399: Making Turn-Key Work

SHOW NOTES FOR EPISODE 399: MAKING TURN-KEY WORK

Turn-key rental properties can be a disaster or a great way to get started and grow a rental property portfolio.  Savvy investors need to know what to look for and what is required to make turn-key properties work for long term success.  In today’s podcast, real estate investor, developer and turn-key provider Jame Wachob shares what he is doing in the Memphis market to make turn-key work every day for his clients.

What You Will Learn

• Why the last recession was the best thing that ever happened for today’s guest
• Can you can still make money building new homes for rentals?
• How to know the best places to build new rentals
• What a “blended” real estate portfolio is and when it makes sense strategically
• Why 3 year leases are the only leases that make sense
• What the three areas are where landlords typically lose money on a rental property
• When it is better to own 12 rental homes at retirement instead of 200
• Who are the best 2 tenant types
• How to find turn-key properties that meet the 1% Rule
• What are the 3 things you need to succeed as a landlord

About Our Guest

James Wachob

James Wachob was born and raised in Memphis, TN. With nearly two decades of experience helping investors buy, renovate, and manage properties, he focuses on specific areas around Memphis where rental properties are in demand by qualified tenants.  His team buys houses, commercial buildings, and apartments, fully renovating them and bringing them up to current code requirements and modern-day standards. He has built 300+ brand new homes and holds two Real Estate Brokerages with licenses in TN & MS. His focused approach with TurnKeyInvest.com, iBuyYourHouse.com, FoundationPM.com, and JamesWachob.com.

More About James

• Born and raised in Memphis
• Knows the area well
• Left to go to school in Missouri, majored in theology and then came back
• Got a job with a new home builder selling their houses
• The company put him to work selling houses before he had his license (not something you could do today)
• He was more interested in watching the homes being built than selling the houses
• He was also more interested in seeing how the company could scale to 1,000 homes a year and how the company operates
• He learned a lot by asking a lot
• The majority of Realtors don’t know a lot about real estate investing
• When he started, he thought the only way to earn money was through commissions or building a house and selling it for a profit
• Then the recession came
  • It was a horrible thing for America
  • A horrible thing for a lot of people in real estate
  • But it ended up being the best thing that ever happened to James!

A Career Shift

• The building company he worked for announced that they were bankrupt
• These were the wealthiest guys James knew and now they were broke
• They had to lay off sales people and builders
• They left houses unfinished and the bank took the homes back in foreclosure
• Luckily, James was single and could live inexpensively
• He decided to stay in real estate
• About a year into the recession, he ran into a group of real estate investors from California
  • They saw the opportunity to buy inexpensive land that was previously owned by builders but now was owned by the bank
  • They were buying land that had previously sold for $65,000 for only $2,500, building a brand new house on the property and renting the homes out to tenants
  • Hedge funds, institutional and out-of-state investors were buying up these lots
• For the next 5 years, James worked with these investors and helped them buy lots, build inexpensive homes on the lots and rent the homes out to tenants
• He would build 3 bedroom, 2 bath, 1,300 square feet homes with a two-car garage on each lot
  • He sold the homes for $120,000
  • Today, they are valued at $160-180,000
  • New homes attract a higher level of tenant for rentals
  • These were good homes, for example, for a mid-level Fed-Ex employee that just moved to the area
• His clients were:
  • First-time home buyers
  • Empty Nesters
  • Divorced people who were downsizing
• He still does the same thing today but the cheap lots are few and far between
• If he can find a lot today for $30,000 that’s a “smokin’ deal”
• In 2011, there were 1,400 bank-owned lots in the Memphis area – today there are zero!
• Today, it could costs between $25-30,000 just to take raw land and convert it to a home site to build on
• The Built-to-Rent model sadly is dying today in Memphis

Building New Homes

• Easier than some renovations
• Being successful is sometimes just a checklist you follow with very competent contractors you can trust
• He learned just by watching the contractors building homes at his first job
• If you mess up, you’ll learn about it from Code Enforcement and, when the house is completed, you’ll learn again from the home inspector
• There’s some degree of trial and error for people building for the first time
• It’s not difficult if you have the right competent contractors
• Typical build time is 4-5 months
• He built a model home for one community in 2 days
• He’s built 3-5,000 total homes and 350 of those are rentals
• Where to Build
  • Memphis has clear borders and a limited area to build
  • Western border is the Mississippi River and the state of Arkansas
  • Southern border is the state of Mississippi
  • When picking an area to build, a lot depends on the infrastructure in place:
    • Sewer needs to be available
    • Proximity to major employers (and Memphis has some great large employers – Fed-Ex, St Jude’s Hospital, Nike, etc.) – no more than 30 minutes away from jobs
  • Memphis is a logistics hub – major Interstate highway system for town of only 1.3 million people greater metro area
    • Highway 1-40 east to west across U.S.
    • Highway I-55, Chicago, through Memphis, to New Orleans, north to south
    • And there are also two loops that go around town
    • Because Memphis is a logistics hub, tons of trucking companies, river, rail, Fed-Ex based there – air cargo business, Memphis is a logistics town
  • Rush hour is not crowded
  • As a property manager, it’s a real strength – it’s very easy to get to any of their properties from one location (from fixing a toilet to installing a ceiling fan) because of the transportation infrastructure

