Interested in building wealth through turnkey rentals? You should know that turnkey means different things to different people. Some may get you access to properties are ‘rental grade’, but then it’s your job to take it from there. Some not only provide the property….they warranty the property, manage the tenants, handle maintenance, etc. Steven Gesis of Smartland join us today to talk about how to find the right turnkey provider for you. Don’t miss this show!
Mike: Hey everyone, it’s Mike Hambright with FlipNerd.com. Welcome back for another Expert Interview show, where I interview awesome guests from across the real estate investing space to help you learn, to inspire you and to encourage you to move forward in your career.
For today’s show, I am joined by Steve Gesis. He’s a EVP with Smartland, which is a Cleveland-based, turnkey rental property provider. I know we talked about turnkey a number of times this year, but it’s a really hot topic, and there’s really a lot of opportunities here if you’re paying attention. So we’re going to talk largely today about what a true turnkey provider is, and how there are a lot of benefits and savings opportunities if you’re working with the right provider, because of their scale and their efficiency, and things like that.
So again, this is a really kind of hot topic, and it’s a broad term, turnkey is a broad term that means a lot of different things to a lot of different people. Sometimes people use it to mean, “We have a rental property, but there’s no tenant and no property management, and we are not going to help you with financing at all. But you can turnkey and do with the rest of it yourself”, or there is the model that, “We do every single thing for you, including maintaining it and everything else,” and that is the model that Smartland uses.
So we’re going to talk a little bit about what turnkey means and some different variations, and if you’re interested in building wealth through rental properties or continuing to build wealth through rental properties, you don’t want to miss this show.
Before we get started with Steven though, let’s take a moment to recognize our featured sponsors.
RealtyMogul.com is an online marketplace for real estate investing, connecting borrowers and capital from accredited and institutional investors. Get a rehab loan fast, and close in as little as 10 days, with rates starting as low as 9%. For more information, call 888-296-1697.
B2R Finance makes loans tailored specifically for rental investors. They can help you unlock equity from existing properties, so you can get cash out to grow your rental portfolio. That’s huge, and opens up lots of opportunities previously not available to rental investors. Need a loan? Call 855-819-4412, or visit B2RFinance.com today.
AceBusinessFunding.com can help you get up to $150,000 in revolving credit lines to fund your business, with rates as low as 0% for the first 12 to 18 months. Use the funds for startup costs, marketing, inventory, or almost anything your business needs. If you can’t get funding, you don’t pay a dime. Get funds for your business today, at AceBusinessFunding.com.
We’d also like to thank Specialized IRA Services, National Real Estate Insurance Group and virtualstaffnow.com
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Mike: Hey, Steven. Welcome to the show.
Steven: Hey, Mike. Welcome. Thank you very much.
Mike: Yes, I’m glad to have you on here. For those who don’t know, I always spend time talking to guests beforehand. We talked for actually quite a while before this, and had some really interesting conversations about this space and what Steven and his company do differently, and trying to find ways to make this show unique from other turnkey topics we’ve talked about in the past.
It’s such a hot area, and I’m sure Steven feels the same way. I’m a huge believer in using real estate to build wealth. So I feel like it’s something that we, you know, kind of justify as talking about it a little bit frequently, because it’s a great opportunity to kind of build your wealth through really kind of the uprising of what I’ll call an asset class, which is real estate investing. A lot of people are dismayed with the stock market and stuff, and want to invest more in real estate, and this is a great way to do it if you’re busy and you don’t have a lot of time to do all the components of it.
But Steven, before we get started here, why don’t you tell us your background, how you got to where you are, and a little bit about what you do now.
Steven: Awesome, Mike. Thanks a lot, I really appreciate that intro. It was very nice speaking with you earlier, right before we began. So my name is Steven Gesis, as Mike had mentioned, and I’ve been with Smartland for a little bit over six years. I’m the Executive Vice President here. I oversee our main operation.
I work with investors directly myself, along with some of my colleagues, and then I oversee our critical departments, construction, maintenance, management, everything except for accounting. So I had the pleasure of going through and building my own wealth alongside with Smartland, and sharing that experience with a lot of my clients all over the world, domestically and globally.
