Would this qualify for a good Turnkey Rental?

14 Replies

THIS HOUSE IS NOT FOR SALE. 

Would a house like the one below qualify for a good out of state turnkey rental? As far as purchase price, rent, area, rehab etc

Its in the Midwest.

Its in a very landlord friendly state

New roof, updated electrical, plumbing, and HVAC

4 bedrooms 2 baths 

New 10 mil laminate flooring 

both bathrooms are full tile on floors and showers, all new fixtures

new kitchen cabinets, appliances, backsplash and granite

fenced in backyard

area sales for this kind of house are 135k to 145k in the past 6 months in same neighborhood

Purchase Price 129k

Rents would be 1,100 to 1,200 a month

Property Tax: 690 a year

Appreciation would be minute at best as it is the Midwest no ups and no downs just steady. 

Would a house like this qualify for a good out of state turnkey property?

House looks great! I don't personally think this is a good example for "turn key". Most people who are looking for turn key homes are looking for a higher return. 

Buyers determine the market not sellers.  If you can find a group that wants to buy it then yes.  Just because other people do it one way doesn't mean that you have to do it that way.

@Ryan D.

So with numbers like that the house is to high or the rent is to low. For the return a out of state investor is looking for?

AC

@Andrew Cordle

One huge issue for me is the home is a split level with the lower level under ground, this makes me nervous as for potential future leak issues.

Obviously the home looks great but for a rental home it seems over renovated meaning with the granite and custom tile in the showers, seems more like retail quality but hey, for an end investor if that's what they are providing then better for end investor. Not sure why the owner would spend more then necessary. 

The rent to price ratio is not that good but in nicer areas with higher rent, I think its ok to go with a lower ROI if the quality, area and tenant quality are all there.

Thanks for the share.

This property doesn't even meet a 1% sale price to rent ratio.

Anything under 1% sales ratio or around that has to be a stellar area for investing. Those investors are looking at excellent rent growth due to the area and appreciation in those cases.

If the area is average the rent to sales ratio is typically 1.5 to 2. For an average area this would be overpriced for the rents it gets.

Typical buyer might be an uneducated first time investor buyer or an overseas buyer wanting to place money in the U.S and less concerned about the starting return. 

@Curt Davis

That is spoken as an experienced PM. Because the house is split level it is open to more leaks and water issues. Very Smart. 

When you talk about a lower ROI if higher end areas can you give me a little more specific numbers as to what you are thinking?

@Joel Owens

When you refer to the 1% and 2% can you give a simple breakdown as to what all is included in that?


AC

The 1% or 2% rule is that you "want" the home to rent out for roughly 2% of what the all in cost is. For this house to meet the 2% rule it would have to be 2600. Obviously this is hard to hit. 

Turn key you want RENT READY as opposed to SALE ready.

Now it's a catch 22 because I am an advocate if someone is going to buy turnkey then everything needs to be redone. Over time maintenance will increase as things age. So it's kind of a balance what you want to do.

The rent to sales ratio means if you had a 100,000 house throwing off 1,000 a month rent that is 1%, 2,000 2%, 1,500 1.5%.

Yes 2% is very hard to do unless in an average area. The hotter areas investors try to hit 1% to 1.5%. Your target investor might be someone not as focused on cash flow but a long term hold for retirement build up. Those types generally like to buy in more affluent and high quality location areas.

Sometimes investors have to buy in more moderate areas as the property meets their rent ratios they just can't afford a 300,000 rental for example in a high end area even if it throws off 3k a month.

So it really varies across the board. I see buyers in all asset classes buy things I would never touch at those prices but investing is subjective. So if buyers want to buy what someone is looking to sell then let them go for it. 

The 2% is mythical  figure that is not truly realistic for an actual end buyer, it is hard enough for TK guys like us to get that if we wanted to keep them for ourselves as persona properties.  

The 2% rule will only ever work on the cheap homes which usually means low income, higher crime, lower quality tenant.  

@Curt Davis

Yes I can see the 2% on lower end areas where you buy at 25k or something like that. 

But in general the 2% rule is simply put, if I pay 100k for a house then I should want 2k gross rent?

Good Lord, I would love to know where that area is? Does anyone know? Is anyone doing that good, no correction that great, at cashflow from rentals. Minus maybe the one off deal here and there that is a crazy steal? 

Is there a part of the country, that you can get solid rentals, that are resellable to end buyers when the day comes, while collecting a steady 2%? And be able to do consistent business there? Meaning buy more than one house? If someone is wanting to build a rental portfolio?

AC

Are the taxes on an abatement? I live in the Midwest, in Podunk ( My high school graduating class had 25 people)   Those seem very low even to me.   I would make sure your taxes wont shoot up.    You don't have much room to work with there and that could kill you.  

@Andrew Cordle  Yes, interesting point about split level that @Curt Davis  brought up. In fact, it looks more like they have taken a small house and had its basement converted (so that its square footage isn't so small any more). I also agree with Curt that it has been over-renovated. This home is presented and priced in such a way that only owner-occupants are likely to show interest.

There is bound to be houses in the area for HALF that price (yes, needing some work, but not $60k's worth) that would STILL generate close to $1000/m rent - thus getting closer to that sought-after 2%. Cheers...

Originally posted by @Andrew Cordle:

But in general the 2% rule is simply put, if I pay 100k for a house then I should want 2k gross rent?

Good Lord, I would love to know where that area is? Does anyone know? Is anyone doing that good, no correction that great, at cashflow from rentals. Minus maybe the one off deal here and there that is a crazy steal? 


I've owned about a dozen of those over the years, many in decent parts of Cobb County (not too far from you) and in many cases, the houses were less than 20 years old.  The key is good marketing to find these types of deals.

As for the deal posted above, I personally wouldn't settle for less than 1% of purchase price in gross monthly rents. Assuming 50% of gross rents to rent loss, expenses and capex, that puts my cash flow at about .5% of the purchase price per month -- or about 6% CoC return. If that were leveraged with a conventional or portfolio product, at today's terms, you could probably get it to 8-9% CoC.

I can't speak for others, but 6% unleveraged and 8-9% leveraged is probably as low as I would consider for a completely passive investment.  In fact, I'd probably be more comfortable with a diversified portfolio containing no physical assets, as it could likely achieve the same results with less hassle.

Just my $.02...

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