an area you have a lot of expertise in and I think it's really one of the good options for investors who want to get started or build their portfolio today. So maybe you can just explain to us what turnkey investing is in the first place.

[Chris Clothier]

Sure. So to me it describes the process of someone else, an individual or a company has taken the risk of identifying and using their money to purchase a property. Then they've taken the risk of creating a scope of work and completing that scope of work on that property. They've taken the next step of residenting the property, putting a resident into that property. And now they offer you as an investor a stabilized asset that at this point is performing. And this is the key for me. They offer you an option for in place property management within their company. And the reason why for me that's so important is going forward, real estate is real estate. There will, there will be issues, there will be move outs, there will be maintenance, there will be items that come up. Nothing changes with that. But the reason why that, to me is. Is the actual definition of turnkey is that there's one point of contact.

[Dave Meyer]

Oh, I see.

[Chris Clothier]

There is no, you know, kind of. It's. It was the. It was the renovation's fault. No, it was the management's fault. No, it's the renovation's fault. And you as the investor, you're trying to make three different phone calls. The management company says, hey, it wasn't renovated very good, so it's not our fault. You have maintenance. And the renovation team says, well, the management company did a bad job with their resident selection, so it's not our fault that there's a maintenance item already and you, as the investor, are left. This doesn't feel very turnkey. This just feels like I bought a stabilized property and it's not performing very well and nobody wants to take responsibility. 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. 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.

[Dave Meyer]

I think that the value of what turnkey, in the way that you describe it offers is that when we talk about, quote, unquote, real estate investing, you are not just investing like it, you know, buying a stock, obviously, or buying cryptocurrency where it's passive. You're actually starting a business. And what has always intrigued me about turnkey investing is that it takes a lot of the harder business operations outside of your hands and lets you be more of actually just an investor. You're kind of just purchasing an asset like you would with a stock. There's still more you have to do than if you're just buying a stock. I don't want to oversimplify it, but like Chris said, you know, rather than having to find your own property, identify the right neighborhood, find a property manager, find tenants, all those different things, you just work with a turnkey company that does that part for you, and you get to sort of sit back and be more just of an asset owner rather than an active business person inside that business.

[Chris Clothier]

Yeah, you're. You're building a balance sheet, you're building your rent roll. And in doing that, you're not having to make all the big decisions on which assets to put in. You do, but you should get a very neatly finely packaged final product to decide on. So rather than making a hundred Decisions along the way. You make one decision on the back.

[Dave Meyer]

End and does this, does turnkey? Well, I know you have a company, you do this kind of stuff. So like are your clients mostly new investors or people trying to scale it? What is the profile of an investor who benefits most from this approach to real estate?

[Chris Clothier]

For us it's a mix of two types of investors, but they do share one thing in common and I'll get to that on the backside. The two kinds of investors, one new investor. I do not have an investment portfolio but I know this is the route I want to take most in that scenario. They're in hustle mode. They're trying to actively build their careers, they are building their families. They are, I would say, dreaming their life as they go. And they understand that real estate's important. They've got to have a piece of their future growth in real estate. So that's the first one. A new investor that doesn't have a lot of time built in the market. They don't have a lot of time built in how to, but they know they need it. The second investor, believe it or not, and this is, it's, I would say this is about 50, 50, very experienced at real estate, very experienced at investing in general and they are looking for a return on their time. That's why they are turning to turnkey. I'll give you a very particular scenario that happened two weeks ago. A group of investors, there was two of them that were selling a portfolio of properties in California that were commercial light industrial and it wasn't time intensive for them. They had management companies in place but they had hand selected these properties well over 10 years ago for a particular use and purpose. Now in the past decade they have since built other companies that they're actively operating and running and they turn to turnkey. Because I want to take these properties and I want to 1031 exchange them into a large portfolio of single families that have a lot of upside, have management in place. I don't have to do any legwork on the front end. They understood that their legwork was us. They needed to do their due diligence on us and how we were going to perform for them. Outside of that they were strictly looking for I'm taking these assets and selling them. I'm putting my money into these assets here and I need the best management company. It's just balance sheet. They're creating a new balance sheet. That's all it was.