So my background, educationally actually I was a bio major, and I was planning to be a dentist, and I went to the Ohio State University. I was on my way, bags packed, I was going to go off to dental school. I had a second thought, and I decided that wasn’t the route for me. I went and got an MBA after Ohio State, at the Executive Program at Cleveland State University. From then on, I’ve been in real estate now for a little bit over seven years.
I was in real estate prior to Smartland. However, being able to come from a very educational direction and operational perspective, we were able to refine systems, put systems in place, and offer a global turnkey solution to clients, and now I’m able to share that experience and professionalism with people all over the world.
So what’s cool about that is that through my experiences here, one of the things that sharing that with those clients, and kind of going through the economics associated with doing turnkey deals versus non-turnkey deals. Then also learning from experiences from clients about what has worked, what hasn’t worked, and then being able to define those red flags on the front end, and trying to really make something successful out of it.
Mike: Yes, that’s great. And Steven, it sounds to me like extracting a tenant may not be that much more difficult than extracting a cavity. I had to put a correlation there between being a dentist and being a tenant manager. Say that again?
Steven: Cavities are probably the easier one.
Steven: Tenants are probably the more complicated piece.
Mike: Just get some pliers and pull them out.
Mike: We’re going to talk about turnkey today, and what that means for you guys. From my understanding, in terms of a turnkey provider, you guys are a true turnkey provider. You do every single thing that a person would need to allow them to be more passive than they would if they had to rehab it, or they’d have to evict tenants or some other things.
Maybe try to help clear any confusion that there is on the phrase turnkey, because a lot of people use that to mean, it can be from, we have a property that’s already kind of rehabbed for rental, for a tenant, but we’re going to hand it to you and you’re responsible for everything. And then there’s the soup to nuts version at the other end of the spectrum that’s we have a tenant in place, we can help you get financing if you need it, we are going to manage it for you, we’re going to do all that. We warranty the work that we did on it. There’s that other end of the spectrum, and then there’s a bunch of flavors in-between. But maybe help clear up that confusion that’s out there.
Steven: Yes, absolutely. So turnkey is definitely the new sexy phrase out there right now, and to your point, we definitely need to standardize what that definition really means.
Mike: I think Kim Kardashian is buying turnkey rental properties. She just needs to tweet it. She needs to put your name in a tweet and you’ll be famous, my friend.
Steven: Well I’m in Ohio, just so everybody knows. So I want to start maybe on the spectrum of what a real turnkey provider is, and then we’ll look at what the full turnkey provider is. So if we look at a turnkey asset, my expectation is, whether it’s in Cleveland, Ohio, or in Kansas, Missouri, or if it’s in California, doesn’t matter where it is, my definition of turnkey is quite simple. I expect that the property has been already acquired, renovated, a tenant has been placed and vetted by that operator, and it’s cash-flowing today. Right away, from day one. So as soon as I infuse my capital, I’m getting capital return immediately, within the hour, hypothetically.
And that operator, in a true turnkey definition, will have somebody who has their own management in place, they’ll have their own maintenance in place, they’ll have their own construction division in place. They’re a licensed entity. So they’re giving you the full operation in one. So when we say a true turnkey provider, you’ve purchased then an asset that has been already acquired, it’s already been renovated, we’ve already placed a tenant and it’s cash-flowing today. And what that offers is that, and again, it doesn’t matter where it is in the country, but what that offers are monetary controls that normally you wouldn’t be able to control, depending if you’re not within that hyper-local market.
So for example, when we say turnkey and you have all those pieces in place, and we compare it to somebody else misusing that term, where the situation, maybe they call themselves a turnkey operator, however what their process is, it’s more like they’ll help you purchase the home. They’ll help you renovate the home. But then they’ll pass you along to a secondary or tertiary management company, so they’re not physically managing the asset, nor have they placed anybody in a tenancy where you’re producing income from day one.