Building His Personal Portfolio

• As he was working with Californians, major hedge funds, building houses
• He saw what they were doing and saw that it was not that difficult
• They would put a sign in the front yard of one of their houses (before it was even completed) and it would be rented
• James thought, “I should build some houses for myself in this process.”
• So, he would build 10 houses and keep one to rent out for himself
• He was still living well below his means and was still single at the time
• He grew a portfolio of of rental houses that way
• During that time, he read Robert Kiyosaki’s book Rich Dad Poor Dad
• Before that, he never thought about owning rental houses.  He thought that was only for the “elite” and the super wealthy.
• He also found that financing was key
• In America, he saw that we were spoiled with the financing options we have for rental properties
• He feels you new investors need an experienced investor to help develop a plan
• Understanding the “10 Golden Tickets”
  • As an American, he is entitled to maximum of 10 Fannie Mae, Freddie Mac loans
  • It used to be only 6 loans a few years back
  • Fannie Mae and Freddie Mac is a government-backed entity that secures/insures your loan, in case you default it
    • It allowed him to buy properties for as little as 20% down, plus closing costs
    • He didn’t have $120,000 to buy a brand new house but with Fannie/Freddie financing, he could still acquire one
    • He could buy a property once a quarter or one a year from the profits he made building houses for others
• He hasn’t held on to all his houses
  • Clients would end up with a 1031 Exchange and they need to buy a house quick
  • If he had a rental house, he would often just sell it to or trade it with a client
  • He has also used that opportunity to “upgrade his portfolio” from some of his less expensive houses to nicer homes, therefore, attracting a higher class of tenant who would take better care of his properties
    • This has been his personal goal for sometime now to upgrade homes in his portfolio, when possible, and own properties that attract a higher class of tenant
      • For example, he has a property he recently bought and renovated with granite counter tops, stainless steel appliances
      • The value is still low when you compared with other similar homes across the country – it’s worth about $240,000
      • He moved a Naval officer (recently moved yo and stationed at a Memphis-based military base) who signed a 3-year lease
        • She has a good salary, great credit score, money in the bank
        • He’s driven by and seen her working on the yard
        • She keeps the house in great condition
        • That’s an example of the type of tenant a nice home attracts
  • James doesn’t like one-year leases
    • He recognizes that sometimes people don’t have a choice
    • But he feels, it isn’t enough time for a landlord to recoup what it costs to get the house “rent ready,” etc.
    • He likes to see the tenants in his personal portfolio houses, on average, having signed leases at 2.7 year leases on average
    • Landlords lose money in three places owning rental properties
      • “The Turn” – when you have to put a new tenant in a property
      • Vacancies – when the property is sitting idle, with no tenants
      • Repairs
  • The way to make money on rentals is to have:
    • Occupied properties
    • Tenants who take good care of your properties
    • Tenants on long-term leases