[Dave Meyer]

That makes a lot of sense to me. One, it's a great way to get started if you're busy and you haven't yet learned the ins and outs of operating the business. And you could just like, it's not as easy as just clicking a button, but compared to doing everything yourself, it's, it's a, it's a lot more on the passive end of the spectrum. And we'll get into this more. But I would assume lower risk too because you have experienced people doing a lot of the work for you. But then I also imagine, like myself, I try and diversify my own portfolio. But like that, like I do some properties where I'm actively involved and then I invest in funds or syndications because they're more passive because I can't put a lot of time into every deal I do. But I want to scale faster than my time allows. And so I've always been sort of intrigued by turnkey because it would allow me to sort of scale my rental portfolio faster than I currently do, to be perfectly candid.

[Chris Clothier]

Sure. And it, and it can. But even as you and I are sitting here talking like a really big point of emphasis I want to make today is that the word turnkey, it's neither a noun or a verb and unfortunately it's been used as both and it's become both. A noun, a turnkey property, as if that is descriptive. It's no longer descriptive. It's a word that everyone uses. And then also I invest turnkey, meaning I invest with little work, little anything. As a verb. To me, they both have done a lot of harm to the industry itself. When I use the word like as a noun or verb. Most turnkey investors are going to lose. Now, they may lose money or they may miss their objectives, but they're going to lose because they're, they are investing, buying the word. So there's a lot of misnomer, There's a lot of, hey, I'm just going to buy turnkey. Totally passive, everything's done. For me, it's super easy. And it just really lowers the alert level of an investor. It lowers the attention they need to pay to what they're doing. And it allows a lot of. I don't want to use the word unscrupulous because it makes it sound like it's intentional, but just allows a lot of error.

[Dave Meyer]

Yeah.

[Chris Clothier]

To enter into the equation.

[Dave Meyer]

I guess that makes sense about the risk because like, obviously I, my assumption when I said it was lower risk is that you are doing your diligence of working with a qualified absolutely high integrity operator. But obvious to your good point, it should be called out that not all turnkey operators are the same. Okay, time for a break, but more with Chris Clothier when we come back on the BiggerPockets podcast.

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[E]

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[Dave Meyer]

The real estate market right now.

[E]

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[Dave Meyer]

Let's get back to my conversation with Chris Clothier. This is resonating with me today because I spent the early part of this morning dealing with a contractor who was threatening to put a lien on one of my properties because my property manager didn't pay a bill. And I was like, of course I would have paid it, but you sent it to the property manager who somehow lost it. And like this is just how real estate goes. Like there's so much of the business is just coordinating between disparate parties who have no incentive to coordinate with each other. And you're sort of just quarterbacking the whole situation and you get a hang of it. But it can be annoying for sure. And I can imagine that having basically just it's sort of like customer service, right? Like you have a point of contact that you can call and they sort of deal with whatever situation arises, whether it's on a maintenance side, tenant side, asset management side.

[Chris Clothier]

There's misconception and misdirection when it comes to turnkey. And the way that that a lot of turnkey companies try and say they're Incentivized to have, you know, their interests aligned is if you're happy, you'll buy more properties from me, and if you're not, you won't. But when it comes down to it, if they're not responsible for end to end, like a circular transaction, for instance, my company, we buy back a lot of properties from investors. Now, it could be year three, it could be year seven, it could be year 15, but we're there. We are able to purchase properties back when an investor is ready to exit out of an investment. But we can because we bought it, we renovated it, we sold it, we managed it, we know every detail about the property and it's an ease of transaction for the investor. So it's the ability to get in, make your investment, earn your return, exit easily, and either move into a new investment with us or into something else. But that circular transaction doesn't exist with most companies that use the word turnkey to describe what they do.

