Turnkey at full value

17 Replies

Hello all,

I have a question about purchasing multifamily turnkey properties. Is there a formula for this or would you want to purchase at full value and look to gain your investment back in cash flow? I know we always look for a lower price but I am wondering if there is a standard formula for investors when looking for multifamily turnkeys e.g duplex, triplex?

If you are buying through an actual turnkey company then there is not really a formula because you aren't the one deciding on a price, they list the price of the property. You would/could compare that to market value, but those prices are pretty much set. If you are just buying a random turnkey property, the seller has probably set the price and you just need to determine if it's a legit price or not. You can do two methods for that- look at comps and see what it should be valued at (taking into account it's fully rehabbed and good to go) or you can look at the income approach to valuation and, knowing what cap rate is standard for that market, figure out what the sales price should be.

Turnkeys will always almost be more of a cash-flow play because they are almost always at or above market value, so no equity starting out. The real trick to get some appreciation working in your favor is to buy the turnkey in a market whose growth spurt hasn't fully happened yet and has room to grow. Atlanta was a huge one over the last few years, Phoenix before that, and more recently Dallas and Chicago have been fast-movers. Chicago especially. So that's the trick for equity in a turnkey, grab the right market at the right time.

Actually the best way is have the seller carry 10% with a 5.75 CAP RATE and a 4.25 interest only loan for 3 to 5 years this will reduce cap.

Thank you both

@Ali Boone - Yes I would be looking to buy from a seller directly so I would have to do my due diligence for sure. Thanks for the tip!

Then the best way to do that is start buying understanding the going prices in that area. Talk to more than one turnkey provider, understand in detail their offering, learn more about the market, and see if their price makes sense. A lot of turnkey providers will price the property based on the income approach- if the going cap rate for a market is 7%, for example, they might set their price so that you would get 7% out of it. That is assuming they don't have comparables in the area to base the price off of.

My recommendation is don't worry so much about focusing on their pricing. I've never seen a turnkey provider price anything at that absurd of a price (knowing that most of their prices will be at or above market value). I'd focus more on doing due diligence on the company and the properties. As you do that and once you have that under your belt, you'll know whether their price makes sense.

Hi @Michael Gee

With a turnkey provider, don't forget you have to do your independent due diligence on both the provider AND the property (and area). Also, don't forget that good property management is absolutely critical to making a rental work so you have to have that set up before you buy as well. If the turnkey provider is providing all these services then your due diligence of them would have to extend to ensuring they perform well in their rehab work as well as property management. In that case, it would be prudent to have a backup plan (e.g., another property manager ready to go) in case it doesn't work out. Be wary of long term property management contracts.

Let us know how it goes

Larry

Turn keys are full of scams;

Buy at 12K, put 18K in it they call it being 49K at that point for financing.

Then their buddy moves in, signs a lease for 700, now it's a 70K property to sell to a beginning investor.

The seller helps the tenant with a few months rent, then they take off.

The investor tries to rent it at 700 only to find he can't, that lesson may take 3 months, finally he get it leased for 450 and is lucky to do that.

Lots of due diligence is required with turn key operators, find what they got it for, what improvements they made, who is that really on the lease, where did they come from and what is the market value based on comps not on lease amounts. ")

@Bill Gulley That's a pretty depressing attitude. While I'm sure that can happen, I would expect companies like that to be short lived.

Like everyone says on BP, do your research, due diligence is key. If anyone here doesn't want to do research on these significant investments... well they are going to get what they work for.

Originally posted by @Alex Moore :
@Bill Gulley That's a pretty depressing attitude. While I'm sure that can happen, I would expect companies like that to be short lived.
Like everyone says on BP, do your research, due diligence is key. If anyone here doesn't want to do research on these significant investments... well they are going to get what they work for.

happens more than you think, these guys change names and move as well, not my attitude as spilling out the facts.

Most all will attempt to influence price from the lease payment, the purpose of turn keys is selling the lease and expected rents more than the value of the dirt, that is not the aspect of valuation most weighted in single family 1-4 properties. I would never base a purchase price on a lease put in place by any seller on such properties, I'd look to fair market rents. If you use FMR then you just eliminated the possibility of pumped up rental values. :)

Thanks for the advice everyone!

Originally posted by @Bill Gulley :
Turn keys are full of scams;

Buy at 12K, put 18K in it they call it being 49K at that point for financing.

Then their buddy moves in, signs a lease for 700, now it's a 70K property to sell to a beginning investor.

The seller helps the tenant with a few months rent, then they take off.

The investor tries to rent it at 700 only to find he can't, that lesson may take 3 months, finally he get it leased for 450 and is lucky to do that.

Lots of due diligence is required with turn key operators, find what they got it for, what improvements they made, who is that really on the lease, where did they come from and what is the market value based on comps not on lease amounts. ")

Very sad, but true.

Most turnkey properties are sold based on the cap rate and not value. In saying that, it is very difficult to predict what the true value of a property is in a lower class area where the comparable are all over the shop.

I know when we were working the Kansas City market and someone would ask me for comparable sales it would be very difficult to provide figures or even give estimates.

Our asking price figure would include a medium price point with a minor profit that we believed was sufficient but would also guarantee that the numbers promised on paper will be achieved in real life.

The higher the class of area, the lesser fluctuation in the comps.

Thanks for reading and have a great day.

Originally posted by @Bill Gulley :
Turn keys are full of scams;

Buy at 12K, put 18K in it they call it being 49K at that point for financing.

