RI-- Here is my perspective on turnkey rentals for new or experienced investors looking for xx yield.
Background first- I've been an investor/developer, builder, landlord (fair market and subsidized), private lender, project manager for 20yrs and for the past 7yrs an "accidental" litigator, involved in litigation against all the major banks for all the bad things they did to consumers and investors.
I didn't go to law school but had to learn on my own (10,000 hours later in commercial law, trust law, tax law, securitization, syndication, consumer protection, fed, state and bk rules, appeals, etc) and ended up litigating in about 20 different states. Also used to be a deep sea diver working in the oilfield doing underwater construction-- so I have a lot of construction and PM background.
We also had a $3MM real estate investing/development business wiped out overnight when hurricane Katrina hit New Orleans a decade ago-- had to rebuild from scratch in an entirely new city.
Could write a book about how ins. cos. try to screw policy holders and refuse to pay legitimate claims in a city that was underwater for 3 weeks-- but I digress......
that said --we "fell" back into r.e. after a 7yr hiatus after people suffering from litigation fatigue deeded us their properties- many of them. We've also done a lot of short sales.
Some good attorneys I worked with suggested "stop fighting the bank.. be the bank..." and that is how we ended up buying pools of non-performing notes-- since we can be much more effective advancing social good-- keeping people in their homes and putting a business/ profit model around it. You can make money actually doing the right thing that the big banks won't-- having had to do our own "modifications" (a joke) on res. and commercial property-- we know how to do workouts and underwrite as well.
All of the above is important to give you perspective on the comments I'll share on turnkey rentals- We have a lot of inventory now (midwest, southeast, mid-atlantic)-- much of it is/ or has been sold on owner financing or as a turnkey rental.
When I model out the exit on a property we pick up -- I look at 2 back ends (excepting the ones we keep in rental portfolio) 1) sell on owner financing 2) sell a turn key rental.
1) The owner financing payment has to be affordable and below the market rent for the area to attract a buyer with dinged credit and a down payment that has the highest chance of succeeding in buying the home eventually. We-- generally- stick with 33%/48% ratios to underwrite-- 33% of gross monthly income toward house payment (PITI) and 48% of gross toward other obligations (excepting groceries, gas, etc). By sticking with these ratios( there are some compensating factors to move those around) we generally have less than 10% default rate.
2) The turn key rental/ sell to an investor properties has these attributes-- 1) property is in decent repair (not the Taj Mahal- but decent clean housing), 2) major repairs are done, 3) tenant is screened/underwritten like when we sell on owner financing-- we do criminal background, don't care about credit as long as they paid their last landlord and the one before- or have good reason for not doing so, 4) 12 month lease, 5) sell on 10 or 12 cap (10% or 12% annual ROI) depending on neighborhood.
In working class neighborhoods we sell turn keys on 10 cap, in lower income neighborhoods we sell turn keys on 12 cap. We don't work in the hood/war zone as I've had enough of the hassle after 20yrs of doing this.-- You can make $$ in the hood-- but it's not good place for passive investors buying turn key rentals to buy in.
You may be temped to buy in the hood due to the pro forma (projected) yield, but when the vacancy happens and the property needs repairs-- the extra security, break-ins, theft, etc can eat you if you don't know what you are doing.
We also sell the above turn keys on those cap rates based on fair market rent rates. If the turn key has a subsidized tenant in, it -- then it's the cherry on top for the turn key buyer.
Having had about 60 units in New Orleans when Katrina hit and having dozens of units now- we had a lot of subsidized units-- back then Sec8 was paying 130% of fair market rents. But the banks we dealt with always wanted numbers run on fair market in case the Sec8 market dries up-- it usually does when a lot of investors flood in.
Subsidized tenants are a great way to boost your annual ROI. We often (with a few exceptions) rented to those with partial vouchers (when they used a voucher system) meaning the tenant paid usually 20% of the rent. That meant they had to work or had to have some income and contributed to the rent-- meaning they were less likely to destroy the place-- they had a little skin in the game.
We sell with and w/o management-- make sure you factor in management cost-- even if self managed-- because you may turn it over to a manager later. Management fees in our markets still run about 10% of monthly gross and 1/2 to 1 month rent to place a new tenant. Ideally you want a manager that is also an investor since they more likely have your interests in alignment with theirs and know more than general property managers- this is not always possible but look for that.
Last comments--I would look at your target yield, pick your markets, then develop relationships with those you trust to buy from.
We are always selling part of our inventory-- both turn keys and owner financing so we can recapitalize and buy more product -- Notes and properties-- to repeat the process over again.
Most investors-- like us-- selling turn key rentals want: 1) repeat buyers and/or 2) referrals.
There are those short sighted investors that sell a lemon to an unwitting buyer-- but in my experience they are the exception and you can protect yourself with the same diligence you do when buying any property.
Last-- verify-- never trust-- This is coming from a very trusting guy (until you try to screw me) but after litigating for the past several years-- dealing with hordes of lying attorneys, judges and bankers-- you MUST do your own diligence and don't trust anyone else-- unless they have a track record of past performance you can count on-- that goes for 1) sellers, 2) realtors (BPO agents), 3) title companies 4), attorneys, 5) appraisers and any other vendors you deal with--
Contractors are a special breed of weird-- We have several good ones in the markets we do business in- but if one thing hasn't changed in 20yrs-- it's that contractors are generally a pain to deal with-- even the good ones flake out sometimes-- it just comes with the business.
Hope that was helpful-- we have inventory we are always moving-- if you want me to send you what we have let me know--
Hope this has been helpful as well and you succeed in meeting your goals in this business.
todd wetzelberger