Steven: So some of the pitfalls that are associated with that is that now if you’re using what they call turnkey provider, that’s only helping you acquire, that only helped you do the construction. So during the construction phase, you are still at their mercy in case a change order, or something unexpected, something behind the wall creeps up. So you have allocated dollars for it, you’ve infused capital into the acquisition, you’ve infused capital into what you believe is a sound estimate. However during the process, all of a sudden you’re incurring these change orders. So now, what your investment was set to look like, no longer looks like that.
Steven: So that’s one of the major pitfalls.
Then there’s time value of your money. So consider you’ve done the acquisition, you’ve infused all this capital into this asset, so your money is not working, it’s under arrest in this property. So let’s say, best case scenario, it takes 45 days for that process to occur. Then you have another 45 days, best case scenario, for a thorough construction. I’m using it very loosely when I say thorough, because in 45 days, considering all the administrative hurdles that you have to abide by in each local municipality, it’s probably like 60 days. But for this conversation, we’ll just say 45 days.
Steven: So now we have 90 days, still not making any money. We’re at 90 days, still haven’t made money, may have had some construction overruns, so now we’ve infused even more capital, still not making money. Now we’ve delivered the product at 90 days, and you’ve been passed off to a management company. So the person, this turnkey provider that you were working with, that gave you these construction cost overruns, that helped you buy the asset, is not responsible for placing the tenant. And we’re at 90 days, you still don’t have a tenant, you still haven’t made any money.
Steven: So now we find ourselves at 90 days, we’re with a new management company, some affiliate group that are trying to place a tenant. Now, are they overseeing your best interest when placing that tenant? Are they just placing a tenant to place a tenant and appease their partner? Or are they placing a tenant with you in mind, and doing a very good, thorough vetting job while placing that tenant to ensure that you have a good life term, or good longevity on that tenant placement.
Mike: Yes, especially when you consider most property managers get paid for replacing a tenant. I mean, everybody hopes that it’s a good tenant, but there’s usually not a warranty on that tenant. We’ve had tenants that we’ve put in place and the first… they make the first payment and they don’t make another one, and then we have to evict them. So we’re paying for eviction, we’re paying for placing a second tenant inside of two months maybe, all those things.
Steven: Exactly. So those are all really big trials and tribulations that you can be dealing with, with a property provider or a turnkey provider that’s not really a full turnkey provider. So then you have to consider, okay, so they’ve placed this tenant and hopefully they’ve done a good vetting job. Now you’re going to have some ancillary maintenance company that’s going to be responsible for taking care of your problems and [inaudible 00:13:43] solutions to those tenants, trying to keep those tenants happy. What are the costs associated with that? Are they just passing on a direct cost? Is it an inflated cost? How do they control those costs [inaudible 00:13:55] investor?
Not only that, but during your turnkey provider process, while you’re vetting these turnkey, different providers all over the country, one of the things that really I think is important to look at is one, do they manage properties outside of their network? Will they take on external management clients beyond group purchases from them?
Two, what are the construction materials that are even going to go into these? Are we still talking about carpet in 2015 and 2016? If we’re savvy professionals who are investing our dollars and our clients’ dollars into these assets, are we being good ambassadors of those dollars? Are we making sure that we’re placing good quality materials, that are resilient, that can stand up to multiple tenants turns?
So the goal here is to mitigate all of those kinds of chaotic situations where you don’t have uniform construction materials to mitigate those turnover costs, or to mitigate those turnover, sorry, not turnover costs, but those long term maintenance costs. So those are all things that really need to be considered.
Mike: Yes. Another thing too is really the opportunity cost of the buyer. So a lot of people that are moving into the rental space, more so than in the past, are busy professionals that don’t want to do anything themselves, and their problem is if, I’ll kind of use myself as a comparison.
I’ve rehabbed, you know, a couple hundred houses at least, so we used to have a person where I had, we called it a general contractor, but it was really just the person doing the general work. So the electrician, the HVAC guy, they were all different, and anytime there was a problem they would always complain, because, “Well, I didn’t know so and so was going to be on the job, because he’s in my way, and I can’t get this done.”
Steven: Excellent example.
