Hello,
Can anyone please give this first-time landlady some advice on this issue?
I bought a turnkey from Roofstock last summer. It is out of state and I have a PM to take care of it. It's supposed to cashflow about $100/mo. But there have been a lot of fixings and left me with negative cashflow. The major fix was on the gas line, one on tub drain, and a couple minor fixes like clogged pipe.
What should I do with this property? Should I keep it and hope it would cashflow this year or plan to sell it? What would be the worst thing that could happen if I keep having negative cashflow year after year? This situation makes me nervous about rental investment now. :(
Ok. The worst thing that would happen is you would keep negative cash flowing...which adds up, and subtracts. Think of it as having a job, that you pay the employer for the privilege to work there. So you say you can cover it with your current job. Fine, then let me reword what I just said.
It's like working full time, and making enough money so you can work a 2nd job...and pay that employer for the privilege of working there. If that was the case, what should you do? Probably quit the 2nd job...right? So I ask you this, using that same thought process, what should you do with this rental?
Now, onto the property specifics. I wouldn't buy any property that only has $100/month CF...and you're seeing why now. That's not positive CF...that's negative CF, guaranteed to happen.
Any money you lost so far though negative CF is gone, and you'll never get it back, as long as this job property has negative CF. If it starts to get positive CF, then in order to start making a profit, the first thing that has to happen is get all the negative CF back...from the new positive CF. How long will that take? How long and how far behind are you?
Don't fall in love with any property. The property is just the temporary resting place for your cash/equity until said time it grows enough for you move it forward into exponential gains. The longer you retain a negative CF property, the more negative CF you have to recover, the less money you have left to recover it with, and the longer it takes to actually recover it. Cut your losses, stop moving backwards, and move forward.
@Supada L.
Properties advertised as turnkey are usually marketed towards novice investors and priced so that it is difficult to make a return. They will compare the return to that of the stock markets and argue that there's is higher than 7% or whatever number they use. However the difference is that, as much as people wish it was, real estate is not passive investing. Even if you hire a property manager you will still need to manage them. My advice is to get something in your area and manage it yourself. If it's not in peak condition try to learn how to fix minor issues like leaky faucets and clogged drains. Those things can be resolved in a couple minutes but if you call a professional they are going to charge you a decent amount just to come out. If you need a PM make sure you vet them first, And if you're in town you will still need to check periodicaly that they are doing a good job and are keeping their end of the bargain.
Thank you. I'm one of the novice that fell for it. Lesson learned.
I would create a simple pro-forma with basic assumptions such as rent growth percentage (3%); operating expenses (15%-20%) and get NOI, this will help you to get a better view of the next 3-5 years. The point of investing in RE is to take advantage of appreciation, tax benefits and hedging against inflation. Positive cash flow can be obtained from operating and reversion.
The is a basic handbook that might help you with some financial ratios - What every investor needs to know.... by Frank Gallinelli.
Best.
Thank you. I will look at those numbers and do more analysis.
A good education always cost money, for me I only invest in areas I can easily drive to within a couple of hours. Cash flow of $100 is to close for me. I know there are areas where this might work out with potential growth, but those little things , like plumbing issues, HVAC, electrical seem to always creep up . A partner has a condo make 100 a month, 1st month needed HVAC unit, $3500, dryer has went out , Small electrical issues have shown up, SO far the condo has never made a dollar. The rents in that area are low, association fees, Insurance Hikes, Increases in property taxes. have killed the partner. Loan has been serviced, and more equity has been built.
Turnkeys and flippers I stay away from. Good luck to you.
Thank you. Lesson learned. I'll stay away from them too.
@Supada L. As far as rent growth, I don’t think so. I was borne there in 1957, it had a population of about 40,000.....today it is 40,000. “Turnkey” investments are typically the worst investments you can buy....they are always sold at or above market prices with totally unrealistic expenses advertised and in areas that typically never appreciate.
Thank you very much for your advice. I've jotted down all of them.
It is listed as a turnkey. I will check with Roofstock if they have a warranty on it. Having a 3rd party PM to look at it is also a good idea. I will do that too.
$100/month CF is way too thin as you can now see as if anything goes wrong with the property, it will gulp up that $100 CF in no time and even much more, which means you will then have to throw money into the property.
