Turnkey for First Rental Investment?
Jeremy BakerPro Member
Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votesTurnkey for First Rental Investment?
Most Popular Reply
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12yTurnkeys are, in theory, fully fixed up properties that are ready to rent. Often with tenants and management in place.
Do your own due diligence. Verify everything turnkey seller tells.
I've looked at quite a few of these. While there may be acceptable deals out there many are overpriced, with overly optimisitic rent projections, and a shoddy rehab job. After the one year rent guarantee runs out the buyer, almost always distant, discovers they have bought a property at an above retail price that needs continual maintenance and doesn't rent for anywhere near what the seller claimed.
At best you'll give up some of your profit in exchange for not having to do any work. At worst you'll take a beating. Get on a plane or in the car and go see the property. Drive the area. Do your own research. Forget about what properties are worth in your own area and learn values where the property really is.
57 Replies
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
Many thanks to everyone for your responses. We've decided to concentrate locally for now, but we will always keep an eye out for deals out of state but just in those areas where we have contacts and knowledge of the area.
It's funny, my wife and I were joking last night as we recounted how we bought our Maui property sight unseen with absolutely no experience. A kind of "what were we thinking!" type of discussion. However, as many have mentioned in previous comments, we did a lot of research and took out time for the right deal to present itself. Even though we already knew the area well and had some knowledge of the market, we turned over as many stones as possible in our search for our little piece of Hawaii. This is the type of work we are going to do with investing locally and with any out of state turnkey that may catch our eyes.
I will definitely update this thread if we venture out of state and let everyone know how it goes. Thanks again!
- Austin, TX · Member since 2013 · 103 posts · 19 votes12y
@Jon Gable It's not just the info presented by the seller that you need to confirm and verify.
It's what is not provided by the seller that an experienced investor knows what to look for--such as schools, demographic trends,crime, etc. Visit the city and do your due diligence before investing. If you don't have the money to visit the property before investing in it, then it is better to invest closer to home.
Don't look for a Grand Slam on your first investment..or any others for that matter. Singles and Doubles drive in runs (to continue with the lame baseball analogy).
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
Originally posted by @Robert Piller:
@Jon Gable It's not just the info presented by the seller that you need to confirm and verify.
It's what is not provided by the seller that an experienced investor knows what to look for--such as schools, demographic trends,crime, etc. Visit the city and do your due diligence before investing. If you don't have the money to visit the property before investing in it, then it is better to invest closer to home.
Don't look for a Grand Slam on your first investment..or any others for that matter. Singles and Doubles drive in runs (to continue with the lame baseball analogy).Thanks @Jon Gable , very nice baseball analogy...and good timing w/ the opening day getting closer!
From what I have seen from turnkey providers in my area, "Cash Price" actually translates to, "The price is so high it will never appraise for this so financing is out of the question" instead of the implied "Deal".
I would suggest checking any potential turnkey property against the MLS or Realtor.com. Make sure the price isn't totally out of line for the area as you will probably never be able to make up that permanent loss of capital. If you can finance a turnkey property, I would say to look more into it and proceed if it's good. If it is cash only, ask why and be very, very suspicious.
Originally posted by @Jeremy Baker:
Many thanks to everyone for your responses. We've decided to concentrate locally for now, but we will always keep an eye out for deals out of state but just in those areas where we have contacts and knowledge of the area.
Just curious, what made you guys decide to stay local? At first it seemed like you guys were already leaning toward going out of state.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
The "2% rule" is, IMHO, a horrible rule. Forget about it. It contains assumptions that make it useful only in a narrow range of rents, right about $500. And it makes assumptions about interest rates. Current rates are a bit below the assumed value of 6%. Do your own math.
Be cautious of folks promoting turnkeys who have a vested interest in the business.
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
@Chris K. We definitely are not ruling out going out of state. We will be asking around and doing research to put together a good team for our out of state investments. However, at least for our first buy and hold investment, we will be focusing locally as we want to be more hands on with this investment. We feel this could help us with future out of state investments...then again, if you knew my wife, this could change by the time I'm finished typing this!
@Ali Boone not saying there are none, but from my ability to search Denver metro properties, those 2% properties are almost extinct here.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes12y
Originally posted by @Jon Gable:
I find it absurd that people buy turnkey properties without verifying and validating every piece of information provided by the seller.The saying goes: "Trust, but verify." This is the reason we help our clients do their due diligence. We know that without our hand-holding, some investors will go forward blindly. It's important as an investor to know what you're buying, and confirm the facts and numbers so the property you think you're buying turns out to be the property you ended up buying.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes12y
Originally posted by @Jeremy Baker:
"So, I guess this isn't going to be our first investment since we have a vacation rental property in Maui, but this will be our first buy/ hold / rent property. We've been looking locally here in the Denver metro and quickly found that this is not the best market when it comes to price/ rent ratios."Denver, like many other active markets have become very difficult to invest in. With the low rent-to-value ratios it is hard to cash flow or get a decent rate of return relative to other options. However, there are many markets where you can get R/V ratios of 1.0% along with good cash-flow and appreciation potential (icing on the cake).
