Your Complete Guide to Finding a Profitable, Well-Managed Turnkey Deal [With Example Pro Forma!]
After emailing back and forth with Allison, the totally awesome Managing Editor of the BiggerPockets Blog, she mentioned that laying out actual deals or case studies is super helpful here on the blog. COOL! We do mainly turnkey investments in our business, so my goal is to talk through not only what the numbers of a deal look like, but also some thinking surrounding the deal.
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As an overview, what are some actionable things for the turnkey investor to think about? What are the different types of turnkey deals? What are the types of providers and the rehabs they are doing? And from there, what does the management to service your investment look like? There are three things I believe really drive the entire thought process if you are considering turnkey:
- What area do I want to buy in (geography, state, city, kind of market)?
- What is the quality and scope of the renovations?
- Who is managing my property and what are the details around that management?
First, I always like to start with “what is the end game?” You could start by thinking about the investment itself. Maybe you want a property in a C+, B, or A neighborhood with at least a 1% rent rate to sales price (as in, $1k rent and $100k house). Or maybe the neighborhood or schools aren’t as important as straight cash flow is to you. You night look in a neighborhood that could produce a C- or D class property in the $40-$65k range, renting likely a 1.5-2% rent ratio. This isn’t the model that I personally work in, but I do know a lot of people who are in that market.
There are some really easy tools these days to be able to see where the property actually is, what the neighbors’ houses look like, and even fairly sophisticated demographics for the area. Between several of the well known sites like Zillow.com and Trulia.com, you can garner a lot of data on the property. Pair that with Google Earth, and you can see a picture of the entire street, neighborhood, house itself (usually), and whatever surrounds it.
Actual topographic view of the subject property in the post from Google Earth
Type of Rehab
With regard to the rehab, first you need to know what is being repaired or replaced in the property. Is the seller doing the basic paint and carpet? A partial renovation? Or a full rehab like you would see for a fully flipped house on the MLS? Make sure before you buy a turnkey investment property that you ask what kinds of renovations were done and even for a list of those items. Ask the provider what their philosophy on renovations is, so you are informed and understand what you are getting before you buy.
I’m not suggesting one is better than the other. For my business, we do full renovations on nearly every property. But not every turnkey provider or owner is looking to do just that. Make sure you ask the question. Know the type of work that is happening and have clarity on exactly what you are getting into before you purchase.
Interior shot of a recently renovated turnkey rehab from my team
Related: 5 Exit Strategies to Consider for Turnkey Rental Properties
The renovation and sales side of the turnkey experience may be over, but the profits and cash flow come with a tenant in place, and this is all about the management. Ask if your turnkey provider is also the management or if they bring in outside management once the property is sold. We decided early on to set up our business with us controlling everything from the buying, renovating, selling, and managing the property. If we didn’t control every stage, we didn’t feel we would have clear ownership after the sale. There are some great turnkey providers out there who don’t manage their own, so I’m not suggesting you couldn’t find that setup that would work for you. Just make sure you ask the question who is managing my property? And if it is not the turnkey provider itself, then what does this handoff look like?
Some more questions to ask would be:
- How much do you charge for placement of a tenant?
- How long are your typical leases?
- What is the annual review or lease renewal process?
- How much are the monthly management fees? Is it a flat fee or percentage?
- How are your rentals priced compared to other rental properties in the market?
Regarding Your Provider
Who to Call if There is a Problem
Maybe the issue is as simple as a question about your owner’s statement or a maintenance charge. Whatever the situation, you will want to know exactly who you speak with within the organization. What is the expected timeline to get information or changes back to you? As we grew, we had to learn to do a better job of teaching our clients who they needed to contact for each specific question or issue. Make sure you know who to contact for whatever department you are looking for after the sale.
Also, ask about what kind of warranty, if any, there is on the property and how long it lasts. What does that warranty cover? If my HVAC goes out in the next 12 months, are you going to fix or replace it? These are seriously important questions, as HVAC replacement on your dime as the client could cost you a year or more worth of your anticipated cash flow.
Kitchen shot from a turnkey property recently renovated by my team
Who’s Actually Selling You the House
In the turnkey space, there are both direct provider sales and aggregators not connected specifically to one company. The aggregator’s job is to get interested buyers thorough marketing and education and to help connect the dots with great marketing and online tools to both develop buyer leads and partner the turnkey provider with the buyers themselves.
If there is an aggregator or marketing company involved with bringing the provider and you together, make sure to ask them who takes what responsibility if you have issues and what that line of communication (and responsibility) looks like. Within our business, we sell direct to the client, do the rehab, and manage the property because we believe it’s most simple for clients—although much more complex with internal handoffs from acquisitions, renovations, and then management. I think the key here is to ask the question and know what the company you are interested in does.
Related: The Top 3 Mistakes New Turnkey Owners Make Once They Buy
There is more than just the numbers on your pro forma that creates the return on your investment. Read and study carefully. Some companies include just your cash flow number from your rent, mortgage, and management fee. While we can all agree that the cash flow number looks way better without including all the other types of expenses, they are real expenses for a reason. Because maintenance and capex will be important at some point, if not right at the purchase of your property depending on the type of renovation, make sure you factor in all the expenses.
If you aren’t sure what the rate of return actually is, use a tool like they have here at BiggerPockets, and plug all the information into the rental calculator and see what the actual rate of return is on the property. I’ve attached an actual pro forma here (from the middle property above) to provide an example that includes all the other expenses and the calculated cap rate and cash-on-cash return after expenses.
It’s a great joy for me to write about the turnkey properties because it is an awesome asset class that has now become very attainable for more and more investors. The opportunity to take full advantage of all the benefits of real estate without having to swing a hammer or know how to buy a distressed property is really awesome, as long as you have the right property and the right team working with you.
Start saving, buying, and investing now. I don’t think people realize how little they need to invest to start their real estate portfolio. Save your money! Get fired up about what life looks like when you have made the commitment to do all this hard work of saving, learning, and investing. Then begin to enjoy the rental income, tax benefits, and the fact that your tenant is now paying off your house for you. If you have been on the sidelines thinking about investing and are ready to pull the trigger, then go out there and do it!
Are you considering turnkey investments? Why or why not?
Leave your comments below!