[Dave Meyer]

Yeah.

[Chris Clothier]

So they take pieces of it and they say that for them. What turnkey means is, I'm going to find it, you're going to buy it, I'll manage a renovation for you and introduce you to a management company. You might as well at that point hire an agent and make sure that you have a professional with a, with a fiduciary responsibility.

[Dave Meyer]

Yeah.

[Chris Clothier]

Rather than just buying from an individual, there's no risk.

[Dave Meyer]

Yeah. Because when you're saying done well, Right. You said that the turnkey company should be purchasing the property and doing the renovation while they're the owner of the property and then only selling it to an investor or passing it off to an investor once it's de. Risked by having the renovation completed.

[Chris Clothier]

Right. And the reason why I bring that up is that if somebody advertises turnkey, but all the risk is on you, what, what value are you truly getting? You're just, perhaps you trust them, perhaps they're fantastic and they're, you know, they're, they're going to be able to help you. But what value did you get other than you met somebody, you came to them because the word turnkey told you that it was less risk, less work, easier to do. But in the end, nothing's changed. It's just a real estate transaction. And, you know, the reality is that turnkey done well, it won't be instant equity that you get in the property, it'll be bought equity, whatever. Especially if you're using financing. Whatever you put down, you're probably going to pay closer to retail pricing on a property. Because the advantage, the purpose of it is I'm buying a properly renovated property that is going to be, should be less headache for me, should be managed well and should be a relatively simple, straightforward investment over the next few years where the company I hired is able to perform at a high level. You know, I'm saying a lot of jargon there, but that's the, that's what it's, that's what it's supposed to mean. Turnkey means that I'm not having to do a lot of work going into this. I make sure and vet the professional and they're going to deliver to me a smooth, relatively stress free and consistent investment. Otherwise why am I paying retail value?

[Dave Meyer]

Yeah, you're hitting on two of my favorite themes here, Chris. What is incentive alignment, which I want to come back to.

[Chris Clothier]

Sure.

[Dave Meyer]

But the second thing is about the risk reward relationship in real estate and all investing. Right. I try and stress this a lot to people, but the more risk you want to take, the higher the potential reward. But when you work with a turnkey company, you are basically paying them to lower your risk. Right. And so that means that you are, there is going to be in some ways less opportunity for reward. And I'm not saying you won't make money, but as Chris just said, you're not going to be buying it at a super steep discount. Because Chris and his team, I'm going to ask you about this in a minute. But I assume need to make money somehow. Right. They're not doing this out of the kindness of their hearts, but they're basically. Or Chris and other reputable turnkey companies are taking on that risk for you and so they're going to enjoy some of the benefit. That's what a good partnership is, right. Is both sides have mutual benefit. But I think I've heard people at turnkey say, oh, you're buying retail, it's not a good deal. Well, it depends the kind of investor you are. Right. Like if you want to go and do all the work yourself, you're probably not going to be attracted to a turnkey investment. If you're saying, hey, I'm trying to buy a property for the next five, 10, 15 years, I don't want to do a lot of work and I'm willing to pay retail and they're going to de risk it for me, then that can be a great deal for you. It just depends on your personal preferences.

[Chris Clothier]

If your investment strategy, your high risk, high reward already is in oil and gas futures or you have cryptocurrencies that you're heavy into and you're diversifying into real estate because you can leverage your purchase, you can use a fraction of your money to own the whole investment, and then you gain. For each of us, it'll be different, but some form of tax advantage from that somewhere along the way, you know, more for others and less for, you know, some. But you know what I'm saying, there's some there. And ultimately, in the end, what you're doing at this point is I want less risk. I want a stable and high likelihood that when this investment's done, my up will be that, you know, let's say you put 25% down. My 25% has appreciated, but so has the bank's 75%. And along the way, a resident gave me every dollar I needed for the operation of that asset. That's it. I didn't make any cash flow in the end. I made a little bit here, a little bit there. But after seven years, they gave me all the money I needed for my cost. The value went up, they paid my note down, and I got all my money plus a, a standard 8 to 10 to 15% return or whatever it is being. But, but, but guess what? I got that return on the bank's money too.

