Invest in CA or out of state (Turnkey?)

David Song · 2015-11-15T08:22:12-08:00

Here is my dilemma: as stated in title. Seeking advices. All of my investments are in Bay Area, the high price region. Mostly SFH, duplexes and one 5 unit. Cash flow covers mortgages payments, but not as good as other states. Recently, starting to look for out of state turn keys. I started in some of the areas that I have lived before: Columbus, oh; Philadelphia, New Jersey, and Boston area. Surprisingly, I did not find any deal that meet my criteria. Interestingly, since I know these cities personally, the turn key companies are sending me properties in neighborhoods that I consider C- and they claim B. Whereas the properties in true B neighborhoods provides as little cash flow as CA properties. Furthermore, it seems they want to sell at a higher than market value price, just because it's TK! ( I do my own CMA) My thought is if I buy at higher price, I get a negative equity immediately. No matter how good the cash flow, it's just not good investment. Is there really GOOD TK provider? Anyone has good experience? (fair market price, honest representation of the property, full disclosure, honest projection of cash flow, etc) I spent the last few weeks searching for some positive, but did not find any verifiable case. This is leading me to believe that I should stay away from TK in the future. I heard about 2% rule, but all my properties in CA has about 1% or lower. However, their appreciation is much greater than rental income.

Keith Anderson

Investor · Cambridge, MA · Member since 2014 · 92 posts · 87 votes

10y

First, out of curiosity, did you find turnkey operators in the Boston area? I'm based here and consider it a market not unlike California -- expensive without a lot of cash flow potential unless you go 1+ hours outside of the city.

Your intuition on many turnkey providers is sound, and you should trust your diligence. I am under contract for 2 turnkey properties that are in stable, mostly owner-occupied neighborhoods outside of Chicago. They have no trouble appraising, the rents are realistic, and the renovations are high quality.

But during the diligence I did on many markets and operators, I found exactly what you described finding. It strikes me that there are a lot of high-income investors getting skittish about the stock market and looking to diversify into real estate, creating demand for turnkey properties.

In many markets, it seems investors are willing to pay above fair market value for the "service" they expect to receive. I am willing to pay more than I would buying a distressed property on my own and managing the renovation myself, but I am not willing to pay 10-15% above what the property will appraise for. But it seems like there's a glut of investors out there that are.

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Willem Young

Real Estate Professional · Jacksonville , FL · Member since 2015 · 112 posts · 13 votes

10y

There are reputable turnkey operators out there. A pitfall that out of area investors may miss is cheap or poor construction and poor property management. That is something that may not be evident upfront but will bite you down the line. Make sure you do your research on the track record of the turnkey operator. Complaints about poor construction and PM will come up later down the line.

If the operator is able to buy right and fix up the property efficiently not just cheap, there shouldn't be any need to mark up the property over retail. Chicago is a market that does allows for cash flowing properties in B markets.

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Marco Santarelli

Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes

10y

Hi @David Song,

Welcome to BiggerPockets.

You have a lot of great questions here, and I could write pages in response. Here's a quick summary:

First off, some of the markets you are looking at are certainly going to be pricey with low rent to value ratios.

Forget about the so-called "2% rule". Unless you're in the right market and actively doing all the work from acquisition through renovation and management, you'll rarely achieve a 2% rent to price ratio.

You happen to live in a high-priced market with low R/V ratios and returns. Looking into other markets with less risk and higher returns is smart.

There are a good number of quality turkey providers. There are also a good number of less than ethical and reputable companies too. Ask around and do your due diligence.

Continued success!

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Alex CraigBusiness Member

Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes

10y

@David Song To sell TK and offer equity is really hard these days, mostly b/c if the property is bought out of foreclosure, the house is not as discounted as much as one thinks. The only way I am able to offer so many turnkey homes and at the appraised price is because the people who work on the houses work for me, thus I do not need to hire a contractor, thus saving me the 40% mark up on a 17 to 25k job. If you are doing your CMA on sites like Zillow or Trulia, then you will probably always come to the conclusion the houses are sold over the market value. The best comps are pulled from the MLS b/c you are able to get a little more insight such as: did the house sell out of a trust (which would indicate below market value), floor plans (room sizes, 9' ceilings, function of the rooms), condition of the homes indicated by Realtor comments (things such as motivated seller would indicate a lower comps), pics of all sales (which would show whether or not the home was updated), etc. Those are all items an appraisers would take into consideration when valuing the home. Even then, appraisers are subjective as I had a FHA loan on a FLIP last year require 2 appraisals and one came in at $115 and the other came in at $105k. 10k difference within 2 days; that has happened on 2 occasions. Point is, your CMA, the comps and the appraisals are all subjective. If you want equity at close, then you will need to buy direct, but then the challenge is fixing it up cheap without sacrificing quality.

