Out of state turnkeys

23 Replies

I am starting to read up on real estate investment and quickly realized that investing close to where I stay(California) is not possible as 1% rule does not really apply here. So I have been reading up on out of state investments and turnkey comes up as a good way to achieve this. But the convenience of turnkeys sounds too good to be true - they buy rehab, find tenant and maintain the property. I wanted to get some information on turnkey investment and what are the things to watch out for. Are there any bad experiences out there and ways to overcome it? 

Originally posted by @Srini Ramkumar :

I am starting to read up on real estate investment and quickly realized that investing close to where I stay(California) is not possible as 1% rule does not really apply here. So I have been reading up on out of state investments and turnkey comes up as a good way to achieve this. But the convenience of turnkeys sounds too good to be true - they buy rehab, find tenant and maintain the property. I wanted to get some information on turnkey investment and what are the things to watch out for. Are there any bad experiences out there and ways to overcome it? 

 Below are some more best practices for out of state investors.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.

@James Wise That makes a lot of sense. It definitely helps to get the neighbor hood right. Will guarantee a good rent and less problems with tenants. I still have not zeroed in on the market that I want to venture into. I am open to looking at a bunch of markets. Some of the most common ones I have come across in biggerpockets are - Birmingham AL, Boise Id etc among other places. The biggest problem I face as an out of state investor is to zero in on the markets and getting the right zip codes. I assuming there is no easy way for this other than due diligence. Are there any metrics/characteristics that you look out for (one which helps filtering out locations better) ? What are the sources that are available that would help a novice (like me)?

@Srini Ramkumar just beware of properties older than 1950s, under 80k and rent for less than 900 a month. Low end properties is a bad way to start your portfolio.

Originally posted by @Srini Ramkumar :

@James Wise That makes a lot of sense. It definitely helps to get the neighbor hood right. Will guarantee a good rent and less problems with tenants. I still have not zeroed in on the market that I want to venture into. I am open to looking at a bunch of markets. Some of the most common ones I have come across in biggerpockets are - Birmingham AL, Boise Id etc among other places. The biggest problem I face as an out of state investor is to zero in on the markets and getting the right zip codes. I assuming there is no easy way for this other than due diligence. Are there any metrics/characteristics that you look out for (one which helps filtering out locations better) ? What are the sources that are available that would help a novice (like me)?

 Citydata.com is a nice resource. All & all which market you choose isn't something to loose sleep over. Its rental real estate, at its core it's a profitable business. Just buy right in the market you choose.

I've almost always bought turnkeys for myself and have worked with them for years. They aren't too good to be true because nothing is ever guaranteed. They still require you, the investor, to conduct proper due diligence and to keep your head on in case any challenges arise. If they were really too good to be true, you wouldn't have to pay attention to them. 

Things to watch out for? Not working with a shady company, being tricked into thinking you don't need to do due diligence, and then general cautions about working with property managers and keeping an eye on them.

Have you started looking at any turnkey markets in particular?

Originally posted by @Srini Ramkumar :

I am starting to read up on real estate investment and quickly realized that investing close to where I stay(California) is not possible as 1% rule does not really apply here. So I have been reading up on out of state investments and turnkey comes up as a good way to achieve this. But the convenience of turnkeys sounds too good to be true - they buy rehab, find tenant and maintain the property. I wanted to get some information on turnkey investment and what are the things to watch out for. Are there any bad experiences out there and ways to overcome it? 

Turnkeys are a great investment when looking OOS. I would just make sure they are a TRUE provider. You want to make sure they are not some company that just shows listings off of the MLS. They should own, renovate, and manage the property all in house. The only third party should be the inspection.

Try looking at:

The Best Types of Markets for Profitable Turnkey Properties

What to Ask When Working With a Turnkey Provider

It all comes down to what works for you and the team you work with.  To be sure it is not to good to be true, but some of the projections put out by some turnkey companies can be too good to be true.  Be sure you verify and use your own numbers for projected soft costs like vacancy and maintenance.  If you are looking for a variety of ways to do relatively passive investments you might want to check out my blog article Three Key Routes for Passive Real Estate Investing

@Ali Boone Turnkeys, definitely suit nicely for me. I am a first time investor and I want to concentrate more on getting the home and market right and do not want to worry about buying a property and work on it and rehab it. I have currently not zeroed in on any markets? Are there any list that you would recommend? Once I have chosen a market, I plan to look into turnkey companies in that market. Is this a reasonable/logical approach?

@Srini Ramkumar The turnkey team you work with can be even more important than the market choice.  Regardless, I highly recommend that you visit the market and the team(s) you are considering before closing on your first deal. Get to know the rehab work they are doing, the neighborhoods they are investing in, and the quality of their property management.  Nothing is more important for the long term success of your investment than the PM.

Originally posted by @Srini Ramkumar :

@Ali Boone Turnkeys, definitely suit nicely for me. I am a first time investor and I want to concentrate more on getting the home and market right and do not want to worry about buying a property and work on it and rehab it. I have currently not zeroed in on any markets? Are there any list that you would recommend? Once I have chosen a market, I plan to look into turnkey companies in that market. Is this a reasonable/logical approach?