The answer is simple: Cut your losses and sell this thing, as you never supposed to buy it in the first place.
Thank you for your response. I will talk to my CPA about this as well.
@Supada L.
Scenario with house price 300,000
1. appreciation . $500 permonth. and cashflow $300 per-month
2. appreciation $1000 permonth and cashflow -$100
3. appreciation $4000 permonth and cashflow -1000
in above scenario why we care about cashflow if appreciation earn more?
This is a great cautionary tale. I see a whole lot of hype about "building your stack" and "How to become a Real Estate Milllllyonaire!" The reality is that in hot markets, particularly the hot ones that are relevant to me (Northern Utah), buy and hold properties simply don't cash flow. Any SFH that comes on the market is being snapped up at or above the asking price by retail buyers. Appreciation is great, but is that really going to be all that attractive in the long run? Do I really want to lose money in the short run for the possibility of long term appreciation? Not really.
"But, but invest OOS!" Is the counter-mantra. But that's not necessarily a good choice, either. When you invest OOS, property management is generally mandatory, not optional. So that's a 8-10% expense that you pretty much have to spend that local investors don't necessarily need to. Also, you gotta ask why these properties are cash flowing in what has generally been a hot US market? In my view a lot of it can be explained by the simple lack of economic opportunity in the areas in question.
Thank you for your response. Markets are what I have to look closer next time.
@Supada L. Real estate is a long game. I agree with a ton of the sentiment. Given the other factors to building wealth in real estate besides cash flow, it might be better to give this a little more time to accurately assess if this property is making you money or not. Selling this quickly after buying an investment is almost always a sure fire way to lose money. Good luck!
@Supada L. Real estate is a long game. I agree with a ton of the sentiment. Given the other factors to building wealth in real estate besides cash flow, it might be better to give this a little more time to accurately assess if this property is making you money or not. Selling this quickly after buying an investment is almost always a sure fire way to lose money. Good luck!
Thank you so much. I will hold on to it for another year and see how it will turn out.
If there are any lessons to be learned from your experience it is essential that you go back to your original investment thesis. Did you buy in Meridian because it was a growing market? an undervalued market? Did you buy this property because you saw value in its location? what about its location made it valuable? did you buy because you saw some value-add opportunities? because is was especially desirable as a rental for some other reason? Or did you buy because you had an itch from all that cash in your pocket and this was property that looked "cheap" or one that you could "afford"?
Echoing what some others said here, when you buy "turnkey" you are buying from professional investors - and not from a homeowner much less from a "motivated" seller - who have made the judgment that they would be better off selling the property than holding it as a rental. Think about that for a second. People with more market information than you as a long distance investor could ever possibly have gained have made the judgment that selling is better than holding the property and as sellers naturally they are trying to fetch the highest possible price. Under these circumstances, what makes you think holding the property as a rental is going to be worthwhile?
First of all, congratulations for getting off the sidelines and making your move. I’m sure that was an experience in itself, and while it surely won’t make up for the sting of $ flowing the wrong way, I’m sure there will be lessons learned here that can’t be learned without doing.
A couple observations: $100 in pro forma cash flow is more than adequate on a 70k house. BP hasn’t been told what your investment is worth so I’m not sure how someone might say it’s not adequate. Also, one(or three) months isn’t a reasonable look back history to evaluate the performance of your real estate investment. It’s very possible that your investment is solid from the proper perspective. The monthly variation in ACTUAL cash flow is part of the risk that allows us to demand a proportionally higher return from our investment than say a physical bond with a defined coupon rate.
Mississippi is a great place to invest in SFR homes. Our landlord-tenant laws favor landlords very strongly. Cost of labor (repairs) is reasonable. Demand is extraordinarily high, and finally the relatively inexpensive homes here allow an investor to scale and smooth the monthly cash flow line by doing so.
In summary, make a plan, stick to that plan, evaluate the results of your plan on a periodic basis (3yrs., 5yrs?) and then allow your plan to evolve as your knowledge and insight grows. Stay the course and work the plan..
I’m a full time investor and professional property manager in Mississippi. I would be happy to talk specifics of your particular investment if that suits.
