The TurnKey Investing Philosophy - Part 2

by Matthew S. Chan

(Book excerpt from "TurnKey Investing with Lease-Options")

The first six principles were covered in Part 1 of this article.

7. Practice Kaizen

We are a firm believer in practicing the Japanese concept of Kaizen. The concept of Kaizen is the belief of making small, ongoing improvements to a business system, which over time, net great results.

Practicing Kaizen is not always about being the fastest sprinter or making large changes to a system. It is about finishing the marathon as a winner. Sometimes finishing the marathon successfully is not about speed. It is about steadily making progress throughout the entire race.

We are constantly refining how we manage our investment properties, our tenants, and the support team we work with.

8. Make it Easy for Investors to Invest

This is something we are passionate about. We believe investors want to easily and safely invest their money and receive good steady returns on their money. We also believe the investing experience must be a positive one.

Unfortunately, the general nature of real estate makes it somewhat more involved than stock investments. However, this does not mean it has to be a painful experience.

We have two programs we provide to those who want to invest funds with us. One is an all-cash program; the other is a cash plus credit program, which we do only on a case-by-case basis. By far, we prefer to work with people on the all-cash program since it bypasses the entire mortgage loan qualifying process. While we do everything we can to make the loan qualifying process painless, there are many aspects of the process we cannot control.

With the all-cash program, we are able to control most of the process so investing with us is a positive and pleasant experience.

9. Manage Investor Money More Carefully Than Our Own Money

We feel a greater weight of fiduciary responsibility to invest more carefully when using investor funds. Our business is highly dependent on “repeat investors” and “word of mouth” referrals. And we encourage this. As such, we have a vested interest in closely guarding our reputations.

For example, if we used an investment partner’s financial resources to take on borderline investment properties and they did not perform well, we create the potential for long-term damage to our reputations. While personal reputation is relatively unimportant to some, we greatly value ours. No deal is worth damaging our reputations over.

It is quite common for us to either decline borderline investment opportunities or use our own financial resources to “test” or “guinea pig” properties we are interested in before placing investor funds into it. Any financial setbacks that could occur would impact no one but us. As such, we take a more conservative approach when using investor funds than our own funds.

10. Invest in the Management as much as the Property

There are two ways of looking at this. We have always known how well we perform as property managers determines how well our investments perform. After all, management drives the success of the investment.

As such, we have committed financial resources to set up more effective management systems. These include management and accounting software. In addition, we also work with vendors who provide services to support our ability to manage. We actively cultivate relationships through familiarity with staff members in the court system and the banks we deal with.

As an investor, you will have many investment opportunities presented to you. However, you should ask yourself the following questions:

• How much access will I have to the principals of the management team?
• Do the principals value their reputation?
• Are they selective with whom they work with or will they work with anyone who has money?
• Do they value working relationships or do they only value my money?
• Will they go beyond the call of duty?
• How much do the principals have vested with the company and their portfolio of properties?
• Do they have references and other credibility materials?
• Do they have a strong support network?

Getting answers to these questions will help make your decision as to whom you should work with, not simply the returns you will make. After all, there will be many investment opportunities you will be exposed to which will have similar rates of return. The deciding factor will be the management team you choose to work and spend your time with.

11. Better to Make No Investment than a Bad Investment

In the aftermath of the Technology Stocks Crash of 2000, there are many who have been humbled. In 1999, if you offered to pay someone 5% return on their investment, they probably would have been laughed out the door. Today, if you ask someone who lost money in the years after 2000 if they could go back and earn 5% instead of speculating on stocks, they would probably jump at the chance. In fact, those who lost tremendously would be more than happy to have broken even with a 0% return. Hindsight is almost always 20/20.

However, this is truly a sad sight to see. The whole point of investing is to create returns, not hoping to break even. But that is what many people today are saying. They wished they had broken even so they didn’t have to take the loss.

The reality is they dealt with investment managers who had no control over the market or the investments they were promoting. If those investors had not been overly speculative, they probably would not have lost their money. The fact is, speculative stocks are often bad investments. You either win big or lose big. It sounds like gambling to me.

Fortunately, because of the niche we are in, we do have influence over the marketplace. Even so, we do not offer huge speculative rates of returns. We offer good investments with steady rates of return. It gives us something clear and predictable to work with. More importantly, the investor gets a steady return they can count on month in and month out. Personally, I think every investment portfolio should have such elements of reliability and stability.

12. Always Tell the Bad with the Good

I have always disliked people who sell a fairy tale story where everything always turns out good. They never tell the downside of a story.

In investing, there is always a risk, the downside. The extreme downside is obvious. You could lose all your money! Experienced investors know that investing involves some degree of risk. However, the question is what is being done to mitigate the risk.

Telling the bad side is not about being pessimistic or cynical. Telling the bad side in the context of investing is being upfront with all parties as to the potential risks and downsides of a particular investment. It makes good business sense.

We’re upfront and tell both sides of the story. But it still goes without saying we are clearly confident and optimistic in what we do. (Otherwise, why would we continue to stay in this business?)

13. Be Firm but Fair

As investment managers and investors ourselves, we have a clear bias towards the investor. Investment partners help fuel the growth of our acquisitions. However, it is our tenants who make an investment perform. So we take this into consideration.

As property managers, we walk a fine line between taking care of the investor and being fair to our tenants. After all, there are rules and laws to abide by with our tenants. Even if this were not the case, our tenants are the people who make the payment, which allow our investments to perform.

We are not absolutely ruthless, nor are we unforgiving of our tenants. Why? Many times it is simply not in our best interest to do so.

We exercise a firm but fair management philosophy not only with our tenants, but the vendors we work with.