Then their buddy moves in, signs a lease for 700, now it's a 70K property to sell to a beginning investor.

The seller helps the tenant with a few months rent, then they take off.

The investor tries to rent it at 700 only to find he can't, that lesson may take 3 months, finally he get it leased for 450 and is lucky to do that.

Lots of due diligence is required with turn key operators, find what they got it for, what improvements they made, who is that really on the lease, where did they come from and what is the market value based on comps not on lease amounts. ")

I don't know Bill. I'm with you on the due diligence and that you have to keep your BS meter turned real high...but isn't that the case with all real estate and especially buying out of state? I've been in this particular niche for a long time and I have run across all sorts of questionable characters, but i've never come across a company who does what you say. Not specifically what you say anyway. Anyone operating like this would be a one-and-done kind of company without question and would have no way of avoiding a crazy backlash all over the internet.

This may be a little picky, but there are enough documented instances of companies just simply behaving poorly to use as a reminder for out of state buyers and TK buyers. You may know specifically of a company who does or did exactly what you say, but for me, I have never heard of that.

As for buying Turnkey at full value, there is absolutely nothing wrong with that if the buyer is achieving their goals of return, comfort and security in the deal. It is absolutely the buyers responsibility to be diligent in their research and preparation before buying, but what price you pay is not the only factor in a deal. With passive investments (and that is what Turnkey is), the buyer has to make sure that value they are receiving from the seller and the company they will continue to work with, justifies their buy price.

Chris

@Michael Gee I always tell investors to start with a clearly defined financial objective for your cash flow and ROI. I think sometimes when people are starting out, they can get too focused on comps and market values and lose sight of their ROI goals. If you're buying a turn key property, you should not be expecting a whole lot of built in equity. You are buying cash flow. New investors just fresh from a Carlton Sheets seminar think that they have to have 30% equity going in but that only applies when it's a distressed property, not a turn key. The turn key company has take all of the risk of acquiring the property and renovating it. They need to make a fair profit too so there is not usually a lot of room to be pricing it significantly under market value. If you can get a 9 or 10% return from cash flow then you have to decide if that's enough to make the property worth the price.

@Bill Gulley

I'm with @Chris Clothier on this. "Lots of due diligence is required with turn key operators". You have to do thorough due diligence no matter how you are buying a property, not just when buying through a turn-key company. There's snakes in every aspect of this business but implying there working with turn key companies is somehow more risky is really doing a disservice. It lulls people in to a false sense of security if they think that by not dealing with one of those "evil" turn key companies that they are not going to get ripped off. Actually, I think it's just the opposite. It's much easier to get ripped off going the do-it-yourself route. With a turn key company, you have to find one company that you can trust and work with them, and there are some very good ones. When you do it yourself, you need to find a good real estate broker, contractor, property inspector, property manager etc. It's a lot easier finding one person you can trust than finding 5. I've seen people ripped off both ways. It's all about knowing who you're working with.

Mike

Regardless of how one may justify the valuation of a SFD, it is not done by an income approach, that's pretty much a period. So I agree with you that not everyone is a crook, but that is something to look at in the due diligence.

I really do understand dirt out of state, I have no idea why someone would choose that over doing properties locally, as if they don't have any properties locally.

Seems like all you're doing is going on the hook on a property you are relying on someone else to manage, etc. there are better ways to invest.

What happens if your property manager in Tim-buck-too, 800 miles away gets hit by a bus? People do die, they become incapacitated, who steps in to take their place? How do I know the guy will even be in business next year?

Right, passive income, until I have to step in and put myself in management position because my PM's wife who took over the company has no real RE experience.

The due diligence would be endless. There are people who are not very sophisticated who can be sold almost anything when marketed well if they are given enough reassurances and never really informed of all the risks, I mean who does that in RE?

I doubt all the Saints could convince me to buy SFDs 800 miles away placing it under management of individuals, no matter how honest they might be. I'd jump into a REIT before that. But, that's just me, maybe others know more about RE issues and have things covered as well as if the property they owned were 20 miles away. :)

Originally posted by @Bill Gulley :

I have no idea why someone would choose that over doing properties locally, as if they don't have any properties locally.

Hey Bill - Your response had a bunch of good points and I really can't add anything or take anything away from it, but I copied this line because it really goes to the psychology of buying. I have a lot of clients that simply do not want to do anything with the properties themselves. I would say "fear' is too strong of an emotion, but it becomes much more of a decision to invest without the responsibility of actively overseeing any parts of that process. Without the responsibility, it becomes easier to make decisions.

Funny thing is, many can admit that to themselves. They know that they will not buy real estate if they have to find it or fix it or manage it. They also want more than a REIT where you have no connection to the company or the process and properties. It just goes to the very heart of buying psychology and understanding what makes investors take actions. I would like to think that we are pretty good now at recognizing investors who are going to do well with a company like ours and those who need to find another for of investing.

@Mike D'Arrigo Draws a good comparison between the risks of turn key vs doing it yourself. I see people on here get too focused on the risks of using someone else to help them find properties but nobody talks about how ineffective DIY can be from out of state. Unless you've got the experience, network, and knowledge to pull it off yourself, do you really have another option?

More simply, what's more difficult - due diligence on a prospective property sitting in your lap, or everything that goes along with finding your own property plus due diligence?

Its also not that easy to find cash flowing properties in markets like Southern California.

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