Mike: I was still in the middle of kind of coordinating it all, and finally it was like, “I need my general contractor.” Maybe you don’t do those things, but you need to be managing all the subs too. And once I kind of made that connection, and I said, “You manage all of them. I’ll pay you a little more to do it, but I’m not going to do it,” then everything changed for me.
Steven: Yes, so that’s an excellent example. You know, one of the things is that, you’re absolutely 100%, correct, is that really turnkey clients are passive investors that are just seeking a solution where it’s supplement income, it’s not a primary income. So typically, at least from the Smartland experience, most of our clients are some sort of a professional within their field, and this is not their core competency. Therefore we’re bringing these subject matters to light, because you do your core competency to be able to buy real estate.
So if you can’t allocate time to that because you’re dealing with your real estate problems, well, then you can’t buy future real estate, right? Because you can’t spend any time on your core competency. So yes, that’s an excellent factor, that you all of a sudden sometimes become the construction manager, and then all of a sudden, if you’re working with somebody who helped you buy the asset and is helping you renovate that asset, so are they realtors and contractors in one? Who are they really?
Mike: A funny thing is, this is one of the things that I struggle with, because through our real estate investing career, we have been coached, conditioned, taught to buy at really deep prices. And that served me well, that’s a great thing. I think everybody should buy as low as they can.
But we were set up operationally to deal with every aspect of that supply chain of buying deep. If you don’t have to do the rehab, if you don’t have to own the property before it’s rehabbed, then you’re basically, somebody’s handing you over a finished product. If you don’t have to place that first hand, and all those things that add thousands and thousands of dollars in the months before, you should be willing to pay more for that service, because you don’t have to deal with it.
I think one of the challenges that a lot of the people that want to buy rental properties and accumulate rental properties is they sometimes want both worlds. They want to get it at an extra deep price, but they don’t want all the headaches of it. So sometimes I think what people tend to do is they undersell or undervalue how much time they’ll have to put into it themselves if they don’t work with somebody that can have a solution in place to just kind of hand it over to them. Because you lose a lot of time, you’re talking about just the natural wait times, permits, contractors and all those things.
Now add in, when you’re coordinating it and you need to call somebody, like, today, and it’s Friday morning, and next thing you know your day got away from you. So now it’s Monday and you still haven’t called them yet, but you’re going to get to it. You just start to lose . . . if you start to add up that time, of just days and weeks of your time to coordinate stuff because you’re trying to be frugal and save money, it’s costing you money in the long run, often.
Steven: Totally. Or, you know, it’s really important to really evaluate that operator that you’re working with, because, to your point, yes, a lot of people undersell their own understanding of what kind of time obligations they’re going to have to place into it. All of a sudden you become the construction coordinator because you want all these worlds to collide at the same time and you want it to work.
However, unfortunately, it’s not necessarily not possible, but it’s pretty impossible. So one of the things that you can do is really scale back and take a look at the turnkey providers that do have a global solution, that do offer all in-house services, and are you able to take advantage of their economies of scale?
Steven: So if I look at our experience from our end of it, and/or any other turnkey provider, what I’m looking for, I’m still looking for a wholesale deal, I’m still looking for that property to be complete and cash-flowing right away. So I’m not looking for maybe a 20% gain on the equity side, but I do want to have a little bit of fat left on the table, a little bit of exit strategy, maybe 7%, 10%, something where I can take advantage of that today, and also have a little bit more for future appreciation.
So to your point, you don’t necessarily have to be right at the top market value for that turnkey asset. I think that there’s still plenty of providers out there that offer a full turnkey, global product like that with a little bit of fat on the table, and I think that that also speaks to what kind of relation they’re seeking to forge with somebody, is that it’s not a short term stint, it’s a long term play. And obviously there can be exits in-between. Everybody has a different exit strategy, 3, 5, 7, 30. But at the end of the day, you still want to have that value on the table. You want to buy an asset where you don’t have to worry about who that tenant is, because it’s the responsibility of the manager company of the turnkey provider that sold you.