[Dave Meyer]

Yeah.

[Chris Clothier]

And I can't do that with my oil and gas futures where I took big risk, but I, maybe I rewarded, maybe I didn't. I can't do that on my other investments. And the crazy thing for me is that each of us as investors, we get to decide why we're buying a piece of real estate, and we get to decide what our expectation of performance or return is. And so if my expectation is, number one rule, I'm not going to lose money, and number two, I'm going to be able to leverage myself intelligently into a better return, cash flow, you know, be damned. It doesn't matter.

[Dave Meyer]

You raise up a really important point here, Chris, which is that even within turnkey, there's just a huge spectrum of type of deals and prospective returns right now in 2024. Can you tell me a little bit about what a good deal looks like to you? And I know this is individualized to anyone, but if you were just advising, let's, let's start with a new investor who is doing buying their first deal. Like what should they look for in terms of price point, buy box and type of return?

[Chris Clothier]

For me, I would not invest anywhere that I was in the bottom quartile of the market. I would invest as close to median value as possible.

[Dave Meyer]

Why is that?

[Chris Clothier]

Because every piece of data you can look at will point to the majority of renters in any market are going to be in that middle section. There's fewer that can afford the lower end and almost none that are looking for the upper end. So a majority of the renters in a market are going to be renting homes that are at median value and just below. So median value minus about 10%, you know, in that area right there. So one, you're buying a property with the highest probability of finding a qualified renter.

[Dave Meyer]

That's such a good tip. It's the most demand, right?

[Chris Clothier]

Yes.

[Dave Meyer]

And.

[Chris Clothier]

But the demand also exists in the resale. So you're also buying in the most affordable part of a market where your exit strategies will be the probably the widest that they're going to be because not only would it be owner occupants that that's also the median price is where they're going to be the majority, but also investors. So investors that want a stabilized, proven product that you've owned for three to five years and you're exiting for whatever reason, they're going to exist there and they're going to be looking for, hey, this is just the right spot for me to be.

[Dave Meyer]

That's a great tip. I just want to reiterate that for everyone before you move on. Chris, like, just so everyone understands, if you were talking about a market, let's say that the median home price is 400,000. Chris is saying that if you buy something in the use 10%, 360 to 440,000 range, that's from, you know, around the median, you're going to always have a high chance of renters because they get most people. Just statistically, most people are going to want and be able to afford that type of apartment as a renter. And the same thing is also true when you go to sell the property, either to a prospective home buyer is going to use it as their primary residence or to another investor. And that is such a good tip because I think a lot of people say, like, hey, I can. I found this great market, it's growing. But then they try and buy at the bottom of that market because it's what they can afford, which can work. But you're taking on that risk, like you said, of not having a product that is going to be very attractive to your prospective tenants and then in the future to someone that you're going to want to offload this property to. All right, time for one last break and then we'll be back with the BiggerPockets podcast.

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[Dave Meyer]

The real estate market right now.

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[Dave Meyer]

All right, we're back with Chris Clothier.

