Fair estimate for a maintenance cost on a turn-key property

25 Replies

Does anyone have experience with the maintenance cost on a turn-key property bought through American Real Estate Investments? 

The spreadsheet they sent me for the portfolio of properties uses

$312 in annual maintenance for properties that cost $144k (Fort Worth) and $134k (Houston), and $162 for a $145.5k property. Because of these low maintenance numbers, they were able to show a COCR of around 10%, but when I use the general 1% rule of thumb that people recommend, then the COCR drops down to below 6.77%

As a newbie about to purchase my first deal. This seems like a pretty big difference and does anyone have any recommendation on how to proceed? The company explained that the units are 'fully rehabbed' and shouldn't incur much maintenance cost but holding for a long period of time does entail costly repairs like roofs, termites, etc and those numbers seem awfully low for a SFH right?

I read that 10% COCR on a turn-key is solid, but 6.77% is pretty low in a market that I'm not as comfortable with due to oil prices sliding (been following oil for awhile now) and the economic articles I've read about the areas' economies (feel free to correct me if I'm wrong). I do know that in 2016 (looking in the rear view mirror) that Dallas was #1 and Houston #9 according to the BP blog post.

Here's just an example:

http://www.businessinsider.com/houston-economy-com...

Was really excited when I got contacted by someone from the company when I did my newbie introduction, but now while doing due diligence I'm wondering if it was a mistake to put in the loan application today and ding my credit score when the COCR is so low and Houston is somewhere that according the literature I follow is in the final phase of decline:

http://www.businessinsider.com/phases-of-the-housi...

Thank you for your time and advice in advance.

On a Fully Rehabbed Turn Key you will generally have a lower maintenance %. I don't know much of this company but so long as the work is good, then you will definitely be safe with a lower allowance. Give yourself a fudge factor of a few bucks if it worries you.

Roger that, thank you Brandon!

@Ray Lai I'm not super experienced with real estate as I only have a couple properties so I would get some more opinions, but one thing to keep in mind is there is a difference in repair costs and CapEx. New roofs, siding, and other large ticket items fall under CapEx (Capital Expenses) which is an entirely different savings than planned repair costs. Another things to remember is the age of the building makes a difference as well, so I would look into how old it is. The reason why is maybe it from the 1900's and they did a complete cosmetic overhaul and it looks amazing, but what about the pluming, wiring, foundation, roof, supports, heating and air conditioning, and other things that don't have anything to do with the way it looks but might have a little to do with your bottom line. Like I said, I would get the opinions of other more experienced investors. I would say this though, no one is going to care more about your bottom line and your family than you, so if your numbers don't add up to what their telling you than I would figure out why because ether their wrong or your not doing your calculations right, either way your the one that will suffer not them. Good Luck man, let us know how it goes.

Thanks Daniel. They didn't include a line item for CapEx so I assumed Maintenance Fee included CapEx. Didn't know everyone broke it out separately, thank you. I'll go read up on CapEx estimates.

Good luck to you too! Will keep ya'll in the loop.

@Ray Lai

I was contacted by the same turnkey company after I posted a couple times...not by one of their sales guys but two...and they didn't realize it.

I had a phone call with one of them and it was average at best. Not super open to answering my questions and a lot of sales pitch and general answers.

I live locally in Fort Worth and the Dallas area and I'm still very new but in this market 6 percent CoC is very low.

Also even if it's rehabbed I would say that those mainence costs are very low. I usually use 10 percent of rent for CapEx and maintenance costs and I've heard that could be low.

I did some digging online and I couldn't find much about the turnkey company you mentioned, which is puzzling consider they say they have a great reputation.

Feel free to message me if you have any questions about them, turnkey or my local market and I can do my best to help.

-Caleb

Caleb,

Thanks so much for your response. They were using 2% of rent for maintenance (no CapEx). Numbers seemed quite off. I just plugged in 10% of annual rent for CapEx and maintenance and it dropped it to 6.22%!

Thank you so much for taking the time to respond. Going to add ya! If you're ever in San Diego, I'll buy you a beer. I'm avoiding Texas right now because of the business articles I've been reading and also one of my mentors is selling off properties there as the appreciation there has been significant and he wants to take some off the top.

Cheers mate,

Ray

@Ray Lai it would be a good idea to have someone go by each of these properties (if they are not occupied then maybe get inside to look at the HVAC, HWH, Appliances, structural (foundation) to get a good idea of the area but most importantly the overall condition firsthand. Just to have an actual person check it out is wise. Let me know, we're in both DFW and Houston markets and we can take a look.

Finally, I always like to go a little conservative on my own numbers; I definitely run my own numbers and don't just trust what some of these turnkey companies provide. I am not familiar with this company but instead of the normal 5% for maintenance in my calculations, I would do 2% to be safe since it has already been rehabbed. Also, is the property already occupied? If so, how long and ask them for a income/expense statement. If it's not occupied I would still do 5% for capital expenses again, to have that cushion. 

