Would you buy an overpriced turnkey rental house?

27 Replies

I’m finally planning on making my first jump into real estate investing and I plan on starting with a fix and flip. I know this sub forum is for rental investors/landlords. The reason I’m posting here is because I want some insight from this group of investors.

I know this isn’t a new idea, and there are some big groups already doing this, but I’d like to purchase a home, rehab it, put a renter in it so it cash flows, then sell it all as a turnkey rental to an investor like you.

In the process, I would consider raising the price of the house compared to similar homes for sale in the area because 1. The house is rehabbed, 2. It has a renter in place, 3. The house cash flows

Now, as the title of this post states - Would you buy a turnkey rental house like this that has a renter and cash flows, but is 15-25% higher in price than other houses in the area?

Please comment on why you would or would not.

@Ali Dawood , NO, NO, NO!  For a few reasons.  The rating system by most turnkey providers is a little higher than it should be.  If a property is really a C class property (by my standards), the turnkey will be saying it's a B.  If it is a B for me, they are calling it an A.  And if it a F, they are calling it a D.

IMHO the easiest way to determine a class of property (outside of the wacky coasts) is to look at the surrounding school scores.  if they are 8,9, or 10 on a 1-10 scale, probably an A.  7,6, probably a B.  Below 5, watch out.  Below 2, hood.

Because the turnkey is doing their pro forma, their returns are much higher than you will experience.

I looked at a property here in Phoenix via a turnkey provider in an area I knew well.  The price was high, the rents were impossible.  As a result, so were their returns.

A turnkey provider will put lipstick on a C and call it a B.  The problem is that it will NEVER perform like a B.  ;-)

You are better off going it alone on a buy/hold, finding a B/A property in an area you know and trust.  I see you are in Frisco.  I'd look there, Plano or Richardson.  Even if you only have enough money for a condo.

Hope that helps.

Alan

Originally posted by @Ali Dawood :

In the process, I would consider raising the price of the house compared to similar homes for sale in the area because 1. The house is rehabbed, 2. It has a renter in place, 3. The house cash flows

No. The market dictates the value of a home. As an investor, I'll compare your home to similar homes on the market and determine the value myself. I'm not going to pay your price just because you tell me it's renovated or because you've put a tenant in it. I prefer to place my own tenants because I know my screening process whereas I don't know yours.

I suppose there are some investors that will pay you extra because they'll believe what you tell them. That's how investors tend to dig themselves into a hole.

 

Originally posted by @Ali Dawood :

I’m finally planning on making my first jump into real estate investing and I plan on starting with a fix and flip. I know this sub forum is for rental investors/landlords. The reason I’m posting here is because I want some insight from this group of investors.

I know this isn’t a new idea, and there are some big groups already doing this, but I’d like to purchase a home, rehab it, put a renter in it so it cash flows, then sell it all as a turnkey rental to an investor like you.

In the process, I would consider raising the price of the house compared to similar homes for sale in the area because 1. The house is rehabbed, 2. It has a renter in place, 3. The house cash flows

Now, as the title of this post states - Would you buy a turnkey rental house like this that has a renter and cash flows, but is 15-25% higher in price than other houses in the area?

Please comment on why you would or would not.

Why would one buy an overpriced turnkey property when there isn't a shortage of properly priced turnkey options available?

 

@Ali Dawood

How is a house 25% over priced cash flowing? How is a buyer obtaining a loan on that? If a cash buyer, they have the money/experience to not buy this.

This must be a really low priced house to begin with.

Originally posted by @Russell Brazil :

Will I slightly overpay for an asset I particularly like? Sure. Significantly overpay? No.

we will over pay if we know something you dont or the seller does not..   IE like there is 200k worth of standing timber and the realtor did not put that in the listing price.. or there are 3 hidden lots under the property that you just think is one lot.

Or we know something is happening via up zoing or some other factor.  but for  vanilla rent house.. I think most of those sell via comps.

 

Would you buy a turnkey rental house like this that has a renter and cash flows, but is 15-25% higher in price than other houses in the area?

Answer:  Absolutely NO, NO, NO. 

My past experience as a seller.  Most of my properties are updated and renovated.  On the "Vacant" Renovated properties, I'm able to get higher price offer because the buyer is owner-occupied, they fall in love with my house and have an emotion attached to my Vacant renovated house.  However, on my other Updated, Renovated "Tenant-Occupied" properties with "Top-dollars monthly Rent", the offer price I get from the buyer is always lower than the market price, because ALL/Most the investors (include myself?? haha) are very cheap that the investor calculate many numbers, that most investors want a bargain.  The investor do not live in the rental, so the investor do not have an emotion on my rental property.  Most investor mainly care about the numbers more than the house is renovated.  

If you want to sell a turnkey house that is 15-25% higher in price than other houses in the area, the only chance is to "Vacant" the house.  Do NOT make it be a "Tenant-occupied" Rental.  Then sell the "Vacant" house to an owner-occupied who fall in love with your house.  

However, the downside of selling the house vacant, you don't have a monthly rental income to cover the on-going monthly expenses such as property taxes, HOA, mortgages etc. If the house is vacant for 5 months while it is listed for sale on MLS, then you lose 5 months rental income, and need to pay 5-months on-going expenses. That's the trade off.

