January 27, 2020

JF1972: The BRRRR and Turnkey Combo Approach with Ali Boone #SkillsetSunday


Ali Boone is the founder of Hipster Investments, which focuses on connecting investors to hands-off turnkey investing opportunities. In this episode, Ali talks about the advantages of working with a turkey marketing company who vets out turnkey providers to find the best, non-biased option for you. She also explains how to combine the BRRRR model with a turnkey property so that you are able to keep any forced appreciation.  

Best Ever Tweet:

“If you have the risk tolerance and you really know who you’re working with, [the BRRRR and Turnkey combo approach] can be a fantastic option for the people who want to take advantage of the BRRRR advantages but don’t have the time, energy, or interest in doing the work themselves.” – Ali Boone, Hipster Investing

Ali Boone Real Estate Background:

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. First off, I hope you’re having the best ever weekend. Because today’s Sunday, we’ve got a special segment called Skillset Sunday. The purpose of today’s episode is to introduce you to a new concept called– well, it’s a BRRRR model plus a turnkey approach. With us today to talk about that is Ali Boone. How are you doing, Ali?

Ali Boone: I’m good. How are you? I was waiting to see what word you came up with for this model. [laughs]

Joe Fairless: A little bit of context, Best Ever listeners, it’s the BRRRR model and turnkey. So Ali said maybe it’s the BRRRR-key model… So we didn’t know exactly what to call it. She’ll describe it in a moment. First, just a refresher about Ali. She’s the founder and owner of Hipster Investments. She’s facilitated over $18 million in real estate investing sales in the first five years of business, author of over 170 articles on BiggerPockets… And not one, not two, not three, not four, not well, five years ago, so five years ago she was on the show, Episode 40, four zero, and it’s called “Love is in the Air”. Wow, that’s a funky title to the episode.

Ali Boone: My suspicions are sky high right now. I’m like, “What did we talk about?”

Joe Fairless: I’m interested in what we were talking about, too.

Ali Boone: Someone go listen to it and report back.

Joe Fairless: Right. I, for some reason, titled it “Love is in the Air”. You can go listen to it. We’re gonna be talking about the turnkey and BRRRR method combo approach. First, Ali, if you can just catch us up to speed, what you’ve been up to, and then let’s roll right into this combo approach.

Ali Boone: Cool. Man, I’m like, “What’s happened in the last five years since we talked?” I’m still wondering what “Love in the air” is. So I started Hipster Investments, I think we’ve just hit our 7th anniversary. For anyone not familiar with the company, we’re basically a matchmaker service, we focused on turnkeys up until now. Over the years, probably even since we last talked, I realized that we actually serve a second role, which is emotional support dog.

So over the years, we’ve probably worked with hundreds of turnkey buyers at this point, and turnkey, they’re a great thing for new investors. But new investors are often a little more scared, fearful of not understanding what the process is going to be… So there’s questions, and if a challenge comes up, we really step in and help support them.

I think my favorite thing about the company and just over the now seven years that we’ve been doing this is, I’ve really tried to make it a point to just seem different, in an otherwise stuffy, intimidating industry sometimes. You’re never going to catch me dressed up or in a suit, I’m probably gonna be the first person to tell you not to buy a turnkey. I just really wanted to keep it real and really build relationships. We’ve totally done that over the last few years and I’m so proud of our team and the company. It’s just it’s been a really cool place. As everybody knows, we’re now 2019 and it’s a very different dynamic real estate-wise than it was five years ago when we talked, and seven years ago when I started the company, as far as where the prices are, where the returns are. So we’ve had to do some innovation, because the turnkeys are typically sold at market value anyways, and market value right now is on the higher end. So everybody has an interest in this BRRRR model, and now we work with this opportunity to combine the two. So it’s been a really cool thing and I’m super stoked to talk about it.

Joe Fairless: Well, before we get into it, just to crystallize in listeners minds’ exactly what you’re company does know, are you a turnkey provider? If not, how do you work with turnkey providers?

Ali Boone: Great question. I’m glad you asked that. We are not a direct turnkey provider. So in the turnkey equation, you have the turnkey investors, obviously. Then you have the turnkey providers, who are the ones that physically produce the property. They’re the ones rehabbing it, they put tenants, you buy the property from them.

My company and myself are essentially a middleman. So some people call it turnkey promoters, turnkey marketers, and typically any company in this category probably works with several different turnkey providers. The advantage to that – and obviously, I’m a little biased because I am one of these companies, but I think there’s a huge advantage to working with a company like ours, because, first of all, we don’t charge you anything to do it. But if you go direct to a turnkey provider, there’s a lot that you may not know. First of all, how do you know they’re a legit turnkey provider? Then second, if you’re looking at your overall portfolio, how do you know where to buy or what to buy. If you’re trying to do some portfolio strategizing, the turnkey providers, if you say, “Hey, where’s the best place that I should buy?” They’re like, “Well, obviously, the city that I sell in.” All of us are holding a little bias in the equation, but they’re holding an extreme amount because they only sell properties in one market. If you say, “Hey, are you a legit turnkey provider?” They’re going to say, “Well, obviously.”

