Hello @David B. ,
Buying turnkey is only a purchase method, it does not assure you that you are getting a good property or that you are going to get good tenants. Also, a property is no better than the jobs around it so if the economy is going down in the location in which you buy, what is a good investment today could be a disaster in 6 months. I believe that the process should be:
1. Determine where and what kind of property will generate a sustained positive cash flow and is located in an area likely to appreciate over time. I call this a property profile. (I will elaborate on this later.)
2. Once you have determined the best property profile for you, then you need to consider all your purchase options in that specific location. Whether or not you buy a property turnkey or some other approach is a trade-off you can evaluate based on differences in money, time and risk.
Below is a diagram illustrating the process.
Below I will explain about each block in the illustration.
Property Profile
There are two parts to a property profile: where and what.
Where
• Choose a city which is experiencing sustained growth and is likely to have continued growth. See population changes by state here.
• A rental property is no more valuable than the jobs around it. The local chamber of commerce or university will likely have the information you need. Avoid boom towns where the jobs are here today and gone in 5 years. An example would be a town fueled by a major construction project (a dam, pipeline, high speed train, etc.). Once the project is complete all the construction jobs will vanish as will your renters and you will likely have a disaster on your hands. Job growth and population increase are the basis of long term appreciation.
• Check the landlord/evictions laws. For example, in Las Vegas the typical eviction takes less than 30 days and costs less than $500. I have heard from clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and costs thousands of dollars in legal and other fees (not to mention the accumulated damage over the extended eviction period). No investor initially worries about evictions, until one happens to you. So, check the appropriate laws and regulations before you buy. Your simplest option would be to talk to local property managers. They deal with such issues every day.
• Remember that you need to have sufficient cash reserves so you can carry the property for several months if necessary. This dictates the price range of properties that you can afford. I would start by looking for rental properties in the cities you are considering and then looking for sales comps of similar properties.
• State/city/county income taxes. Most states have a personal income tax. This can significantly impact your return. For example, a property with a 5% return in Nevada, Texas, Washington or Wyoming will actually earn you 5% (subject to your own state income tax and the ability to deduct from your state/federal taxes paid in other states). If the same property was located in areas with taxes you would also have to adjust down the return based on these taxes.
• A city where climate is not a major factor. For example, people rarely move during heavy snowfall seasons in the North East. Or, if the population swells and contracts rapidly with the season as in south Florida where rentals tend to be seasonal.
• A location where annual maintenance costs are reasonable. Higher costs are sometimes due to climate or how the homes were constructed. For example, in heavy snow country you will have to include snow removal costs and more physical damage to driveways and the structure in your annual maintenance cost provision.
What
Now that you have a location that may be profitable, you need to know what to buy. And, what is a good type of property in Cleveland will not necessarily be a good type of property in Phoenix. So, you need to determine four criteria for each specific local, which are listed below. Your best source will be interviewing three or four local property managers. Tell them you are staring out and that you are looking for a property manager to work with.
• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
I have a set of property manager interview questions which I use (I am a Realtor in Las Vegas and my practice is almost exclusively remote investors and I occasionally have to move my clients to a different property manager when the current one starts to go bad.), and I will be happy to send to you (or anyone else who want it). Just drop me an email.
Profitability
After talking to a few property managers you will have a very good idea of what properties rent best. The next step is to determine whether you can make money with these properties. Look on Zillow (or similar sites) for recent sales of such properties. Once you know the sale price of such properties and know what they will rent for (from talking to the property managers) you can use a tool I created to determine if you can make money. (Break-Even Calculator - see here for more information.)
Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV.
If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see in the table above the prices of properties in Cupertino (and possibly Austin) are too high relative to the rent to generate a positive cash flow.
If you cannot make an acceptable level of profit, look somewhere else.
Acquisition Method
At this point you are ready to consider your acquisition options. I believe this decision can be made through a spread sheet and a thorough evaluation of the property manager involved if you are considering turnkey. Even though you buy a property that has the potential to be profitable, only a good property manager can make it happen. Be very careful on choosing the right property manager. Once you evaluate this and you are satisfied, it is time to buy.
Remote Investing Considerations
• Choose a location where you would like to spend some time. When I was setting up manufacturing for a certain item (past life) I chose India as opposed to Vietnam or China. I like spending time in India. I find the other two places more challenging. Almost all of my clients are remote investors and they like to come to Las Vegas to "inspect" their properties once or twice a year. It is actually a vacation for them but they can deduct a portion of the trip cost from their taxes (in most countries). During winter, I find that Canadians are especially interested in "inspecting" their properties!
• As I mentioned before, be VERY aware of issues like: landlord laws (eviction process and costs), climate factors, population trends, job stability and rent stability.
David, I hope the above helps.
Eric Fernwood