I'm still a firm believer that both of these markets are GREAT, rents in DFW are higher and lots of corporations are moving here, but if you're buying in the right areas in either market you should be good. 

Reach out to me if I can help!

@Ray Lai I have heard a number between $150-250 per month should be set aside just for capital expenditures (roof, HVAC, plumbing, electrical, etc). If it's a fully rehabbed house, you shouldn't have any of these expenses for 5-10 years, but you have to account for them in the overall analysis. Sure you could have great cash flow for several years, but one big capital expense would eat up many years of positive cash flow. 

For maintenance, like others have said I'd probably use 5% to be safe. 

@Ray Lai Let's round up on a call so I can personally give you some more insight on how we run our numbers. Ray, I prefer to let the investor decide how much to set aside for CapEx, maintenance and vacancy. I agree with Courtney that all investors should run their own numbers and not just take the word of a company like mine. I would do the same thing if the roles were reversed and I was in your situation. Some investors tend to error on the side of caution more than others. I can say that my company purchases homes in very desirable and safe areas, we fully renovate our homes and replace all big fix items like roofs, HVAC, HWT, etc.. if we deem that there there is less than 10 years useful life (at least half useful life left on a HWT). By doing this we believe we are setting our investors up for the best chance of success. This is why we use low assumptions for maintenance and vacancy.

I'm sure Courtney and Caleb can attest to the strength of the Dallas market at this time being that they also live in the area/state. Dallas, along with all the other major cities in Texas have been seeing exponential growth over the past 5-10 years. There are over 300 people a day that move into the Dallas/Fort Worth area alone! That is an amazing stat! One that helps get my homes rented quickly and keeps them occupied. There is not much more I can ask for regarding that. Other markets I invest in you can sometimes see extended vacancies depending on the time of year. That is not the case here in Dallas. That is probably the main reason I love this market so much. 

As for the returns, I believe based on the areas we buy in and the safety of my investment opportunities, a 6% + return is solid. I look for stability over risk. Just because on paper I am presented an opportunity with higher returns does not mean that is how it will perform. Generally higher returns are associated with higher risk. I have been investing for a long time and have seen many things go wrong with lower priced assets in more distressed areas and neighborhoods. I prefer to steer clear from investments like that at this point in my life. 

Caleb, I apologize if you started out on the wrong foot with my company. I would like to know (privately) what some of your questions were that my team was unable to answer. I'm sure I would be able to provide more insight and would be happy to do so. As for two members of my team reaching out to you, I will look into that further and see how I can change that. Thank you for bringing that to my attention. I can say when roles are reversed and I am the customer, nothing makes me more frustrated than a company not getting back to me in a timely fashion (or sometimes at all). That being said, in some circumstances I would prefer to have more than one person reaching out to me to make sure I was serviced. 

I would also say that based on the relationships my company has formed with Fortune Builders, The Real Wealth Network, The Real Estate Guys radio show, Get Rich Education, etc.. we are a pretty credible company. We have been featured on all of these podcasts (twice on the real estate guys this year) to educate investors on how to safely and successfully invest in real estate (rental properties specifically). We were also just awarded the turnkey provider of the year from Think Realty magazine for 2016. This should all be easy to find online. 

At the end of the day I care about the success of each one of my investors and am more than happy to answer any questions anyone on BP may have. 

Enjoy your weekend! 

@Ray Lai 2% isn't close to credible, and that type of proforma preys on people who only look at monthly money-in and money-out.

Different properties, different markets, different standards of maintenance, but our local portfolio actuals come out to about 6% of gross rents for maintenance and 10% for Capex. And, that's on some pretty high rents we have here. I think in terms of percent of gross rents, but better to think in terms of per door or per door+bathroom.

So, on a 2bd/2ba that rents for $1900, that comes to $300/m.  Assuming it's a triplex, that's $900/m.  And, that's on a triplex that was fully renovated and hardened after we purchased. It's very easy to want to ignore it, but it's gonna get you.  Good luck!

@John Larson Hey great to see you make your first post on BiggerPockets! Thanks for writing such a detailed response and offering to go over how your team runs the numbers. I understand the low assumptions for vacancy and maintenance, but have 0 for CapEx does seem strange especially if servicing turnkey investors because if I didn't have the time to come to BiggerPockets and network with people, I incorrectly assumed that CapEx was included in maintenance or some other newbie investors may not even know those large future expenses at all; wouldn't it be detrimental for them to assume that and potentially wipe out their cash flow completely in a few years?

DFW looks good still but personally I'll pass on Houston due to the economic signs I've been following. I'd rather invest in a stable market than one that has booming so strongly and has shown warning signs and troubling economic data. The worst place for my personal investing would be to be near the top of a bubble in a local area where my cash flow is minimal, taxes are going up, unavoidable HOA on SFHs that only rise and may come with special assessments, and where the economic numbers are in a troubling trend. Here's the September report from the Federal Reserve for Houston area:

http://www.dallasfed.org/assets/documents/research...