There’s just a lot of unknowns in the equation. So where the middleman comes in, is we are less biased, because we have access to turnkey providers in several markets. We have the experience with turnkeys that we’ve vetted these companies. We know the signs to look for, we’ve seen everything. So we really put a lot of time and effort into a) researching the markets and b) researching the turnkey providers. We can offer that list of people to you, the investor.

Then of course, turnkey providers have never been known for their customer service skills, with a couple of exceptions. For the most part, you’re not getting your hand held by these guys. They are very good at what they do, which is the technical side of finding the properties, rehabbing it. They’re moving fast and they don’t have time to hold your hand, and we do. So we really serve as that customer service buffer. I always joke about– it’s a very common thing that at some point, every turnkey provider goes through a stage of psychosis. So if that happens or any dynamics change, we’re on your side. You’re really coming in as a part of a bigger team versus just going at this alone. So that’s why, again, obviously, I’m biased because I am one of these companies, and it’d be great if you work with me, but you get all this for free from most of the turnkey marketing companies, whether it’s mine or anybody. So that’s where all the players fit into this equation.

Joe Fairless: And how are you compensated in that role?

Ali Boone: We all make money on the seller side in the terms of a referral fee. So if I send you to one of these properties, the seller pays me the referral fee. So that’s why the buyers don’t have to pay anything. I like to be really clear about that, is there’s always thought, “Oh, well, you’re only sending me to this property, because you’re going to make a referral fee on it.” I can’t speak for all the turnkey marketers, but for me, one of the most them important things that I’ve always been huge on is, I’m not going to send you to a company that either I haven’t bought through myself or I’m not somehow so closely tied to that I would send my mother there.

Over the years, especially as my name has gotten bigger in the turnkeys, I’ve had every turnkey provider under the sun offer me referral fees. In most cases, they’ve offered me higher than what I actually make, and I’ve turned them down, because either I don’t trust their company or I don’t know their company, or for whatever reason. So just a little disclaimer on the referral fee side. But yeah, it works out great, because it leaves the investors free to shop around and figure out what they’re doing without having to make a monetary investment into it.

Joe Fairless: I solved the riddle for why I titled the last episode what I did. Should I say it now, or should everyone get to go listen to episode number 40? Your choice.

Ali Boone: Man, that is a toss-up, because I want to go listen to the episode, but I want to know the answer.

Joe Fairless: I described you as “Meet the real estate matchmaker.” So it’s love in the air.

Ali Boone: Oh, fun. I like that.

Joe Fairless: There’s the connection. Once you mentioned your mom, I remember you talked about your mom on that episode, too. You said you wouldn’t send someone to a property or company that you wouldn’t send your mom. Then I asked you, “Well, do you have a good relationship with your mom?”

Ali Boone: Yeah, I remember that actually. [laughs] And you were like, “Wait, let’s clarify. Do you like your mom?”

Joe Fairless: Alright. Let’s talk about the BRRRR turnkey model combo Frankenstein thing. What is that?

Ali Boone: I love that. If anyone listening can ever replace the BRRRR acronym, I don’t care if it’s related to turnkeys… Please, I hate that acronym. It’s so many R’s. As if that wasn’t already bad enough, now we’re adding that to turnkeys, because that’s not super-obnoxious. Okay, so here’s how this works. The regular turnkey model is this – the turnkey provider, they have access to a whole bunch of distressed inventory. They go out, they buy the properties themselves, they fund the rehabs, they complete the rehabs, they put tenants in and they have property managers on standby to manage the property once you’ve bought it. So you as the buyer, you don’t have to put a dime into this investment until closing, which means you have the opportunity to verify that everything has been done correctly, that the property is as it was advertised. It’s a really cool system, aside from your hands off anyways, but you get the chance to verify everything before you put a dime into it.

Essentially, in that equation the turnkey provider is the one holding the risk during that whole time because it’s their money in the pot. So the downside of a standard turnkey model is that you’re going to be paying somewhere around market value for this property, and there’s really not an option to force appreciation. Number one, you’ve already paid market for it anyways, and number two, the property’s already completely improved. So you can’t do that. The only way really at that point is if the market itself improves, but where we are today that that’s not a huge thing.