That turnkey provider, a good turnkey provider, again, whether it’s in Cleveland, in Kansas, wherever it is, they should give you a warranty for the tenant. They should give you a warranty for the tenant. They should give you a tenant placement warranty, you should expect to get a warranty on the property itself. One of the key things I’m looking for when I’m evaluating other turnkey providers is how long of a warranty do I get with the property, do I get a tenant warranty, can you facilitate all the permits you pulled? Can I call the local building municipality and ask them, “Hey, how did this go? Do you know who these guys are? Have they done business in your city before?” Really dive deep into who you want to be working with. Check them out, check every single phase out.
Mike: The tenant warranty thing is really interesting. We had a property manager several years ago that we used, and we’ve switched since then, that had a tenant warranty in place. And over the years, that actually saved us a lot of money. Everybody probably could do it differently. But basically what they did was if they had to evict somebody in the first six months, or the person left, or whatever, they would place another tenant for free, at no additional charge. Of course, I probably would have charges with eviction, and some of the other things that might be there. But the turnover on real estate is really where you get killed. It’s a combination of the lost rent during that turnover period, especially if you’re evicting somebody . . .
Mike: . . . because they’re probably out a couple months of rent, and then the make-ready you have to do on a property that you presumably, recently made ready to rent and now it needs work again.
Mike: So that’s an interesting . . . I don’t know many people that do tenant warranty, so that’s definitely something that should appeal to people if you’re looking for providers out there.
Steven: Yes. Tenant placement warranty, what that gives you, it also gives you the sound notion that the provider you’re working with has a direct vested interest. Because if I have to replace your tenant, it costs us money every time. It costs any provider money, every time.
For example, in our own in-house right now we have staff leasing agents, we have staff maintenance, staff construction, staff buyer, staff broker. Everybody is on staff. However it doesn’t matter how many times, or what has to be done, everything still costs money.
So if you’re not being a good ambassador on the frontend, you can’t be a good long-term operator either, because you’re going to incur so many fees and so many costs as part of bad business, that you won’t be able to withstand or sustain that type of loss. So looking at a turnkey provider, again, taking that very basic idea of somebody who helps you buy something [inaudible 00:23:50], you could look at the time loss of money right away. I mean you’ve dedicated, whatever it is, $100,000 for the first four months of the year, and you’ve made zero dollars.
Steven: So I can’t imagine that justifying making no money, versus making money, can somehow outweigh one another. So somebody, again, who wants to remain passive, who wants to be part of something where they’re investing in a strategy, or using it as an alternate strategy amongst their stocks, and bonds, and cash assets, and has a full time job, this is it. You want a true, standard turnkey provider that will give you a vetted tenant on the front end, that will cash-flow right away, that already has a completed product, and covered all those conscious bases that we just talked about, whether it’s the resilient, to your point, tenant replacement and rent-ready is murderous.
So talk to your provider and ask them, “What are you doing to mitigate those things? Tell me about your process. Tell me about your strategy. Tell me about what are your strategic plans in order for me to have been mitigating those costs on the long term.” So at least in-house here, we spend a lot of time thinking about these things, because a lot of our clients come with complaints of previous examples, or previous stories, and we want to take all those bad situations and learn from them, and turn them into something very positive, and eliminate those risks. So working with somebody who has good knowledge in that hyperlocal market, that can give you that full package in one, I think you can gain a lot from that.
Mike: That’s awesome, that’s awesome. Well, Steven, we have just a few more minutes here, but why don’t you maybe take a minute and tell us about the Cleveland market, and Ohio in general, in terms of investing opportunities. I just know from personal experience and a lot of relationships I have, there’s a tremendous amount of . . . I mean, not so much as a year or two ago, but it was thrown around quite a bit that the Midwest is kind of the last hidden gem in terms of rental opportunities. I know there’s a lot of people from the Coast that are investing in the Midwest.
Steven: You aren’t supposed to be listening to my phone conversations.
Mike: Yes. The thing about the Midwest, I grew up in the Midwest, and my family is still all there. So generally speaking, I would say there haven’t been a tremendous amount of appreciation. It’s different on market-to-market, but there’s not a tremendous amount of . . . I’m in Dallas, so there’s just like massive developments going on everywhere, populations just blowing up, which has pros and cons too. But in the Midwest maybe there’s not that explosive growth, but it tends to make him much more cost-effective and friendly from our rental standpoint. But anyway, maybe share about your market, and why it’s a good place to invest.