Hey Srini! Yes, for sure. Well and so for picking a market when it comes to turnkey investing, the way I see it, is that the market I choose has to 1. be a good market to invest in and 2. have a good turnkey provider. Unless DIY projects where you can pick anywhere, for turnkeys you have to find a market that actually has a turnkey provider in it, and preferably a good turnkey provider. I've known markets I like but haven't found a good provider and I know of providers I love but I hate the market they are in. So for me it's always a combination of the two that I have to focus on and look for.

Which market really depends on your budget and/or personal preferences. Like for instance some markets offer more urban rowhouse style properties whereas other markets offer more suburban freestanding SFRs, etc. And then different markets offer different turnkey price ranges too.

Feel free to shoot me a message either on here or at my email below and let me know what kinds of things you're interested in and I'm happy to make some recommendations!

@Srini Ramkumar

You gotta know your numbers because projections from turn-key providers are full of rainbows and cupcakes. Many won't even include basics like CapEx and maintenance saying stuff like - our properties are fully rehabbed even though appliances/roofs/HVAC don't last forever... in the projections and they like to cherry pick rent projections that are the highest possible in the area.

A common scam is filling a rental with unqualified tenants who default and need to be evicted. Read the PM contract in detail as often it's in their interest to continually place unqualified tenants in your property since they take a 10% management fee per month or 1/2 to 1 months rent for placement.

@Srini Ramkumar I lived in SD and was priced out so I refid my home there and took out all the equity bought 6 homes in STL rehabbed them and they are all cash flowing except the 1 I haven’t rehabbed yet. I’d say it’s a great plan but you need to know something about the area. If you have family or friends that could scout out your potential investments way better. I actually moved to St. Louis to be more hands on and can help you when you get ready to take the plunge. It’s very Important to work with someone you trust. Long term I’d love to help out of state investors build there portfolio and help with the rehabs ETC.

@Srini Ramkumar

you have gotten great advice here. Do your due dilligence, be patient. OOS investing is only good if you have funds to scale to five or ten rentals within a year or two. One or two rentals wont give you much. 

Originally posted by @Ray Lai :

@Srini Ramkumar

You gotta know your numbers because projections from turn-key providers are full of rainbows and cupcakes. Many won't even include basics like CapEx and maintenance saying stuff like - our properties are fully rehabbed even though appliances/roofs/HVAC don't last forever... in the projections and they like to cherry pick rent projections that are the highest possible in the area.

A common scam is filling a rental with unqualified tenants who default and need to be evicted. Read the PM contract in detail as often it's in their interest to continually place unqualified tenants in your property since they take a 10% management fee per month or 1/2 to 1 months rent for placement.

 Ray,   while your statements are certainly hyperbolic and in the past I have seen this and would concur.. but other than Morris invest I have not seen too many follow the path your talking about.. 

and for sure just like buying from a wholesaler ( never take their word fOR ANYTHING related to value or rehab.. Buying sub 150k SFR rentals is simply not that complicated.. use 50% of gross to 60% of gross rents for fixed costs back out your mortgage and that's your cash flow.. if you do a little better great but this will keep you out of trouble.. just like when my accountant wants me to over pay my quarterly estimates it keeps me from having penalties even though I don't really owe that much.. same principal over estimate and live with better results..

When you're all considering calculations.. do you factor in the leasing fee (typically 50% to 100% of a month's rent -so on a monthly calculation it'd be 1/12th of a month's rent assuming 12 month leases) in addition to the PM monthly fee, too?

When I'm analyzing a potential deal, I've been factoring leasing fee (1/12th rent per month) + PM Fee + 7.5% CapEx + 7.5% Repairs + Principle + Interest + Taxes/month + Insurance/mo + Vacancy (10%)... going with the thought that tenants in single family rentals will be responsible for mowing the lawn and all utilities.

Is this too strict in terms of analyzing? Or should I also factor in utility costs, too? 

Right now, I'm not finding a lot of viable options based on asking prices + market/estimated rents using these numbers... experienced folks...thoughts?

@Will Gates I am still exploring the various markets and trying to come up with a way to come up with the right numbers to evaluate a deal. Your formula(if I can call it that) looks good. However, I dint understand the leasing fee part. What is that? Is it a recurring cost? Also, what constitutes a CapEx? Sorry , I am a bit new to this and learning the tricks of the trade. From my knowledge from combing through bigger pockets I was planning to add up - 50%(expenditures + vacancies) + PM fees + EMI. to answer your question about, whether it is being strict - I think its always good to be on the conservative side rather than being on the aggressive side. Atleast I think for a beginner like me that suits.

@Srini Ramkumar , Leasing fee is a fee most PMs charge to owners for getting a tenant in place, which is often 1 month's rental charge. Most PM-tenant contracts are 12 months long, so if you get a new tenant each 12 months. PM would charge you 1 month rental fee, so if you consider it a monthly breakdown that'd be broken to 1/12th of rent per month into your calculations. Does that make sense? If not, I'm sorry - I can try to find a better way to explain it.

