Ask Marco: Exit Strategy for Turnkey Rentals

But they write in, say hello. I would like to have your honest opinion if exit strategy really works with turnkey investments you sell, obviously I know you’re going to say yes.

Here are the reasons I don’t think it will work or fetch positive inflation adjusted returns. Okay, so let’s break this down one question at a time and I’ll give you my my honest feedback. So the first bullet point here, or the first numbered item is turnkey. As in turnkey properties is bought at a premium. It takes years to build real equity. So my comment to that is this, I wouldn’t say they’re bought at a premium at all. The properties that are sold as turnkey rental properties are sold at or below fair market value. And the reason I say that is because each and every single one of them is gonna have an appraisal done at the time of purchase. 99.9% of our investors buy with financing Fannie Mae, Freddie Mac financing, conventional financing. And so there’s a requirement to have at least one appraisal done by a qualified third party appraiser that you have no choice in.

It’s, they’re randomly assigned, and that appraiser is his, their, their job is to justify the purchase price and make sure that you’re you know, well, they’re not trying to make sure that you buy it at the right price. They’re basically saying, this is the market value. It’s up to you to, to decide whether you move forward with the purchase or not. However, I will tell you that most all the properties come in at or below fair market value. So you’re not buying at a premium. If you’re buying turnkey and it’s truly turnkey, which means that there are no capital expenditures and, and little to no deferred maintenance items, there shouldn’t be, then you are buying at a fair price. It’ll be at or below fair market value if you get a discount on it, which happens somewhat frequently because of the the volume we deal with and the providers we work with.

You might be getting a little equity bump right from the get go. So $150,000 property might be purchased by you at $140,000 price, and that’s a, a $10,000 discount in equity terms. So your comment about buying at a premium is not true. It’s not like it’s overpriced or inflated you. What you might be thinking is what if you are buying and fixing and then refinancing your own property where you’re buying it at a distressed price to fix it up, get some equity in it, then you refinance the property and you have a little extra equity or an equity kicker because you bought it distressed and took the time, energy, money taking on the risk of fixing it up into a, like, new condition with the risk of it going over budget, which means now you, you, you’ll have less equity at the get go than you had before because you had to put more money into it.

So it can go the other way. If you’re an active real estate investor, you can choose the route of finding distressed sellers or distressed properties or trying to find a real deal, meaning you’re negotiating and negotiating hard for something that is turnkey or something very close to turnkey. But to your comment that it takes years to build real equity. Yes, this is true. It does take years to build equity and especially real equity. And this is why real estate is a long-term investment. It’s a buy and hold get rich slow investment class. It’s not a three or six month flip. You’re not trading stocks or commodities. It is a buy and hold, build and hold equity over time, investment strategy with a solid asset and inflation hedge, which is what real estate naturally is. So hopefully that addresses the first bullet point here. The second is you say you typically can’t sell at retail because most of the time you are selling to another investor who is looking for a deal or a flipper who is looking to rehab the property consume by your renters.

Well, you should, first of all, you should never let your property get damaged or distressed or worn down to the point where you have to sell to someone who’s looking to flip the property because your property is in poor condition. You should always have upkeep and keep your properties in good or great condition near like new condition. And if you do do that, then you can not only sell to another investor who will appreciate the property and be willing to pay whatever makes sense in terms of the retail market or the fair market value of that property, but that’s just good practice, you know, to keep the property in good condition. ’cause It’s not only for you and to protect your asset, it’s also for your tenants and their living conditions and their willingness to want to stay and pay maximum or top dollar in rent.

So when you say you typically can’t sell it at a retail price, that’s not true. ’cause If you’re selling it to a retail buyer, someone who’s gonna live there, then you’re competing with other properties out there that are gonna be priced at whatever market is. So I don’t think you lose anything other than time, but you shouldn’t be losing on price if you’re selling to another investor. It’s just an a negotiation. Now granted, residential property, one to four units are gonna be appraised based on the market comparables in the area, not based on cap rate or cash flow. So, you know, again, keep that in mind. Let’s see what else you say here. Yeah, you’re, you’re not selling a deal, you’re not creating a deal for someone else if you’re gonna sell because you have to then just sell at a fair price, whatever you negotiate.

So your third item here is I guess a continuation from question two. So you were left selling below market rate or below market price, and then also adding six to 10% in closing costs, including realtors, commissions, or selling costs or selling commissions. Yeah, that may be true. You can expect to pay, you know, between five to eight, even six to 10% all in your closing costs plus real estate selling fees. But it can be less than that. It could be half of that, it could be less than half of that. And I’ve seen that many times. You can sell your property on your own. It’s with the technology online today, that’s not hard. And it’s something it’s certainly an option to consider even if you are a remote or out of state real estate investor. There are a lot of tools online now to help you do everything from soup to nuts cleaning repairs, maintenance turnovers, listing the property on discount services, signage, discounted, you know, commissions or realtors fees.

