Turnkey provider properties = NO CASH FLOW?

Question

Hello,

Very new to real estate investing.  We are interested in buying a SFR property, $1050/mo rent, in Bartlett for $125k from a local turnkey provider.  When I crunch the numbers, using Bigger Pockets rec for 5% repairs, 5% vacancy, 10% cap ex, etc., we end up breaking even, zero cash flow.  I've calculated a couple other turnkey properties and found it to be the same.  Is this the norm for turnkey providers?  I realize we are paying a premium, so, is it worth the investment?

Curt Davis · Answer

There are no good Schools in Memphis in a $77k purchase price range with $875 in rent.  Tenants here move into homes like this for one of few reasons: close to work, friend or family lives close and the home works for their rent range. Schools are further down their priority list.

Jackson Long · Answer

That is a terrible deal for Memphis right from the start.  Further, and not pointing any fingers here, I've yet to here a direct experience from a non biased source about a turnkey deal that worked out well.  DISCLOSURE:  I've only been doing this here 2-3 years and so my experience is limited.  However my anecdotal evidence includes several bad experiences and zero good ones.  Exaggerated, optimistic vacancy and cost numbers, and a generally skewed depiction of the market.  My favorite is a friend who bought a place that was supposed to cash flow 450 with a company claiming less than 3% vacancy" sees 275  after costs- except in the first year they are on their third tenant.  Guy overpaid for the property almost 20k and will be stuck with it for life basically.

Now 275 is FINE once the vacancy stuff stabilizes, but I strongly object to selling people with inflated numbers.  If you are looking at a property that is going to cash flow 1050 and you are buying it with actual money that you could invest elsewhere do not consider paying more than 75ish.  And be prepared to go through a couple of management companies before you find one you can trust.

Memphis is full of sharks.  Swim carefully.

Curt Davis · Answer

There are several factors and everyone runs their figures differently. If you are buying a home that has been renovated you could lower your capex %.   The other thing I am noticing is that a purchase of $125k for only $1,050 in rent is not that great of a deal. The only thing that makes it remotely decent is if its in true Bartlett.

Curt Davis · Answer

$77k homes in Arlington???

Jackson Long · Answer

@mike d

I think there's some old boy Network things going on between some small bankers and appraisal companies.

Frank Geiger · Answer

I tend to disagree with @Curt Davis. Never lower your CAPEX because they go off a predictable lifecycle. Just because it has been replaced once doesn't mean it won't need to be in 10 years. I buy rentals to hold forever. If it's not in the numbers now, it more than likely won't be in the future (unless rent jumps in Bartlett).

Turnkey companies get a bad rep. There are a few out there that will deliver good cash flow. Most are just looking to get paid two or three times. Breaking even is not worth it.

Mike D'Arrigo · Answer

@Brenda Watkins this has nothing to do with buying turn key. It's just not a good deal. At that price and rent it's not going to cash flow. Do you know that it's priced at a premium or is it at market value. You don't necessarily pay a premium for a turn key. A good turn key company doesn't have to sell above market value. Turn key companies make their profits by forcing equity through improving the property the same as someone who is using the BRRRR strategy. The difference is that they equity goes to the turn key company as profit and you're getting a rehabbed, turn key property at market value. The only time turn key companies can sell above market value is when they are selling to cash buyers that aren't getting appraisals.

Christopher Thompson · Answer

@Brenda Watkins I bought a turn key place a couple of years ago and it has turned out amazingly well for me.  I did a lot of my own due diligence (called a local unaffiliated realtor to ask for their opinion) and made sure I bought in a low crime, good school neighborhood -- exactly what I would do for a primary residence.  There are never shortages of people who want to be in good school districts and areas of low crime.  There are a ton of rentals in memphis, with many in crime-ridden neighborhoods with poor schools.  The key is not to buy in those areas - or else you could end up like @Jackson Long 's friend.  Furthermore, if you ever wanted to sell the property earlier than you expect (like me right now due to some big life changes), it's a lot easier selling a place in a nice neighborhood than a poor one.

That said, I bought a turnkey for 77k and it's renting for $875/month.

My first renter lasted for the entire 2 years lease (as expected).  When the renter moved out, my property management team spruced it up and signed my second renter for another 2 year lease for more money.

It sounds like your friends (@Jackson Long ) are not taking the right approach, were misled, or just have bad luck.

Jamal Davison · Answer

@Brenda Watkins I say look for MFH.  Turnkey has very little to no cashflow because of company renovation to  the house and try to sell it at market value. At least with MFH you might be able to house hack or reduce your rent by having other share the payment of your mortgage.

Michael Ablan · Answer

@Brenda Watkins -  If the numbers don't work, then keep looking.  Unfortunately turn key providers aren't looking to sell you any sweet deals.  They're just selling a semi-safe vessel to park your $, in which the mortgage gets paid down by your tenant.  You might be better off investing your cash in a syndication, or getting in with a local guy who has his finger on some great deals, but doesn't have the cash to bring them down

Turnkey provider properties = NO CASH FLOW?

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