Questions about buying turnkey rental
I’m meeting with an agent tomorrow about a 4-plex that’s already rented. What questions should I be asking to understand more about the property and if it makes sense to move forward?
Thank you!
You need to know, at a minimum, the condition of the property, the terms of the current leases, whether tenants were properly vetted (and how), the current security deposits, and whether they pay on time. Don't just assume that the current owner put the tenants in there with your best interests in mind! Be sure to verify.
Thank you, Taylor. These are great.
I would also be knowledgeable on what the owner pays for...ie. water/garbage/sewer...are there any HOA fees...
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Your property taxes will be higher than what you will be told-go to the county website, as will insurance-call an agent or broker. Vacancy, capex and maintenance will likely be actuals, which is misleading and you will want the percentages. Make sure you see every unit-no excuses. In today's market I would use estoppel certs to be sure of rents and deposits. Use rentometer to check market rents.
Quote from @Scott Davis:
I’m meeting with an agent tomorrow about a 4-plex that’s already rented. What questions should I be asking to understand more about the property and if it makes sense to move forward?
Thank you!
What expenses does the Landlord incur monthly, quarterly, annually? What maintenance / upgrades have they done during ownership? Can you review the leases, rent payment history, lease violations, etc? Who handles cleaning of common areas, lawn, etc?
You need full disclosure on all income, all expenses. This will enable you to crunch numbers. Then you need to study market and the property to see if there is room to increase income and reduce expenses, thereby increasing your return.
Later in the process you can verify all this information with an estoppel. What is an estoppel? I'm glad you asked!
The estoppel is a form filled out by the tenant, then confirmed by the Landlord, then accepted by the Buyer. It's supposed to ensure there are no surprises after closing. For example, I often see Buyers purchase property thinking there is a $1,000 deposit but then the tenant claims it was actually $2,000 because they paid the last month's rent. How will you know? An estoppel certificate fixes this problem.
Some things it may include:
1. Tenant name, contact information, and address
2. Occupancy date
3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
4. Are there any modifications to the written lease?
5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
6. Current lease term (expiration date, month-to-month)
7. Current rent rate
8. Rent due date
9. Security deposit amount
You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchange "doc" with "pdf" for more options.
Here is an example and explanation: Sample Estoppel
Some have a lot of legal jargon but this document does not need to be so detailed. This is an important tool for anyone buying a tenant-occupied property.
Run your own realistic numbers vs fully relying on what the seller is telling you. If the numbers make sense make an offer subject to all the usual contingencies. You may not be able to perform a thorough inspection or even get into the occupied units until under contract. Same goes for detailed financials, copies of leases, estoppel certs, and the like. If you diligence holds up the value of the deal, proceed forward. If not, renegotiate the deal so it does make sense or walk away and move on to the next property
Morning @Scott Davis. Asking the right questions will absolutely save you in the long run. I actually work for a turnkey provider thats been around for almost 2 decades. Here some of the questions our owners recommend you asking:
Do you own in the exact neighborhoods you are managing? Sometimes companies or owners do not personally own where they are selling properties. Heck, sometimes they don't even own the properties themselves. Both can be red flags.
How many investors do you work with?
Do you own all aspects of the operation? (or do they hire third party companies). In other words, are you the company I am going to talk to if there are any issues!
Do you offer rental or maintenance guarantees? If they answer yes, ask them why. Then ask them if they will put the guarantee on year three. Guarantees are often used to distract investors from the reality of what they are buying. Any company that is truly offering a turnkey property and wants to guarantee a period of income or occupancy should put that guarantee somewhere down the line to show they do quality work. It is a given that every property you are buying should not have occupancy or maintenance issues in the first year.
Do you defer maintenance? #1 killer of profit on passive investments...deferred maintenance that stacks up and crushes profitability.
How many properties do you manage?
Do you sell properties and if so, do you own the properties you sell?
How long have you been in the business?
What is your average vacancy rate?
What percentage of expiring leases will renew their lease each month?
What percentage of signed leases fulfill their full term?
What is the average number of days a property is vacant between residents, move-out to move-in?
What percentage of billed rent do you collect each month?
What is the cost of an average repair bill after move-out?
Do you mark up maintenance costs?
What are your management fees?
What percentage of collected rent goes to yearly maintenance on average?
What is your average number-of-months occupancy per property?
What is your average occupancy rate?
What programs do you have in place to keep residents happy?
What customer service programs do you have in place for owners?
Will you call me every month with an update on my portfolio?
How many team members are dedicated solely to providing service to your clients?
If you are an investor, What has been your biggest mistake as an investor? How do you protect your clients from making the same mistakes?
If you have any other questions, feel free to reach out.
For a fourplex it's a bit diff than a large multi, they may not have the records straight at all. They may not be tracking. Rent Rolls, quality of tenants, any Cap EX forthcoming or current. Once you get it locked up in contract you can kick the tires in inspection and see if its a winner. There is a bunch of location specific questions. For example in SOCAL its always sewer line and foundation that people often skip in inspection that bites them later. Find out the "skeletons in the closet" which are common in your area. Ask for leases, bank statements, or proof of rent roll. I've seen agents fudge these numbers. I'm analyzing a 12 plex in LA rn and agent says 5,500 per unit and it is indeed 4,000 per unit after my research. Google the heck out of the property and neighborhood. Meet the tenants yourself. There is a BP idea out in the ether saying don't meet them or tell them you own it. I say treat it like a biz and meet the tenants before you buy it. You can't meet them all with 400 units, though you can do it with 4 in one shot on inspection day, or when previewing the home.
@Scott Davis
1. Get all the numbers
2. Make sure you can properly analyze asset condition
3. calculate the numbers based on your walk through and asset condition.
4. Verify all tenant data, rent rolls, review leases, and other paperwork
Bonus tip… don't loss your butt on variable expenses. They are the killers. Maintenance, CapEx, Vacancy, delinquency!!
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Quote from @Scott Davis:
I’m meeting with an agent tomorrow about a 4-plex that’s already rented. What questions should I be asking to understand more about the property and if it makes sense to move forward?
Thank you!
Two biggest things I'd be looking at are the neighborhood and the comps. Get a feel for the type of tenant base you'll be dealing with and whether or not it's something you can handle. That combined with making sure the property you are looking at is in line with neighborhood comps will go a long way at making sure you're making a good buy.