My thought is if you can get similar #'s in your own market, then do that as you will eliminate the property management expense.

Obviously my opinion of a good TK provider is going to be bias, but I know there are good ones and there are success stories on BP, but there are also horror stories too. I wrote a blog which was pretty much a summary of a BP post that I would share, but it got poofed by the BP police. If you research past threads on TK and find my name, you will see a post where I listed things to look for that got really good feedback on the thread.

901-848-9028

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Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

10y

"Is there really GOOD TK provider?"

Consider, they are just another 'business' or investor group with their markup. You're paying top dollar.

Turnkey in my mine requires:

a rental in good condition, no or minimal repairs at coe
with existing tenants
all renters current
no outstanding liens
FLOWING CASH

For an out-of-state owner, you then need a PM company to run it and if there's still cash flow and/or a cash/cash rate you're happy with - - you've got a gold mine.

You can vet all of this in your research or at least in escrow with proper contingencies:

The flowing cash comes from the NOI and that allows your offer to discover the other facts.

1 Reply

David Song

OP

Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes

10y

Keith Anderson thanks for your comments. I lived in Andover MA from 2000-2003. It seems that the housing price did not appreciate much over these years. I sold my Andover house in 2005 for around 540k. Just saw the same house is for sale now, listed for 499k. Comparing buying from turnkey vs regular MLS, why not people just buy directly from MLS? And find a property management company to manage it? What is the advantage of buying turn key? In my view, turn key providers should be able to sell at below market value since they can sell directly to buyer and thereby avoiding the realtor commission. Furthermore, they can also profit from future property management fees. Why can not they compete on price with regular MLS sales?

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John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

10y

Hi David-

The 2% rule is near worthless. A more complex model is your friend. Imagine a $50k 4-plex built in 1792 with 4,000 SF where you collect $250 per unit? 2% rule yes, but also a horrible investment.

You don't need to invest out of state for solid rental returns however, there are many CA opportunities within 3-4 hours drive of where you are that provide excellent returns!

re's

John

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Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

10y

@David Song This really depends on what your objective is but if it's cash flow, you're not going to find it in CA as you're seeing. You might want to consider the Midwest where prices are very affordable and cash flow is much better. Are there good turn key companies? Yes. You just have to know how to vet them. Not all charge high mark ups. Stay away from the ones that don't work with financed buyers or allow for an appraisal contingency. That could be a good indication that they know they are selling above market value.

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

10y

Originally posted by @David Song:

Is there really GOOD TK provider? Anyone has good experience? (fair market price, honest representation of the property, full disclosure, honest projection of cash flow, etc)

Many investors think "turnkey" is the only route to go. I use the term "turnkey" loosely. Do not limit your thinking to a company that buys, renovates and then resells a property to you for profit as the only alternative.

How about buying decent properties on the market with the help of a broker and then getting them inspected by a 3rd party home inspector and managed by a PM. A rental property is a rental property. You have more then one way to buy rentals from afar.

2 Reply

David Song

OP

Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes

10y

Originally posted by @James Wise:

Originally posted by @David Song:

Is there really GOOD TK provider? Anyone has good experience? (fair market price, honest representation of the property, full disclosure, honest projection of cash flow, etc)

Many investors think "turnkey" is the only route to go. I use the term "turnkey" loosely. Do not limit your thinking to a company that buys, renovates and then resells a property to you for profit as the only alternative.

How about buying decent properties on the market with the help of a broker and then getting them inspected by a 3rd party home inspector and managed by a PM. A rental property is a rental property. You have more then one way to buy rentals from afar.

Agree.

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Invest in CA or out of state (Turnkey?)

Invest in CA or out of state (Turnkey?)

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