Finding Good Tenants

• James focuses on attracting what he calls “change of life” tenants
  • Divorced Person
    • A little with two children, who just went through a divorce
    • They lived in a nice 4 bedroom, 3 bath house
    • She has a little money
    • Neither she or her ex-husband can afford to keep the house they currently occupy
    • She doesn’t want to live in an apartment
    • And not downgrade too much the area she’s used to living in
    • She’s willing to sign a 3-year lease for this next phase of her life
  • “Empty Nesters”
    • Older person (mid 70s)
    • Too young to move into a retirement home
  • Too old to take on another 30-year mortgage
    • Kids have grown up
    • Sold their house
    • Has$100,000 in the bank from the house sale
    • Would be open to sign a 5-year lease for the next phase of their lives
    • He recently signed a long-term lease with a widower in his late 70s who wasn’t sure what he was going to do next (get remarried, move to Florida???)
      • Rental was perfect option for him
• Attracting these types of tenants
  • Instead marketing to these specific types of tenants, James prefers to just buy the types of properties (nicer quality homes) that attract that type of tenant
    • House that has granite counter tops
    • Open concept houses (tall ceilings, open living/eating areas, etc.)
• Buying in the right areas
  • Good school districts (like for the divorced lady example)
  • Near big mega-churches (no more than 5 miles away)
    • Empty Nesters are more drawn to that type of community
  • Close to medical facilities they prefer (no more than 5 miles away)
  • Low crime areas
  • “A Class” community
    • Must be Near Chik Fil A — He’s not kidding!
    • Needs to be in an area that has 90% home ownership
    • Tenants must qualify for this type of property
    • Costs $200,000 and above and rents for $1,700 a month
    • Extremely low crime
  • “B Class” communities
    • Good grocery store nearby
    • Near a Super Walmart
    • Costs around $95,000
  • “C Class” communities have the highest risk
    • Very few home owners in the area – some zip codes are all rentals
    • Higher crime rates
    • No good grocery stores nearby
    • Cost around $70,000, rents out at $850 per month – bigger financial returns but higher risk
    • Most investors focus on “C” properties
      • For example, an investor has $100,000
      • They want to buy as many properties as they can
      • They buy 3 “C Class” properties
      • James always talks with his clients first
        • Yes, you get higher returns but it comes with higher risk
        • And you need a lot of these properties to survive
        • 6 properties is not a portfolio
        • With 10 properties, you can stomach some vacancies, unexpected repairs
• James has properties in all three “classes”
  • He has a “blended” portfolio
  • But his goal is to acquire mostly “A and B Class” properties” but with a few “Class”
  • This would allow his to spread his risk out so that if he has a vacancy every now and then, he can handle it
  • James lives in the heart of Memphis – not in the suburbs

Buying in Memphis and the 1% Rule

•  The 1% rule says your rent should be at least 1% of your purchase price
• That would mean a house you bought for $100,000, should rent for no less than $1,000 per month
• That doesn’t work, though, for most “A Class” properties – you’re numbers should be factored for “less risk”
• One reason Memphis is such a hot area for out-of-state investors is that it is pone of the few areas where you can purchase TURN-KEY rental properties that still meet the 1 % rule
• James has turn-key rentals where you can buy $100,000 home and get $1,000 per month in rent and the home comes with:
  • Brand new central A/C
  • Hard surface floors in high traffic areas in the home
  • Carpets in bedrooms
  • Remodeled kitchen, new appliances
  • Smells nice
  • Clean place to raise a family

James Turn-Key Business

• TurnKeyInvest.com is his main business
• He has a great team
• He offers Turn Key properties to investors
• James Defines his turn-key business as “everything an investor, even thousands of miles away, would need to succeed, all under one roof”
• His acquisitions team in out in the field, looking to purchase “the worst house in a great neighborhood,” in key targeted neighborhoods with a proven good rental history for his investors
• They buy the houses for cash in “as-is” condition, without any repairs
• Then, his company comes in does a full renovation, first tackling “The Big Three” – roof, mechanicals and flooring
•  For a $30,000 average renovation budget, “The Big Three” are 60% of the budget
  • A brand new 30-year architectural shingle roof
  • Tile or hard wood in the high traffic areas
  • New heating, cooling and appliances
• Then, the most important part – Foundation Property Management – takes care of all of items for clients moving forward
  • The boots on the ground after you purchase the property
  • Handles all tenant calls
  • Collects rent
  • Meeting with tenants, tours the house to make sure they are maintaining the house properly
  • Changes air filters and other regular maintenance
• Three Key Teams
  • Acquisitions Team
  • Renovations Team
  • Property Management Team

Memphis and Property Tours

• Twice a year, James’ clients come to Memphis to check on their properties (50 investors max)
• James shares with investors why Memphis is the #1 cash-flow market in the USA
• Special guests will include speakers from the industry that will help propel investors to the next level in single-family real estate investing
• Like a mastermind networking with with other Memphis investors
• Everyone shares similar concerns — they want to invest but it doesn’t make sense where they live
• Investors board a tour bus and head to the World Championship BBQ contest where we will have a chance to network with new and seasoned Memphis investors
• They will also visit homes that are under construction, tour brand new homes built as rentals, and answer investment questions

Biggest Mistake(s)

• Getting into real estate investing without a plan – “Forest Gumping” your way into real estate investing
• Buying houses all over the U.S. and just seeing how it goes
• He’s found that it is best to sit down with someone who has been there 15-20 years, been through the trials and learn from other experienced investors’ mistakes and formulate a plan
• Also, not doing the proper due diligence to find the right team for your “boots on the ground”
• You need to look at everything through the eyes of an experienced investor
• Your team should consist of other investors too
  • Your home inspector
  • Your lender
  • Your tax person
  • Provider/realtor
  • Property manager
    • What systems and processes do you have in place
      • If a tenant calls and says the water heater isn’t working, what do they do – “what is their checklist”
• Turn-Key Renovations:
  • A proper turn-key renovation should have taken care of every major big ticket item that could go wrong in the next 10 years or longer