So the upside is you get to verify everything, you get a fully completed product, your money is not at risk until you verified everything, but the downside is you’re paying market value and you can’t force appreciation. Well as most people in real estate know, one of the greatest tools or vehicles for financial wealth is that ability to force appreciation. So the BRRRR model by itself is you go find a distressed property, you buy it, you rehab it, and suddenly the value of that property is worth more than what you put into it.

So combining those models, where the shift from the BRRRRkey is, is the turnkey provider is still involved and all the same processes are still happening as far as getting the distressed property, rehabbing it, putting tenants and yadda-yadda-yadda. Except this time, you’re the one funding it. So they’ll help you select the property, you buy the distressed property yourself, you close on the property, and then you fund the rehab. It usually happens in phases. You’re not just slapping all your money down right off, but you’re giving them the money to do the rehab. So this is where it combines the BRRRR model and the turnkey. The turnkey side of this is that you’re still mostly hands-off, other than basic due diligence and all that stuff. But now because you’re the one funding it, you’re the one who gets to keep the forced appreciation on the other end.

So let’s say you buy the distressed property for $60,000, and the rehab cost $40,000. So you’re a $100,000 in, and now it’s worth $130,000. Well, that’s your equity. So at the six-month mark, you can do a cash out refi on the $130,000, and you’re actually able to pull out more money than you would have… Oh, I jumped ahead and I’m gonna confuse it… But you’re gonna get more of your money back in your pocket. I mean, I jumped, but on the standard turnkey model, if you put 20% down on the property, which is what’s going to be required for financing, let’s say you want ten turnkey properties; well, you’re going to have to have ten sets of 20% down, because you can’t force anything, or appreciation, and all that stuff. So with this, if now the value is $130,000, but you’re only $100,000 in, you actually get to pull more money out, so you’re not out the entire flat 20%, if that makes any sense. Or if it doesn’t, somebody email me. I’ll clarify.

But the moral of the story is you now get that forced appreciation that you would have, had you done all the BRRRR model yourself, but the turnkey providers were doing that. So that’s the super, major, huge upside.

The downside is now it’s your money at risk, and that’s huge. So the key with all of this is, you have got to know the turnkey provider you’re working with. A lot of them who will offer it, because if you say, “Hey, can I fund this and you guys do the work?” They’re gonna be like, “Yeah, obviously.” But if for some reason something goes wrong, you own that property, and it’s your money in the pot, so there’s a lot at risk. I don’t necessarily recommend this model for brand new investors or people who are just going to get their feet wet because of this. But if you have the risk tolerance for it, and you really know who you’re working with, and I mean really know, it can be a fantastic option for the people who want to take advantage of the BRRRR advantages, but they don’t have time, energy or effort or interest in doing all the work in themselves. So that’s the BRRRR-key model.

Joe Fairless: With the turnkey companies, I thought they made a lot of their upside on how much they originally buy it for, and how much they sell it to investors for, because it’s close to retail. So if an investor goes to them and says, “Can I fund this and you guys/girls do the work” why would they say yes? Because I thought that’s where they’re getting most of their profits.

Ali Boone: Well, it’s situational. A lot of the turnkey providers actually don’t make as high of margins as people think they do on essentially the flip, if you want to call it that. In this model, in particular, they’ve built their profits into the rehab costs and just the general work costs and all that stuff. Because the major advantage to them– while they may not make as much per property, it’s a huge thing to be able to use other people’s money. Because that’s where a lot of turnkey companies really get limited, is they only have their own money to do this, so they can only do so many at a time. So now that they’re working with other people’s money, and they’re not having to pull from their own pot, they can actually crank out a lot more of them, and still come out on the other end with their profits [unintelligible [00:15:22].24] while serving more investors at the same time.

Joe Fairless: Okay. You mentioned, “You must really know the operator.” What are some ways to qualify the operator?

Ali Boone: First, I would absolutely hands down look for people who have already been through with them and had a good experience. We started working with a provider on this model a few years ago, actually, and we had worked with this provider prior to that for years on the standard turnkeys. We probably had more people buying from him than any provider that we work with. Everything had gone really well and he had started getting more into this model, so we watched him do it for a couple of years to really make sure that this was happening as it should. He did really well with it and everything was going great, so we suddenly started advertising these.

Then it didn’t go great. People were cautioned ahead of time that, at the end of the day, we can all vouch for it, we can all say we believe this can be good, but this is your money at risk. So you’ve got to go into it with your own due diligence, with your own confirmation. If you want to go visit the provider, boots on the ground – yes, go do that. But I would say more than anything, look for people who have already done it with them successfully and had a good experience.

I would say, one of the key things I look for– and this is even outside of BRRRR-key or turnkeys, or whatever… Whether it’s property managers, whoever. For me, one of the biggest signs is communication. I can see a huge correlation with the people who have not performed well and their communication levels. I’ve rarely seen it where someone communicates everything really, really well and doesn’t also perform. So that’s a very vague measurement, and not one you can go off by itself, but that’s something, that’s part of what I look for. But really, look for those success stories and look for people saying that this is legit.