I wish you much success
@Supada L. I’m assuming there wasn’t any maintenance and/or capex reserves in your monthly numbers before cash flow? Or just maybe not enough? What about an inspection before close? As a rule of thumb, I always have an inspection before close and usually set aside ~10% reserve in case any issues come up but this may be more or less depending on the age of the building and any recent upgrades. I assess my cash flow after taking that figure into account. I find that marketing packages from seller agents and turnkey providers fail to take this number into consideration or far underestimate it. Same with property taxes (sometimes they use the same figure as the existing owner is paying not taking into consideration that a sale - especially one that has an increase in value since the last sale, will trigger any increase in property taxes) and same with property management fees if they account for it at all. It’s important to figure out all the numbers on your own without relying on figures provided to you.
Like others have noted, now may not be the best option for you to sell since you’ll have to pay 6% + to do so, unless your market appreciates very quickly. However, if your market does appreciate well, then that may be able to compensate for the (hopefully temporary) loss of cash flow in the long run.
If you need any further guidance, feel free to reach out anytime.
Sell it and buy ideally local a 2-4 unit these tend to cashflow better after all the expenses then single family.
@Supada L., Keep in mind that you should always run the numbers yourself. I've looked at quite a number of turnkey properties with supposedly great numbers, but when I ran them through BP spreadsheet or my own, they didn't perform very well. I ended up not going with turnkey, but purchasing something on my own with cosmetics and appliances needed. I did hire a PM and I am managing them. The point is do your own due diligence even with turnkey. I gave up on the turnkeys, but if you run your own numbers, then you might get lucky and find a good cash flowing property. As for the current situation, also keep in mind that when you sell you must pay commissions, so factor that into your analysis as well. A major ingredient in RE success is using data in decision-making. Stay well.
Echoing what some others said here, when you buy "turnkey" you are buying from professional investors - and not from a homeowner much less from a "motivated" seller - who have made the judgment that they would be better off selling the property than holding it as a rental.
Good point. I didn't think about that when I bought it. I rushed into the process and bought this because I could afford it then. Thank you for pointing it out.
First of all, congratulations for getting off the sidelines and making your move. I’m sure that was an experience in itself, and while it surely won’t make up for the sting of $ flowing the wrong way, I’m sure there will be lessons learned here that can’t be learned without doing.
A couple observations: $100 in pro forma cash flow is more than adequate on a 70k house. BP hasn’t been told what your investment is worth so I’m not sure how someone might say it’s not adequate. Also, one(or three) months isn’t a reasonable look back history to evaluate the performance of your real estate investment. It’s very possible that your investment is solid from the proper perspective. The monthly variation in ACTUAL cash flow is part of the risk that allows us to demand a proportionally higher return from our investment than say a physical bond with a defined coupon rate.
Mississippi is a great place to invest in SFR homes. Our landlord-tenant laws favor landlords very strongly. Cost of labor (repairs) is reasonable. Demand is extraordinarily high, and finally the relatively inexpensive homes here allow an investor to scale and smooth the monthly cash flow line by doing so.
In summary, make a plan, stick to that plan, evaluate the results of your plan on a periodic basis (3yrs., 5yrs?) and then allow your plan to evolve as your knowledge and insight grows. Stay the course and work the plan..
I’m a full time investor and professional property manager in Mississippi. I would be happy to talk specifics of your particular investment if that suits.
I wish you much success
Thank you very much for your response. It makes me feel much better. Yes, I've learned a lot so far. I've decided to keep it for another year and reevaluate the results. =)
@Supada L. I’m assuming there wasn’t any maintenance and/or capex reserves in your monthly numbers before cash flow? Or just maybe not enough? What about an inspection before close? As a rule of thumb, I always have an inspection before close and usually set aside ~10% reserve in case any issues come up but this may be more or less depending on the age of the building and any recent upgrades. I assess my cash flow after taking that figure into account. I find that marketing packages from seller agents and turnkey providers fail to take this number into consideration or far underestimate it. Same with property taxes (sometimes they use the same figure as the existing owner is paying not taking into consideration that a sale - especially one that has an increase in value since the last sale, will trigger any increase in property taxes) and same with property management fees if they account for it at all. It’s important to figure out all the numbers on your own without relying on figures provided to you.
Like others have noted, now may not be the best option for you to sell since you’ll have to pay 6% + to do so, unless your market appreciates very quickly. However, if your market does appreciate well, then that may be able to compensate for the (hopefully temporary) loss of cash flow in the long run.