All of that stuff can be done remotely. You never have to step foot in or on the property. So there’s no need to sell blow market value or fair market value. And yeah, you could sell it on your own too and save, you know, the agent’s fees among other things. So keep that in mind. But I’m gonna make a big comment here in in a minute about selling in general because I don’t think you should sell your real estate ever unless you have a, a real need to sell it like an emergency. But your fourth question here is, if you were to sell to a retail customer, then you have to wait until your tenant has vacated a rehab or rehabbing the property and then let it sit vacant for a couple of months. All these add costs to your exit process, that’s not necessarily true.

I see where you’re going with that. If your strategy, your exit strategy is to sell the property retail to a retail buyer, not to another investor, you don’t have to vacate the property. It’s, it is easier and shows better if the property is vacant and you have it cleaned up or even staged. But there are a lot of tenants who know they’re moving out or are being forced to move out that will say, yeah, no problem. You know, just when you need a showing, just have ’em contact me or you set it up and coordinate it with them, or your property manager does. And then let the party in with the tenants in the property. That’s not ideal. I don’t recommend that, but it is doable and common. So you don’t have to wait until the tenant vacates. You don’t have to rehab or renovate the property unless there’s something that is in eyesore and it’s blatantly obvious, then you can deal with it and let, what, what else did you say?

Here you have the property and let the let it go vacant for a couple of months. All these well, you don’t have to let it stay vacant either. It’s a, it’s the moment a buyer, whether it’s an investor or a retail customer, meaning a home buyer moves in, then you can do all that while you have a tenant that is in the process of moving out. So keep that in mind and then you just conclude your message here with please help your viewers and listeners understand how you and your investment counselors can exit the property without taking a loss. So the final comment I wanna make to that is this, again, I said it before, I’ll say it again, generally speaking, and most of the time you invest in real estate to hold your wealth and create wealth that’s in the form of equity growth and over time cashflow.

But cashflow, you know, to a comment you had made in your email, you know, cashflow is what I refer to the glue that holds your real estate deal together, which is similar to what you know, you’re closing your email to me with that is, that cashflow will be consumed by the maintenance capital expenditures, increased taxes, increased insurance and whatnot. That’s partly true because as rents go up, they go up in line with inflation, increased taxes, increased insurance, so they should increase in lock step. So as your carry costs and, and expenses go up, so do your rents, you just increase your rents. That’s how you keep up with with inflation and whatnot in the area. So again, to my point, you don’t sell real estate. You keep it, you hold your wealth in it, you create more wealth, you build your portfolio, you increase your rents, increases your cashflow, which it will include disposable, spendable income.

And then ultimately at some point, if your strategy is to pay off the mortgage, then you’ll have no debt service. And now that debt service now becomes positive cashflow, which is real spendable cash income to you. So cashflow doesn’t necessarily have to be considered a myth in time. It becomes a real substantial thing for you where it’s, it is truly income and can be discretionary. But again, keep in mind that you should buy and hold real estate, quote unquote forever. You know, if you don’t keep it, put it in your trust you know, pa pass it along to your heirs, your family, whatever it may be, you can borrow against it, you can leverage it which allows you to invest in more property or other investments in other asset classes. So I understand your point, but don’t be shortsighted about it. It is a great wealth preserver and wealth generator over time.

It’s a get rich slow investment class and strategy. And the cashflow may be consumed entirely in the first few years because of expenses, maintenance capital expenditures, you know, utilities, whatever else that you might be responsible for. But a good deal will generate a positive cash flow from the, the beginning bank it don’t spend it. And then as the years go by, you’ll have more spendable cash and less of a need to bank it. So I hope that makes sense. Anyway, I appreciate the question and all the comments. This is very good stuff, especially for everybody listening to this and thinking about stuff like this or not thinking about this ’cause they’re not aware of it. But, you know, generally speaking, your exit strategies is typically buy and hold, refinance if and when needed, or do a 10 31 exchange, a tax free exchange into other property or more property if and when needed.

But just selling as an exit strategy, just because that’s what you think is the only exit strategy is not really a good exit strategy in most cases. And it’s, it’s also being shortsighted because selling is not the only exit strategy for turnkey rental properties. I appreciate you sending in that question and the comments.

So that is it for today. If you have any questions about real estate investing finance that you’d like me to answer, even personal questions, just go to passive realestate investing.com and click on the Ask Marco button. Remember to subscribe to the show. Itunes is our biggest platform, but we’re available on every platform, everywhere, all around the world. Just click on the subscribe button, share the show with your friends and family and other like-minded people. Visit us on iTunes and leave us a rating and review. I read all the reviews and I appreciate all the five star ratings that you guys have provided. That’s it for this week. Thank you for listening. I’ll see you all on our next episode.

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