Joe Fairless: It was working with that one individual until it wasn’t. Do you know what changed?

Ali Boone: We are all actually still trying to figure that out. [laughs] I mentioned earlier, half joking around, but I’m kind of dead serious, too – this isn’t just turnkey providers. I’ve seen it with property managers, different companies, there’s just a cycle sometimes. This could actually go into your considerations for who to [unintelligible [00:17:35].09]for. The cycle that I’ve seen with property managers, turnkey providers, everybody, is somebody in the beginning is really, really good at what they’re doing. So people start buying into them, like, “Man, this is fantastic.” So they tell everybody they know, and suddenly everyone’s buying through these guys. For the most part, these roles, like I said, they’re really good at what they do, but they’re not necessarily good at business skills or whatever it is. So quite often I’ve seen it where when the company grows too fast, they don’t manage that well. So when they get overwhelmed, they almost start getting into this desperation type of thing and they just start making poor decisions. That’s when the cycle starts. That’s when I say they flip into psychosis at that point. All of these things are very fluid.

So one thing about the BRRRR-key provider we’re working with now, he’s at the beginning stages. He’s been doing it long enough to know what he’s doing and to be very well versed in what’s actually happening, but he hasn’t grown so much that he’s teetering this outgrowth, if you want to call it, outgrowing the capabilities of the company. The guy that we worked with before, he was on the other end of the cycle. In hindsight, really looking back at this, he was past capacity, for sure. So I don’t know what in that mix exactly was the thinking of things, but his communication had really fallen off, and he’s still married… Like, what happened to this guy? [laughs] Sometimes things just kind of happen.

I know this is a sidebar, but there was a Chicago turnkey provider that we worked with – this was years ago – and it was like overnight things stopped performing, and we’re like, “What in the world is happening?” Unfortunately, in his case, he had a brain tumor. It came out of nowhere, it became a thing and he has actually since passed away. But people need to remember that everyone’s a human in this equation. And humans, unfortunately, are not perfect or consistently reliable all the time. With that said, that’s why I encourage people, really don’t go at this by yourself. Because when you have a team of people, it brings on a bigger force to really support you and your investment.

Joe Fairless: Anything else as it relates to this combo approach that we haven’t talked about that you think we should?

Ali Boone: Not that I can think of. Just on the logistics side, like I said, normally you buy the distressed property, you fund the rehab in phases. Once you verify and some percentage is complete, you put more down. Then what they’re gonna do after that – I don’t think I really got into the side – is that once the property is rehabbed, they place tenants, just like a regular turnkey situation. So then you’re actually making the cash flow also. Around the six-month mark is when you have that cash out refi ability. So your money is gonna be in the pot for about six months doing this. But then at that six-month mark, that’s when you can go ahead and start to pull that out.

Of course, I’d say that’s your strategy, make sure ahead of time that you have reason to believe you’re gonna be qualified for a loan… And worst-case, if you don’t pull that money back out, you still own the property, have the equity and have the cash flow coming in, but you don’t get that money back out. So just some random considerations. If anyone has any questions, because it’s a condensed discussion, then they can always reach out for sure.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and then reach out to you?

Ali Boone: I actually set up a link specifically for your listeners. I did not have this five years ago. I wonder what my website looked like five years ago. So I set up a link, it’s hipsterinvestments.com/bestever. On that page that it takes you to– so a few years ago, I wrote a turnkeys eBook that we still sell. On this page, it’s going to offer you guys this eBook for free. So you can type in your email address, get the eBook for free, whereas everyone else is paying for it. Also on my page, there’s all sorts of links to connect with me and you can reach out anytime.

Joe Fairless: Oh, well, thank you for that. I will make sure that we get that in the show notes. So Best Ever listeners, you can just click the link that’s in the show notes and it will take you directly to the page. Ali, I enjoyed our conversation, as always. We will talk again in five years, of course.

Ali Boone: Hopefully sooner this time. We’ve gotta ramp it up a little more.

Joe Fairless: Yeah, we’ll ramp it up a little bit more. Thanks for talking about this approach – two methods that have proven to be effective for real estate investors in certain situations – turnkey as well as the BRRRR method, and doing the best of both worlds. I love that you looked at it in a very objective standpoint and you talked about commercial downsides and how to mitigate that as much as possible.

There’s risk in investing, there’s risk investing in turnkeys, there’s risk investing in our deals, there’s risk in any type of deal. So there’s always going to be some potential downside, so how do you mitigate that as much as possible. Thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.

Ali Boone: Sounds great. Well, thanks for having me. I’ll talk to you soon.

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