When considering what I think my favorite aspects of Active Turnkey are, it was so hard to come up with just a few things because there are really a thousand things I love about program, including the fact that it is the very best way to buy real estate, to buy rentals, and to leverage your money with the banks. Eventually, I whittled my list down to seven reasons why I love Active Turnkey.
There are three types of appreciation in real estate: Long-term appreciation, instant appreciation, and forced appreciation. Generally speaking, people are most familiar with “long-term appreciation” which takes place over a “long” period of time (30 years, for example) and can cause the value of a property to increase 2%, 4%, and even 6% in some areas. If you were to look at the real estate market over a span of 200 years, you would see that a natural escalation of value takes place. Then there is “instant appreciation.” If you buy a property at a discount, it is automatically worth more than what you purchased it for. THAT is instant appreciation. The third type of appreciation is “forced appreciation” which can bring you cash flow in various ways. For instance, if you buy a house for $50,000 and invest $25,000 worth of renovation into the property, you could easily bring the home up to a standard that would allow it to appraise for $100,000; you then have forced $25,000 worth of appreciation in that property. Forced appreciation can also take the form of added property features such as a washer and dryer, a 65-inch TV, or any other type of add-on that can increase the rent charged each month. Not only do you get cash flow from forced appreciation (equity or instant wealth), but you also get a form of tax deferral. You get this gain in equity or wealth but you do not have to pay taxes on this gain until you sell the property. One other method of forced appreciation is raising the rent. This is especially effective when you own a home that has been rented for years, but the rent has not been raised in many years. From an income approach, raising rent will greatly increase your net operating income (NOI). The reason why appreciation with Active Turnkey is number one on my list is because Active Turnkey taps into all three types of appreciation allowing for instant appreciation, instant equity, and instant wealth!
2. Owning Rental Properties
One of the best ways to achieve financial freedom is by owning rental properties. Owning rental properties will give you cash flow every single month! For Active Turnkey the target goal is a minimum cash flow of $350 per property, per month. So if you get a mortgage a property, rehab it, get it rented, and then refinance it, the minimum cash flow allowable for us is $350.
We also teach our clients the benefits of rental properties as “rent to own.” With “rent to own,” the renter signs a lease with an option for $3,000-$5,000. Now, what does that do for us? For one thing, it helps us with our cash flow. It also helps the tenant/buyer get on the pathway to ownership; it gives him skin in the game. A more invested tenant is a more responsible tenant who visualizes himself as a future homeowner. As an investor, the biggest reason I appreciate the “rent to own” option is this: If I have a lease-option tenant living in my property, and he moves out, what’s going to happen? Then I’m going to lose money, right? When it comes to rentals, the biggest loss you’ll have, long term, is going to be vacancies. To have an extra $3,000 coming in from the new tenant helps to smooth out the long-term cash flow.
3. The Process of Active Turnkey is Being Done WITH You
When you’re doing Active Turnkey, it’s not going to be done for you like turnkey, and it’s also not ”do-it-yourself”; the process is done with you, and I really like that! We have people to help you with the acquisition. If you’re out there trying to find a house, you know it’s not an easy market; you’re not just plucking houses off the MLS. You’re not paying list price. Finding a realtor who will help you, as an investor, find a property, is nearly impossible; most are working with retail buyers. I have a few realtors that I work with, but as a company, we place over two thousand offers per week, and in order to do that, we have to have a whole team of people working in our acquisitions department.
Once you have secured a property, the next hurdle is rehab. You have to find an honest construction team with the integrity to do what they say they are going to do; a construction team that is financially trustworthy; one that will deliver on what you want to be done without argument; and one that will produce quality results. As hard as it is to find all these qualities in a construction team, I have taken a long time to create a network of contractors that will produce quality results with integrity and character; in fact, much of our contracting work is cared for by Olson Property Services which is our “in house” contracting service. What a relief it is for our Active Turnkey investors to have this step provided for them.
Lastly, with Active Turnkey, someone will manage the property for you. Personally, property management is a job that I never cared to have, but our program has awesome property management that will be there for you. CAPS is the property management arm of our company. The property management collects rent, schedules repairs, and maintenance, and handles the nitty-gritty side of being a rental owner.
Some elderly clients came to me and said, “You know, we really want to help our kids. We want to give them this rental property.”
I responded, “Wait a minute. Hold on. So you have owned this property for how long?”
The man said, “About 20 years.”
I asked, “Have you been depreciating it for the last 20 years?”
“Yes, of course. Why wouldn’t I?”
I said, “Well, you might want to talk to an accountant before you transfer that property to your children because my accountants have told me, and what I’ve heard from many different
people, is if one of your beneficiaries or one of your heirs gets that rental property, they get a whole new stepped-up basis in their property. So you might have bought the house for a $100,000 twenty years ago, and it may be worth $200,000 now. You’ve depreciated it all the way down to the basis that you’ve got left; maybe $5,000-$10,000. But if you die, and you pass on the property to your heirs, they get a brand new stepped-up basis of $200,000–the real market value of that property. So make sure you understand that there are a lot of tax advantages. You’ve got depreciation.”