Dallas and Atlanta are very good markets with a strong foundation to place your investment capital, and favorable returns and price points. Kansas City is very good too. The Dallas market has been a challenge to get new inventory - we are selling most of our refurbished properties within a day or two. Austin has become a little too pricey to make the numbers work well. Atlanta can provide you 8% to 12% cap rates.
Yes, of course, unless you want to put a unnecessarily large down-payment on a "pricy" property to make the cash-flow work but sacrifice on your returns and leverage. The right turnkey company can provide you will all the tools and resources needed to help you select the right market and property. Be sure to ask a lot of questions to understand what can and cannot be provided for you. It should be a time-saving, hassle-free option for you.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Are you a turn key provider?.. Do you personally buy property and rehab and own them then on sell them , or do you just broker property to your followers? And do you really believe there are 12% cap rates in todays market.. For the Turn Key buyer... Or do you just refer potential buyers to turn key companies and then make a commission referring these folks .
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
@Marco Santarelli thanks for your input and advise!
- Sheffield, IL · Member since 2012 · 85 posts · 27 votes12y
It has been interesting following your thought-journey. I am an out-of-state investor, and, once you have good teams in place, runs very well. I could share with you if you are interested. I get your decision about property management. I used to manage some of mine, now don't manage any, but am considering self-managing a few that are out-of-state. Remember, I have teams in place already, so that's huge.
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
@Steve Endress thanks for your response. I know we should probably stick w/ a niche and go with it, but we keep going back and forth. My wife really is leaning turnkey passive investing and with that, there is much more opportunity out of state. I'm more of a hands on person, but I do see some benefits with a more passive investing style.
I know I said on here yesterday that we are going to focus on local properties for our first investment, however, now that I'm starting to lean towards using a property manager locally, I think we will just choose the best investment for us, even if it's out of state. No matter which avenue we choose, we are definitely going to do our own due diligence with the property and with the team we choose.
Please tell me we are not the only ones that go back and forth like this when deciding how and where to invest. If we didn't have the success w/ our Maui property, then we probably wouldn't even think of going out of state.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes12y
@Jay Hinrichs
We are turnkey provider of passive investment properties in about 10 markets around the U.S. that we determine to present good opportunities for investors. The properties are new-construction or newly-renovated.
We have professional full-service local property management companies in each market that handle all the management tasks and responsibilities. Properties are typically marketed for lease just before they are completed, and tenants move in right around the time of completion or within a couple of weeks thereafter. We rarely see a property go more than 3-4 weeks without a tenant.
Yes, we do see some 12% cap rate properties. Some in Atlanta, some in Little Rock, but most of the time they are in the Midwest in Indianapolis and Kansas City. These are not the norm, but we do have them from time-to-time.
We don't refer clients out (i.e. through them over the fence) to anyone. We work with them from start to finish, educating them along the way, and "holding their hand" to help them make the best decision in terms of the market, neighborhood and property, as well as helping them do their due diligence through the process. Because we work with a large number of local providers, from builders to managers to inspectors, we can stay completely 'agnostic' from the market on down to the individual service providers.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes12y
Originally posted by @Jeremy Baker:
Please tell me we are not the only ones that go back and forth like this when deciding how and where to invest. If we didn't have the success w/ our Maui property, then we probably wouldn't even think of going out of state.
Jeremy -- You are not the only ones as this is very common. I have this conversation with investors every day. They often know WHAT they want but don't know WHERE to start or HOW to get started. That is why most of initial client conversations last about an hour. Once you've started defining the answers to some of these questions, and have some sort of criteria, the rest becomes much easier because you know what you're looking for when you see it.
The good news is that the answers to these questions can be defined by logically answering some questions and relating those to your investment goals, strategy and criteria. I'm happy to walk you through that if interested.
Good luck.
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
@Marco Santarelli thanks! We are going to do a little more digging, speak with our local agent some more, talk w/ a couple of local banks, property managers and we will be looking to speak with some turnkey companies that handle out of state properties. So I'm sure I will be calling on you and anyone else who would like to speak about out of state turnkey investments.
This process can be a little overwhelming at times with all the options and avenues available. Thanks to BP and all those who contribute for making our search much more manageable and enjoyable!
- Denver, CO · Member since 2013 · 185 posts · 160 votes12y
@Jeremy Baker I have seen some of the same problems, Ive noticed are that if your looking for the 2% rule on a rental property its almost impossible. I.E. If you spend 200k on a house its not likely you will get 4k per month in rent. Many of the properties are at the below 1%, so you will have to do some creative financing to make the deals work. but I am also a little apprehensive about investing out of state so I keep searching...