Biggest Success

• Two client examples:
  • One came into some unexpected money
  • The other sold a business
    • They were both “cash rich but income poor”
    • Too young to retire but wondering what to do with all their money – invest in the stock market??? other???
    • James was able to set them up with portfolios that have appreciated significantly
    • They still have the same tenants in some of their properties that they had from day one
    • Saved a ton of money on taxes
    • His systems and processes have worked great
• Most of his clients wish they would have started earlier

Advice for Old Dawgs Looking at Real Estate Investing to Help in Their Retirement Years

• James usually asks new clients a series of questions first:
  • How much do you have to invest now?
  • How much can you contribute each month to grow your portfolio?
  • From those two numbers, James is able to scale out and then he asks
    • What is your ultimate goal?
      • Some often say, “I want $100,000 in annual income from my rental properties.”
  • Then he asks, “Do you want higher risk but bigger returns from a C Class property or less risk and less return with a B or A class property or something in between like with a blended portfolio?”
  • Once he establishes what kind of buyer they are, then he figures out how many homes the client needs to buy and fully pay-off in order to achieve $100,000 in income
  • If a house rents out for $1,200 per month, he would need about 12 houses to achieve $100,000
  • He needs use the money he has now to buy 12 houses for down payment and closing costs
  • There needs to be a maintenance reserve for the houses
  • He looks at how much the client has monthly to spend – let’s say it’s $5,000 per month
  • Then they go into “debt reduction” phase to use a “debt snowball” (Dave Ramsey) to pay the houses off
  • With 12 houses, with mortgages, you should have $300 per month in cash flow, plus your $5,000 a month
    • To prioritize the mortgages to pay-off first, you have to look at the least expensive mortgage or the mortgage with the highest interest rate
    • Then, focus on paying off the first mortgage
    • Once the first mortgage is paid off, you now have $1,000 a month from that home to apply to paying down the next mortgage
    • Then the “snowball” gets bigger
  • James, when he first started investing, wanted 300 houses but now, he realizes if he pays the “snowball” method, he doesn’t need that many
  • He would rather own 12 very nice, fully paid for homes at retirement then 50 homes, highly leveraged, and with much more risk

Current Business

• The future is unknown
• But he likes having options
• Gary Keller (the founder of Keller-Williams Real Estate) has a great book called “Shift”
  • The book teaches that you better be willing and able to shift according to what the economy is doing
  • For example, if you but yourself in the shoes of a Realtor that only sells million dollar homes, during the recession, you would have some pretty skinny years. But if that same realtor could shift and start dealing in bank REOs, they could have had some good years instead
  • As an investor, the same applies.
  • James has built his company on systems and processes in place that he can shift and do whatever the market dictates they need to do
• In the last recession, James saw the demand for quality properties go through the ceiling
• He loves the saying, “For every foreclosure, a renter is born.”
• When thinks get tough, most people don’t go homeless
• They just downsize and get on with life
• James says, “There’s too many rentals in Memphis.  We don’t need any more.”  However, at the same time, landlords should be ashamed at what they are charging in rental to a single mom trying to raise three kids for a home with a 25 year old leaking roof, broken A/C, home smells like cigarette smoke or a wet dog from a previous tenant, and it’s not even a safe neighborhood for kids to run around
• He can deliver, on the same street, for the same rental amount, a house with a brand new roof, in a safe yard for the kids, and it smells nice.  He has a ton of tenants he can rent to.
• Memphis is a “slow and steady” market – some say it’s even boring.  Homes appreciate at 3-5% per year
• Year-over-year there is a higher demand for quality rental properties
• That’s where he is at.  He wants to provide what the market demands
• Memphis is the perfect place for investors who want to buy and hold  long term
• He’s going to continue to grow the right rental side of the business, build new homes and grow his multifamily as well

Rap-It-Up

• Favorite real estate book: Shift by Gary Keller, and Millionaire Real Estate Investor by Gary Keller and What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli
• Favorite business book: Traction by Gino Wickman
• Most valuable web site for success (other than your own): BiggerPockets.com and The FEMA Flood Certification Map (check to see if your property is in a flood zone)
• Favorite app: Land Glide (provides detailed information on any property) – $100 per year fee
• Favorite quote: “If it is to be, it’s up to me.”
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? Buy a cell phone and a bicycle and drive from neighborhood to neighborhood looking for blue tarps on roofs, overgrown weeds, and start knocking on doors.  And I would find properties in dire distress, in a good neighborhood and ask people if they are willing to sell it.  From that, you become the “golden guy” and create an opportunity to become a rental property.  Get it under contract, and make $20-30,000.

How to Reach James

• Website: TurnKeyInvest.com

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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