@Ali Dawood

Ummm No. Why in the world would you over pay? That’s what people did during the boom and they ended up under water.

Why would you buy going in you have negative to no equity?

Buy a mom and pop house on the mls cheaper, throw in some new paint and carpet and you’re good.

Would you pay 7$ for toothpaste at a convenience store or the same toothpaste at the dollar store for 2$ ? Makes no sense . Look bro if it’s overpriced it’s overpriced ! You think cuz it’s got a tenant in it that is worth more , id even go as far as to say that it’s  worth less because inherited tenants usually suck 

I would not by an overpriced turnkey personally.  However, sometimes that is something that OOS investors do.  When you talk about pricing or valuation there is at least 2 ways to look at it.  Most investors buying turnkeys are concerned about cash flow that's it.  They are not usually concerned with how much the house will appraise.  Income approach vs. Comparable sale approach.

@Ali Dawood I might pay a slight premium for a property, if I saw value that the market as a whole was not seeing.

However someone in your shoes, expecting  buyers to overpay is not a sustainable business model. 

This post has been removed.

Originally posted by @Ali Dawood :

I’m finally planning on making my first jump into real estate investing and I plan on starting with a fix and flip. I know this sub forum is for rental investors/landlords. The reason I’m posting here is because I want some insight from this group of investors.

I know this isn’t a new idea, and there are some big groups already doing this, but I’d like to purchase a home, rehab it, put a renter in it so it cash flows, then sell it all as a turnkey rental to an investor like you.

In the process, I would consider raising the price of the house compared to similar homes for sale in the area because 1. The house is rehabbed, 2. It has a renter in place, 3. The house cash flows

Now, as the title of this post states - Would you buy a turnkey rental house like this that has a renter and cash flows, but is 15-25% higher in price than other houses in the area?

Please comment on why you would or would not.

You can get a 5% premium if you include selling it to a tenant buyer who gives you $25k for an option fee on a lease option. But a 15% premium is way too aggressive. For instance I picked up a property "off market" for $160,000 using Subject To with a payment of $717 a month and gave the seller $3,000 walking money. Then I sold to an investor as a Turnkey and got him $25k as an option fee from a tenant buyer with a monthly payment for $1650 for a monthly cash flow of about $933 per month. The option is for $210,000 ( a 5% premium above ARV) Correct, there was already equity when I bought the property, but I'm just talking about the premium at this point. Here are the numbers for the investor over the course of the option:

Here are the basic results: (a full spreadsheet is available upon request, but the numbers are real) This was for an investor from California doing an OOS in Arizona.

Here are the basic results:











Results







Cash In - From Tenant Buyer - Year 1

$25,000




10 Year Cash Flow - Investor profit

$85,654




10 Year Rent Increase - Investor profit

$7,709




10 Year Tax Write Off Investor

$12,848




10 Year Principle Reduction Investor

$29,890




10 Year Profit for Investor



$161,100




Backend Equity to Investor

$43,140




Total Cash Back - for Investor



$204,240




Amount Originally Invested



$70,000




Total Profit for Investor



$134,240











10 Year ROI



192%




Yearly ROI



19%


 

Wow, thank you all for commenting. I learned a lot reading through your responses! I think the winner is -- don't do it! haha

For those who are curious and/or upset with this post, I have no deal in place, no buyer or seller - this was just a hypothetical question where I wanted to get some information and learn a little bit about the mindset of RE investors. That's what this forum is for, right? You guys have all the experience and I have none - for now. So I figured what better way to learn than to post a question here and read the feedback. Again, I appreciate the responses - keep it coming if you have any other advice or comments!

For an informed Investor, the answer is clearly NO.

But if you are looking to profit for a turnkey business, all you have to do is follow the Flipping Model.

Buy a property with all in cost at 70%-75% of ARV.

Since you will be putting a tenant, why not continue managing property/tenant?

Then you will get paid another 8-10% from monthly rent.

@Anthony Rosa

If I kept the property with the tenant and did a cash out refinance - would that be considered the BRRRR method that I've been reading about here? So basically I save money once, say $100k, and just reuse the same cash over and over?

Absolutely not.

However, you might have your market - OOS investors who work without local agent(or an agent who doesn’t care but to sell). Rentals have to be bought under market price or there should be room for improvement.

Buying rental with existing tenant is the worst scenario - the house must be significantly underpriced to make an offer. 

All the updates done by third parties, somehow deteriorated much fasted, especially when you see it on the surface....so called “cheap flip”

I’d rather have underpriced house and make some updates and I do want to choose the Tenant. Sometimes the condition of purchase is free from Tenant property

@Ali Dawood

All the people flat out saying no, make me laugh. There are a lot of factors to consider. One that comes to mind is that appraised value and market value can be 2 completely different things. For example, here's a deal on a duplex I purchased above market value (it was completely rehabbed and rented)

Market Value: $50,000-$55,000

Appraised Value: $79,000

Seller Price$ 58,900

Now, I bought this one with cash, then refi'd it immediately (70% LTV) and got back 95% of my initial investment. Combined both units rent for $1,200/mo, and my PITI is $447/mo. Maybe not a killer deal to some, but it worked for me.

So, to a cash buyer, the strategy could be appealing...especially if they also factor in the value of their time that they saved from not having to rent it and rehab it.

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