If you need any further guidance, feel free to reach out anytime.
Thank you very much. I've learned (from this post) that not having a 3th-party inspection and only relying on the seller's numbers was the first mistake. And I didn't set aside enough reserve because I didn't think anything could break since it was recently rehabbed. I was totally wrong. Many lessons learned. :)
Sell it and buy ideally local a 2-4 unit these tend to cashflow better after all the expenses then single family.
Thank you for your advice. I will keep that in mind.
Ill bet a Dunkin Doughnut OP didnt go and walk the property. First lesson there. Probably bought because house was cheap, etc. Too much you have to do something.
I think Roofstock isnt a TRUE Turnkey Company. Its kind of like a Wholesaler............lol. Personally i would never ever buy from a wholesaler sight unseen.
Modern day new investor. Expenses dont matter. Rent minus PITI equals juicy cash flow.
Ill bet a Dunkin Doughnut OP didnt go and walk the property. First lesson there. Probably bought because house was cheap, etc. Too much you have to do something.
I think Roofstock isnt a TRUE Turnkey Company. Its kind of like a Wholesaler............lol. Personally i would never ever buy from a wholesaler sight unseen.
Modern day new investor. Expenses dont matter. Rent minus PITI equals juicy cash flow.
Thank you for your response. I'm not sure if Roofstock is considered a turnkey company or not, but the house was listed as a turnkey. Anyway I'm not sure if I can trust the analysis they shows on the website anyway. Yep. I think I should stay away from them from now on. =)
i would say first step is to look at what you can do to improve cash flow. are rents at market rate? what is your property manager charging you? where the issues you had to fix one time fixes or atleast wont have to do again for a long time? do you pay utilities? if so is there a way you can make the renters take them or lower the cost to your self? insulation, maybe switch out bulbs to energy efficient bulbs, new toilets can cut down on water. do they pay electric but you pay gas? heat pumps might help switch that over to them and extend the life of your furnace.
i would say before selling look at what you can do to improve you number even if it means spending alittle more now for some fixes. if there is nothing you can do then its time to look at selling taking the lose and using this as a learning experience. from what iv seen turnkey properties from website like that never(mostly) do that great
i would say first step is to look at what you can do to improve cash flow. are rents at market rate? what is your property manager charging you? where the issues you had to fix one time fixes or atleast wont have to do again for a long time? do you pay utilities? if so is there a way you can make the renters take them or lower the cost to your self? insulation, maybe switch out bulbs to energy efficient bulbs, new toilets can cut down on water. do they pay electric but you pay gas? heat pumps might help switch that over to them and extend the life of your furnace.
i would say before selling look at what you can do to improve you number even if it means spending alittle more now for some fixes. if there is nothing you can do then its time to look at selling taking the lose and using this as a learning experience. from what iv seen turnkey properties from website like that never(mostly) do that great
If there’s a history of rent growth I’d stick with it. You probably made tax free money with loan pay down and depreciation included. If the rent is at least $1,000 and you ONLY get 3% rent increases. You’ll be cashflow positive within a few years. But I don’t want to wait that long you say? That’s less than $3600 in cashflow away if nothing gets better until the last month. But that’s not how it works. You’ll be a little better every year.
When you sell you’re not just cash-flowing negative 6-10% (way more than holding on.) you’re actually spending that money. Right now you’re really just sending that money towards loan pay down.
Yes. The rent growth is pretty good there. Looks like it's worth a try.
Did you get this belief (that rent growth is pretty good) from the same turn key provider that did your pro forma? I find it unlikely the rent growth is good, or even OK. There is a association between property appreciation and rent appreciation.
According to neighborhood scout, the annual property appreciation is 1.42% for this century. That is below the rate of inflation, so properties, in inflation adjusted dollars, cost less than they did in the year 2000.
According to Rent Jungle, the rents have declined in the last 6 months. Over the last 10 years, the average rent appreciation is 1.52%. This is less than the inflation rate. So rent, in inflation adjusted dollars, is less today than it was 10 years ago.
Rent appreciation is unlikely to significantly improve the cash of this property.
Turn key providers want to sell you their properties and services. There is incentive for their pro forma to be aggressive. The investor should use a conservative pro forma in determine whether to invest.
Good luck