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
Originally posted by @Kevin Fletcher:
@Jeremy Baker I have seen some of the same problems, Ive noticed are that if your looking for the 2% rule on a rental property its almost impossible. I.E. If you spend 200k on a house its not likely you will get 4k per month in rent. Many of the properties are at the below 1%, so you will have to do some creative financing to make the deals work. but I am also a little apprehensive about investing out of state so I keep searching...@Kevin Fletcher I understand being apprehensive investing out of state. We are digging hard and going out driving around town to find a deal here. However, at the end of the day, we all want a good return on our cash, so if we have to go out of state to do so, then we will. I don't think we would go into an are where we don't have friends and family. Knowing people in the area makes us much more comfortable...then again, we bought our Maui condo sight unseen and didn't know anyone there! We did have our local agent call a few agents to interview them for us and luckily we go a great Maui agent that helped us put together a great team over there. Even then, it took us a good 6-8 months to get rid of the nervousness and worry we had about investing out of state.
- Denver, CO · Member since 2013 · 185 posts · 160 votes12y
@Jeremy Baker And that may be the next logical conclusion I come to If I cant find what I'm looking for in Denver. It may even be worth the plane ticket or the price of gas to check out some new markets. I guess as investors the name of the game is being flexible and following the signs that the market gives you. If its not making money, its probably time to adjust the strategy.
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes12y
@Kevin Fletcher and @Jeremy Baker the part of the equation that is missing from your discussion about Denver is appreciation. I know that's a dirty word here on BP but that's what's in the Denver Market now. Think of it this way, even a meek 5% (some areas are well over 10% plus and the Denver Metro as a whole was 9% year of year 2013 from S&P Case-Shiller) increase in price for a couple of years makes the meager cash flow.
One SFH at $200,000 with 10% appreciation turns makes your $12,000 rent turn into $32,000 in net worth change. A couple of years of that and seeking 2% properties out of state seems like a silly idea. You can do better than that too. Now we all know that 10% appreciation is not here to stay but for those wondering, that's why the ratios are so low in Denver.
Denver is growing and the trend is your friend until it ends. I know you can get better cash flow in other areas but value, rents and cash flow can decrease. If the population shrinks, all of the above get hurt.
All of that said, I have been priced out of the local apartment market and am investing out of state. With 18,000 apartment units under construction and cap rates at all time lows of 6% I don't see much near term upside in apartments. SFH I think there will be some upside because they offer amenities that apartments can not and not so many of them are being constructed (60% of building permits were apartment units-normally it's 25%). Things like yards and unshared walls. I could be wrong and this trend could continue for another 10 years.
Also, you will not find the best deals on the MLS. Everyone is looking there. Do some searching for those sellers that don't want their property for whatever reason. Those are the ones that you can make money on here in Denver. In those cases you buy with equity so it gives you lots more options.
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12yBill S. , thanks for your response. From just driving around the Denver metro, I see a lot of apartment/ condo construction. About the only new home construction I see is SE Centennial and Parker areas. My wife and I drove around for the first time this past weekend and was amazed at how many houses were listed for sale that were not in the MLS. We are running some numbers on these houses and looking to put some offers together. We also saw some houses for rent and will be contacting their property managers for more info and to see if the owners would entertain selling. We will also "interview" these PMs to see if they would be a good fit for us in the future. We've been trying to get the #'s to meet our 10% cash on cash return goal. This way we can handle any rental price fluctuation better. Maybe this is a hard goal to meet, but that's what makes us comfortable. Although we are not banking on appreciation, it's sure nice to have that going in. Something I've noticed you really can't count on when looking at condos/ town homes. We are new to all this, so if we are going about this the wrong way then please chime in. We value all of your input and advise!
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes12y
@Jeremy Baker to look for motivated sellers look to eviction court. Someone just through an eviction is often more than happy to part with their real estate to allow the pain to go away.
I like your driving for dollars. Keep up the work.
Not a fan of condos. Too much like apartments to rent. My criteria would be it need a small yard at least.
Never had much luck contacting property managers to see if the owner wants to sell. No PM wants their owner to sell, it's taking the bread off their table. Lots of them also require some kind of compensation if the owner sells (like a listing fee of 6%). You might look up the owner in the public record and contact them directly. I did that and the owner's attitude was much different than what the PM said. Didn't buy the place but did remember the experience.
- Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes12y
@Bill S. thanks for sharing your experiences w/ contacting PMs. We will probably still talk with them about their services, but not if the owner is willing to sell. If anything, maybe we can get a better feel for the rental market in certain areas.
We've found a few townhomes and condos that had a small yard (ok, smaller yards than my kitchen) and garages, but those numbers are way too tight.
Thanks for the eviction court tip. We have just started looking into foreclosures/ pre foreclosure properties.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.