Steven: Sure, so Cleveland, Ohio, I love Cleveland, I’m from Cleveland, all my staff is from Cleveland. We’re all big purveyors of Cleveland. So Cleveland, and North East Ohio in general, we’re set on one of the largest fresh bodies of water in the world, the Great Lakes. We’re home to three major sports teams. Next year, in 2016, we’re going to be home to the Republican National Convention.
So in due right we beat out a lot of big metropolises, which is Memphis, and I believe even Dallas and Denver, we’re in the bid for it. But our market has been very stable over time, so we didn’t endure a big decline, we didn’t see mass declines. Yes, we did get a little bit of a hit, however it wasn’t on a grand scale of 50% or 80%. And in the same rate, our appreciations have never been 25%, 50% or 100%.
In regards to development, currently in fact in Northeast Ohio and downtown Cleveland, we’re faced with a new challenge. Not a lot, but the greater majority of the commercial high rises have gone under development for new downtown living. We operated at 99.9% current rental rate in Cleveland, Ohio, so actually with waiting lists. So we actually do not have enough downtown living and we have a lot of conversion happening at this time. So we’re facing different challenges now because we’re converting so much, or we don’t have enough commercial space for commercial businesses. So we have some new commercial developments that are happening in our area.
And Cleveland, Ohio is home to 13 of the Fortune 500 companies. Everybody from Sherwin-Williams, global leader in paints, to the Cleveland Clinic, which is the number one heart surgery center in the world, with locations in Abu Dhabi, South Florida and many others. We are also currently the bio-medical research center in the world. So as far as bio-medical devices, we are the epicenter for them, bio-medical research, we are the epicenter for it.
We are currently [inaudible 00:29:19] to have the highest speed internet connection in the entire country, to be able to recruit engineers from the West Coast, bring them in to these new spaces, for this various research in bio-medical development.
Steven: Yes, so Cleveland is awesome. We’re home to some world-renowned chefs. One that really comes to my mind is Michael Symon. As you can see, I don’t shy away from a restaurant.
Mike: And I can tell you love Cleveland too, so that’s great. Well, why don’t you just take a minute and just tell us, if folks want to learn more about you, or about Smartland, or any of the things we’ve talked about today, where they would go to learn more?
Steven: Yes, check us out on our website, www.smartland.com, that’s Smartland, S-M-A-R-T-L-A-N-D dot com. You can visit our Facebook page, you can visit our LinkedIn page, you can visit our Twitter page. Our handle is everywhere @Smartland, and you can check us out there. You can check out our website, we have some good informational videos there. Check us out on our website for sure, we have properties up there always listed. We carry about $2 million in ready-to-go inventory cash-flowing today, in single family residential. So check us out, we can help you out with any type of passive investment information.
Mike: That’s awesome, and I know, you’ve told me before the show that . . . we actually recently added a turnkey category to FlipNerd, where people can list turnkey properties, properties that are ready to go, and that you have most of your properties listed on FlipNerd.com. So you can also go there and check out Cleveland.
Steven: Yes, we’re adding those properties on FlipNerd.com. Awesome space, we love the brand, and we love trying to be a part of the FlipNerd family here.
Mike: Yes, awesome. Well, we appreciate that, and Steven, thank you so much for your time today. We’ll add links for Smartland and some of the other social media sites that you gave us down below the page here for those that are interested. I definitely appreciate your time and all your insights today.
Steven: Awesome. Thank you very much, Mike, very nice to be on your show today.
Mike: Thanks so much, thanks for being here. Have a good day.
Are you a member of FlipNerd.com? The most robust real estate investing platform in existence, where you can find off market, wholesale deals and great vendors literally in your market. You can get access to advice from experts and learn about local clubs and events right in your backyard.
If not, please visit FlipNerd.com and register for a free account. You can register in less than a minute. It’s pretty much the coolest site that’s ever existed in the real estate investing industry, so get on over to FlipNerd.com