[Chris Clothier]

Well, I tell people there's two questions that you have to ask in turnkey real estate. The first one is how. And the second one is why. And what I mean by that is, okay, I'm going to buy this property from you and I'm talking true turnkey, meaning it's, it's everything's in house. You can hire their management company to manage this asset for you. So there's again one point of content contact, one source of truth. How are you going to make this property perform? And why do you think it'll perform the way you're telling me? And those are the two most important things. And I say that because of this, a management company makes their money no matter how they want to say it, they make their money on turnovers. Your property has to go vacant in order for them to make money because a majority of the income comes from the lease up fees. Everything else, the 8%, 10%, 12%, whatever our company keeps of the monthly rent, it's, it's a pittance compared to the lease up. Again, I'm in the, I'm in the middle of it. We manage 8,000 homes. So I know exactly how the math works when you buy from a fully integrated turnkey company and you said you were going to ask me this question and I'm going to tell you, yeah, if they, if they know how to make money, meaning they are successful, that you want your turnkey company to be profitable, the last thing you want is for them not to be profitable because then they're gone. So if they know how to be profitable, they subsidize income through home sales, so they're able to buy the discount, get work done and leave enough of a spread where they can sell the property without gouging the investor.

[Dave Meyer]

Right.

[Chris Clothier]

And so they can make money but still deliver a serviceable product that the investor will not lose on.

[Dave Meyer]

It's sort of like flipping, right? You're buying at a discount, you're renovating and then you're selling it to an investor at a fair price. And that's how the turnkey company makes money and is still able provide the investor with a good enough deal that they too can earn a fair profit.

[Chris Clothier]

You nailed it. It has to be like, I don't like the verbiage of win win for everybody. But the reality is that if the investor wins, you win. Like if you priced it properly where you're not, you can cover your overhead, you can make a living, you can hire your team and innovate and grow and they win as well. They're coming back to buy more. That part of the equation is true. But here's the deal. If they own the management company, then they no longer have to rely on turnovers. So how can really high quality, and it's not just that there are multiple high quality turnkey companies, how can they provide the best services? Well, it's all going to be in the management and renovation. Those are the only two places in real estate that they can make a difference and make a property perform better. If you renovate a property properly on the front end, you save costs, especially in the first seven to ten years of ownership. And then if you are really good at the management, you can increase occupancy and length of occupancy and hold down maintenance costs, especially in those first, like I said, seven to 10 years. Those are the only two differentiators you can really force into real estate to try and make it perform better for that first period of time. That, and I use the term seven to 10 years, that poorly renovated properties, expenses are going to come earlier, doesn't really matter. It's coming. And poorly managed properties will suffer more turnover and higher costs. And that happens in all real estate. That doesn't matter if it's turnkey or you do it yourself, doesn't matter. Those two things drive up costs. And so if you get a good turnkey company that's fully integrated, that has all of those services in house, how are you going to make this property like, what do you do different that will make this have a longer occupancy or fewer expenses? If they just say, well, we're just really good at it, I mean, ask more questions. But if they can point to this is precisely how we do this and they have a track record to back it up, that's going to be the difference maker in turnkey. Because otherwise, as we said earlier, turnkey is meant as a protection of your money. You should never lose in real estate, period. But when you're buying turnkey and you're so passive, you buy from a company that there's a high, high probability you're not going to lose. Now, how can I force a return? They're really good at what they do. That's it.

[Dave Meyer]

Thank you. Well, you beat me to it. I was going to ask you about how to create mutual incentive between investor and company because I think a lot about that. I deal with this with my property managers all the time. Their incentive is to, to turn properties over. I've figured out how to give them retention bonuses instead to incentivize them to keep people. And a lot more operators are doing this now. But this is just, it's such a good point. Regardless of your turnkey or not, just figuring out the way that you and a company both win together. I know it's such a cliche thing, but it really is true that, you know, if whether it's you're working with a contractor or a property manager, like find a way that you both benefit from the same thing is going to help you go so far in this industry.

[Chris Clothier]

I agree.

[Dave Meyer]

Chris, we do have to wrap up soon, but I wanted to ask you to finish your thought because you started telling us about what a good deal looks like, especially we're ending 2024, we're heading into 2025. You told us a little bit about what the buy box should look like. But what is like the, what does a return look? What does a good return look like in 2025? Someone wants to get into turnkey.