You can see job growth in "leisure and hospitality" aka bartenders/servers, and massive losses in the high paying jobs that are required to sustain SFH price growth. GDP is negative for 2015 as well, oil and gas are getting hit but oil prices are going to continue to slide with the supply/demand inbalance going on daily in the world. Those are just a few data points, don't want to turn this post into a debate about areas as that will get people riled up. There are a lot of BP investors that are in those hot areas that have grown tremendously since our last bottom.

I did a lot more research into the middle of the night and you are right, 6% return is solid for turn-keys it seems. Maybe turnkeys aren't for me then, as my personal investment criteria makes it not worth it without a minimal 10% COCR. I don't want to eat up your time since it seems like turnkeys can only offer those types of returns.

Lastly, I want to say that you and Josh were very professional and I enjoyed speaking with you on the phone. I believe you do have a good reputation and you guys are extremely responsive. I was emailing with Josh late into the night last evening. I know you guys built a good reputation because the Real Wealth Network they are big time and they've vetted you all. Also I will check out the Real Estate Guys radio show and I did see you guys win the award at the conference. I did do some due diligence on your company. It is hard to find references online for you guys though through google, it's good that you won at that conference or very little does show up online. I personally would work with your team based on your professionalism and how you've handled this inquiry. It's probably hard to find good COCR as a turnkey now that DFW / Houston have appreciated so much.

Enjoy your weekend! I think your company is great, I'm just doing some due diligence as I am indeed a newbie investor and I'm trying to pick up my first properties so I can't make a big mistake. I've listened to Kathy's talks and even attended one in person, and I know the importance of timing and not getting caught up near a top. Apologies if I seem too risk averse in needing $150-$200 set aside for CapEx as I would like to be a buy and hold-forever type.

@Justin R.

Thank you for your solid information on your local portfolio's actuals that come to 6% of gross rents for maintenance and 10% for CapEx. I'm glad to get solid numbers like that, 2% didn't pass my sanity check so now I know to put 16% at least. Thanks for the caveat that it's on high-rents as well. Your rents are a lot higher than the properties I was looking at $1300-1400, so it seems I would've been severely under-budgeting those items.

Thank you so much Justin! Your examples with your numbers are extremely helpful. Best of luck to you!

@Andrew Herrig

Thank you for the $150-250 figure to set aside for capital expenditures. Also thanks for confirming that 5% is a safe rule for maintenance. 

Great topic.   I run my holding company like a business so I use the published stats.   16% of gross rents for Maintenance and vacancies is a gov number and the underwriters like it.    re:  The Millionaire RE Investor by  Keller.     So my best friend is a big duplex investor with   15 doors, I have 18, and he says to use $150.00 a door per month.   If you stay around here you will be very close on houses with no deferred maintenance.   

@Ray Lai It's great that your questioning the company.  This is clearly part of your due diligence.  If the numbers don't make sense then abort.  I don't get involved with any rental property that I cannot get 100 of my cash out in 4 years max.  Keep plugging away.  

@Ray Lai thank you for the kind words and thanks for giving us a shot. Good luck with your investment goals! I wish you the best! 

The turnkey outfits are sort of in competition with each other to show rosy returns. Some can shave expenses and or inflate rents on paper to do this. Then base the price on monthly rents. Next systematically market to BP newbies. Experienced investors pass on these and only an out of stater type would fall for this. Realize that is the common TK business model. Good luck with your search!

@Tony Johnson

Awesome Tony! Thanks for the info on using $150 a door per month or 16% of gross rents for maintenance and vacancies as a gov number that underwriters like.

I will go read Millionaire RE Investors by Keller. Appreciate the great book rec!

@Matt R.

Makes sense, especially in hot markets. It's hard to show good returns when everyone has got to eat and I read several threads where wholesalers were only offering 80% ARV rather than the 70% ARV, and people having a hard time finding properties since competition has gotten so fierce in those markets since they've been dominating the top charts for so many years now.

Thank you for your time and best of luck to you as well!

@Shawn Ackerman  

Thank you Shawn. Is your goal of 100% of your cash out in 4 years based on a rule of thumb or your personal investing matrix? I read an amazing post by Matt Huber that if you buy at 80% value and do the rehab well and then get it appraised and use his method of 'borrowing your own money from a friend' in as little as 45 days you can pull out 100% of your cash (at least in TX) because he understands the re-fi laws. You also bypass a ton of fees. If you want I can send you a message with a copy and paste from his post. I have it saved down in my notes.

@Ray Lai sure, forward me the link to that post. It sounds like something I may be able to apply to my market. Yes, 4 years(25% COCR) is a rule of thumb that it applicable to my market as the cost vs. rent allows me to use that metric. I only purchase property that are income producing at closing and that need a little bit of work.

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