Another one of my clients is a doctor who has done a lot of deals with me. He told me that the number one reason he does the Active Turnkey Program and why he has taken the route of purchasing rentals is because he has a lot of active income. He said he had to pay approximately $50,000 less in tax because he purchased so many rentals from us over the last year and a half. I personally get a huge deduction every year because I’ve got depreciation on my properties.
One of the awesome tax benefits of owning rental property is what is called a 1031 Exchange.
Internal Revenue Code (IRC) Section 1031 (a)(1) states: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.” A 1031 Exchange allows an investor to defer capital gain taxes. To access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the Section 1031 code. For instance, an accurate understanding of the key term “like-kind,” is often mistakenly thought to mean the same exact types of property. Having knowledge of 1031 Exchanges can create possibilities that might have been dismissed or overlooked. This could be a topic of an entire blog as there are many circumstances in which this could benefit you and your long-term investment strategy. Please contact a 1031 specialist for information concerning your specific situation and see if a 1031 could be the right option for you.
By leverage, I mean you get to leverage your relationships by having people or businesses in your life who can help you. When it comes to investing in rental properties, there are three important stages: acquiring, rehabbing, and managing. Don’t forget about the people that you know that are out there in those various fields; don’t forget that you may already have leverage available to you in the form of people you know who can be your “boots on the ground.” That personal type of leverage is very valuable but you can also leverage the banks. You want to make sure that when you are financing a property through a bank that you get the lowest interest rate possible. The interest rates are so awesome right now that you need to make sure you take advantage of that! If you can get 30-year financing at a rate of 4.2 (a couple I worked with recently got a 3.9 percent interest rate), you are going to make money on a long-term loan as the property value increases. If you purchase a house for $100,000 and make a down payment of $20,000, and the house is eventually appraised at $120,000, you have doubled your money! Everything that goes up in price, multiplies how much money you have in the property because you’re leveraging.
6. Principal Paydown
Principal paydown is very, very important, but often gets lost in the shuffle amid all the other benefits of Active Turnkey. The reason why principal paydown is so important is because every time a tenant pays you rent and you pay the mortgage, the tenant is literally paying down your mortgage. When a mortgage is first getting paid, maybe only $30-$40 is going toward the principal, but as every month passes, the principal starts ramping up; soon your up to $60 per month and then $70, and so on; but every single month when that principal is getting paid down, you are creating wealth. Your equity is growing, but somebody else is paying for it. So many people don’t realize that pay down is a source of cash flow, but it’s like having a piggy bank that is filling up, and you don’t even realize it! One of my great friends, David Phelps, has talked to me about the importance of paydown. He didn’t realize until after twenty years of owning real estate, how much he had paid down the principal and had grown his wealth during that time; and he had grown this wealth, not from his active income, not from his job, but from real estate.
At the end of the day, the whole Active Turnkey program is about people. There are people out there who need a house and are looking for a home to rent. There are people out there who are looking for a property to buy. Did you know that over 25% of the credit applications to purchase a property get turned down? So if over 25% of people that actually have the guts to go to a bank and apply for a loan get turned down, I wonder how many people out there just don’t even have the guts because they don’t know if they will qualify? I’ve seen some people who actually did qualify but just didn’t think they did. With the knowledge that probably more than 25% of people want to buy a home but can’t, I wonder, “Who is servicing that group of people? Who is trying to help teach them what they have to do to qualify for a loan so that they can feel the pride of ownership?” Over the last 8-10 years, the ownership rate in the United States has dropped to almost an all-time low, and this unfortunate condition is not improving. We are trying to fill this problematic gap in the market by being a company that offers people a solution to help pull themselves up and become proud homeowners.
So who are we helping as a company?
- First of all the tenant, because at the end of the day, he is the person who should end up with a house. We offer to him the pathway to ownership. It doesn’t always happen, but that is the person we are serving.
- Next, we are also serving the actual investor. We are helping him create cash flow as he gets the principal paid down, and as he uses leverage to create wealth. He gets all those benefits.
- Another service we offer is to the contractor by providing work through projects. Every single time there is a project, the contractors have work. Right now we have 82 projects in the pipeline. We have provided a lot of job opportunities to a lot of people.
- Active Turnkey has been a great source of work for property managers too. Property managers must have properties to manage. We are creating more work and creating jobs and creating income for a property manager.
- Every time a real estate deal has to be funded, the deal creates work by creating paperwork which is handled by the banks and the loan officers. Active Turnkey creates paperwork, which creates commerce which helps the overall economy.
- Communities are served by Active Turnkey. We take houses that have been sitting vacant and put those houses back to good use. Getting people into a home that once was vacant, puts that house to good use and creates value and a feeling of safety in the neighborhood. Who wants four or five vacant properties in their neighborhood? I sure don’t! I have one vacant property in my neighborhood, and everybody watches out for that house making sure that no one is going into it. The whole neighborhood will be very happy to see people once again living in that house and bringing life back into it.
Active Turnkey really is helping to change lives, all the while we are being helped too. Obviously, the Active Turnkey program is income for us too. I love the service aspect of this program because I love people. I love working with people. I love talking to people. I love having the relationships, and to me, that’s what life is all about–helping people get what they want. That’s why I love Active Turnkey.