CapEx - things like roof repairs, big purchases that will eventually need to happen, so you consider CapEx % taken from monthly rent so you're not shocked when big ticket expenses occur.

The 50% rule is good to consider, but if you're able to pull data to break down the expenses further to get a better idea (area taxes, insurance quotes, PM %, etc) it'll make things more accurate.

Originally posted by @Jonna Weber :

Hi @Srini Ramkumar -  Memphis Invest is one I would be looking in to if I were investing in turn key, and they are in several markets. You may have heard BP member @Chris Clothier on podcasts.   @Ali Boone knows the turn key business very well - and always has great insight.   Happy researching!

 Thanks Jonna! :)

Originally posted by @Will Gates :

When you're all considering calculations.. do you factor in the leasing fee (typically 50% to 100% of a month's rent -so on a monthly calculation it'd be 1/12th of a month's rent assuming 12 month leases) in addition to the PM monthly fee, too?

When I'm analyzing a potential deal, I've been factoring leasing fee (1/12th rent per month) + PM Fee + 7.5% CapEx + 7.5% Repairs + Principle + Interest + Taxes/month + Insurance/mo + Vacancy (10%)... going with the thought that tenants in single family rentals will be responsible for mowing the lawn and all utilities.

Is this too strict in terms of analyzing? Or should I also factor in utility costs, too? 

Right now, I'm not finding a lot of viable options based on asking prices + market/estimated rents using these numbers... experienced folks...thoughts?

 Your calculation of 1/12 rent per month to cover the lease up fee is not going to be universally applicable.  As you mentioned sometimes the lease up fee is less than a full month's rent, maybe 1/2.  But what you didn't say is that a tenant may stay in place for more than 1 year.  In fact, that is one of the things I look for in property managers, their average tenant occupancy.  I like to see 3 years or more as an average.  Of course their could also be renewal fees, and you should know about those as well.  But these are usually far less than the lease up fee.  Some of the better providers may also focus on longer leases 2, even 3 years, like my turnkey provider in Jacksonville, FL. There I have tenants that signed renewals this year of 2-3 years, after already being in their homes 3 and 5 years respectively.

Property management is such a critical part of the long term success of your investment, and truly projections are not one size fits all.  

Originally posted by @Larry F.:
Originally posted by @Will Gates:

When you're all considering calculations.. do you factor in the leasing fee (typically 50% to 100% of a month's rent -so on a monthly calculation it'd be 1/12th of a month's rent assuming 12 month leases) in addition to the PM monthly fee, too?

When I'm analyzing a potential deal, I've been factoring leasing fee (1/12th rent per month) + PM Fee + 7.5% CapEx + 7.5% Repairs + Principle + Interest + Taxes/month + Insurance/mo + Vacancy (10%)... going with the thought that tenants in single family rentals will be responsible for mowing the lawn and all utilities.

Is this too strict in terms of analyzing? Or should I also factor in utility costs, too? 

Right now, I'm not finding a lot of viable options based on asking prices + market/estimated rents using these numbers... experienced folks...thoughts?

 Your calculation of 1/12 rent per month to cover the lease up fee is not going to be universally applicable.  As you mentioned sometimes the lease up fee is less than a full month's rent, maybe 1/2.  But what you didn't say is that a tenant may stay in place for more than 1 year.  In fact, that is one of the things I look for in property managers, their average tenant occupancy.  I like to see 3 years or more as an average.  Of course their could also be renewal fees, and you should know about those as well.  But these are usually far less than the lease up fee.  Some of the better providers may also focus on longer leases 2, even 3 years, like my turnkey provider in Jacksonville, FL. There I have tenants that signed renewals this year of 2-3 years, after already being in their homes 3 and 5 years respectively.

Property management is such a critical part of the long term success of your investment, and truly projections are not one size fits all.  

 Good point, longer leases would be great!

@Will Gates Best way to estimate capex is to take the estimated cost of all major items. Roof, hot water heater, AC, furnace and divide each of those by their useful life into a monthly payment. PM fees vary but typically will be 11-13 percent if you include a placement fee annually (you don’t want that by the way). I typIcally just do whatever the monthly fee Is because I dont personally expect vacancy per house per year Repairs should likely be 800-1000 a year per house on general maintenance. This doesn’t include a turnover if a tenant leaves. Mortgages, taxes and insurance you can all look up. Vacancy rates can be looked up to. I typically use 8 percent which is what Memphis was at last I checked (as an example). So for example a hot water heater cost 1000. Lasts 12 years. If it’s 4 years old, then I got 8 years left or 10.41 a month. If everything is brand new (which it should be for turnkey), then your capex is much smaller. I’m not sure how important it is to calculate furnace cost something like 25 years from now (if it’s brand new). I may never own the house that long. Just depends how far into the weeds you want to go