[Chris Clothier]

So given the state of the market, the state of borrowing costs and where we are, if you can get a consistent and reliable cash on cash of six and a half to eight, eight, I mean you're hitting home runs. There's nothing wrong with five and a half today on a highly reliable property.

[Dave Meyer]

That is pretty good, man. That's higher than I thought you were going to say.

[Chris Clothier]

Well, those are no brainers. And every bit lower that you go. You know, it has to come with success. It has to become some level of advantage for you. And so you know, you go up in price point, those returns come down. But going up in price point, your advantages, for every percent of appreciation, it's more dollars. And so it's going to come down as you go up in price point. The other thing that I think success looks like today is if you're with a company that is successful at length of occupancy, at being able to extend and hold down your move out. So they're just really good at what they do. Doesn't mean you're getting rent increases, but you're not suffering move outs. That's what you're looking for.

[Dave Meyer]

Vacancy crashes, you. Yep, yes, it's the worst. Once you're in this business long enough, you, you stop caring about rent increases.

[Chris Clothier]

You care about vacancy 100%. It's reliable, consistent revenue and it's better for the tenant.

[Dave Meyer]

It's better. That's another win, win situation. That's just a better situation for everyone.

[Chris Clothier]

Yeah. So as an investor, what does successful Turnkey look like? 1, it's median priced homes. You're investing there and you're investing with somebody that can, that can demonstrate to you that they can keep your property occupied. Those are the two big things. Properties don't stay occupied if they're not well renovated and they're not well managed. Those are the two things passive turnkey investors need to focus on. I need to be buying in the right price points and if I don't have enough capital. Wait, you're not going to miss out. Believe me, anybody that says you have to buy this today or you'll know, wrong, wrong. Move away from that person. Like you do not have to be in a hurry.

[Dave Meyer]

That's great advice. Yeah. I think that especially now, like the market is, you know, weird right now, but you could take your time. Things aren't moving as quickly as they were a couple of years ago, you know, and you should, whether it's turnkey or not, be comfortable. And with whatever deal that you want to do, you know, as Chris said, the main goal is not to lose money. And real estate's pretty forgiving. But one of the few ways you can lose money is if you rush into a deal before you really understand what you're buying.

[Chris Clothier]

Yeah. Work with companies directly. There are no shortcuts to this. There's nobody out there that has the magic crystal ball. The reality is that if you're going to buy far from where you are, you need either a really, really good agent and somebody that has a fiduciary responsibility to perform for you, or you need a high quality turnkey company. What you don't need is a consultant to tell you those two answers.

[Dave Meyer]

Yep.

[Chris Clothier]

And I say that because, again, it just goes back to the whole thing of turnkey. It's spun off into all these cottage industries today, and there's turnkey for everything. But what you don't need is a turnkey coach to hold your hand and tell you how to buy turnkey.

[Dave Meyer]

Yeah. It's kind of like the opposite of what it's meant to be. Right. Like, that's if you need a coach to tell you to buy turnkey, it's not turnkey. Yeah.

[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.

[Dave Meyer]

That'S a good way to say it.

[Chris Clothier]

You don't need that. You don't need that person.

[Dave Meyer]

Well, Chris, this is great. Thank you so much for joining us for your fifth time on the BiggerPockets podcast. Congrats. And thank you so much for being such a great member of the Biggerpockets community for so long. If you want to learn more from Chris, just go to biggerpockets.com and you can see literally tens of thousands of things that he's contributed to our community for free. Chris, thanks again, man.

[Chris Clothier]

Hey, thank you for having me. See you soon.

[Dave Meyer]

And thank you all so much for listening to this episode of the Biggerpockets podcast. We'll see you next time. Thank you all for listening to the Biggerpockets Real Estate podcast.

[D]

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[Dave Meyer]

Or any other podcast platform.

[D]

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[Dave Meyer]

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[D]

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[H]

The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose, and remember, past performance is not indicative of future results. Biggerpockets, LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.