SFH turnkey in Kansas City - deal or no deal?

22 Replies

Hey all, 

I've been in discussion with a reputable KCMO turnkey operator over a house they only closed on this week - love everything about the property, but just got the offer numbers and now I'm not so sure.  

Location: Raytown-adjacent, outside the 435 loop, 73% owner-occupied neighborhood, Raytown schools

Property specifics: built 1960, 3/2, 1200sqft, 2 car garage, large lot, quiet street

Planned renovations: New roof, HVAC, some new electric, finished basement, good cosmetic finishes (hardwood/tile, granite, etc)

NUMBERS:

Price: $99k (after renovations)

Projected rent: $1100/mo

Estimated monthly expenses: ~$400 (allowing for vacancy, maintenance, taxes, insurance, PM fees)

I'd use leverage to purchase, and with the payment factored in I project just under $300/mo cash flow and about 11% COC, Cap rate between 8-8.5% depending on how you crunch the numbers (I'm rounding them for the purposes of this post, but I calculate pretty conservatively).

The numbers are decent, and I like that this house is on the higher end of neighborhood normal - it should be a very desirable rental, and attractive to a potential future buyer (though I intend to hold).  My big concern: the price of $99k is well above the comps in the area (there aren't many, but similar properties are $70-85k). 

I welcome your input!

@Julie McCoy

Few things. It does sound like a very nice house and the price to rent ratio is good. Regarding the comps,  are you getting them with your own research, by an appraiser or another Realtor? I ask bc if you are doing your own research it might not be that accurate if your using sources like Trulia or Zillow.  You should make sure to put the contingency in the contract that it is contingent on the home appraising for the sale price or greater. 

If the company is reputable you should be ok.  I cant imagine them selling it for $25k over market value and it actually appraising for that if that were the case.

If you are still concerned you could hire a local appraiser to do a desktop review of the home.

If you can get a similar property for almost $29,000 less why would you be interested in this property?

How and why are you trying to figure a cap rate on a SFR? If you had reliable cap rate comps you'd realize the market cap rate is closer to 11% and if your turnkey company is trying to sell you at 8-8.5% then they are ripping you off. Any turnkey provider that advertises cap rates are either stupid or crooks.

At $300 a month how long will it take you just to recoup your $25,000-30,000?

@Curt Davis , the comp numbers are from my own research, which admittedly has limited resources (i.e. Trulia and Zillow).  Agreed re: appraisal contingency, thank you for reminding me about that, I think that's a must in this circumstance.  I'll look into a desktop review too, thank you!

@Bob Bowling, the only "advertised" numbers are the property price and projected rent (which appears in line with the property/neighborhood). The rest is my own math and research. As for why this property, my comps are coming from the MLS and I have very little information on the condition of those homes; this one I know a lot of major CapEx items will be new. I'm definitely willing to pay a bit more for something I won't need to rehab at all, as I have literally no time for that. I'm just trying to determine how much more is reasonable while maintaining the upside of the investment.

Overall, I want my investments to cash flow but also have appreciation potential and appeal to future retail buyers.  I recognize that this often means paying a bit more for better properties, but of course don't want to overpay and lose years of potential appreciation in doing so.  I'm also still learning a lot about this process, which is why I'm here soliciting opinions and advice. :)  Thank you both for your input thus far!

@Julie McCoy

I agree with the purchase price question as well. Comps being 70K to 85K means they're either attempting a flip with a bad purchase price up front or attempting another flip in your bank account.

I'm not sure of any market other than my own but 14K to 29K above market isn't a good deal to me regardless of the area. Their asking price seems off. The comps are easily verifiable though. Simply call a real estate agent in that area and ask for all comps within the last 6 months and another list for the past 12 months. They might want you to sign a contract for this specific deal but one of the big brokerages probably won't.

Also it might not be a bad idea to ask on BP. Someone might be a realtor in that area or be able to access their MLS. Or call around to find an investor friendly realtor in the area.

Last tidbit, Do your numbers reflect anything close to...

5% vacancy, 5% cap expense, 10% management fee, actual tax and actual insurance quote?

Jeff Sechrest

Thanks, @Jeff Sechrest .  My numbers actually reflect higher percentages for vacancy and capex - I like 10% and 7% respectively, but I know those are high percentages so I'll also run numbers for 7% vacancy and 5% capex, so I get a more standard pro forma calculation as well (I split the difference for my numbers in this thread).  I'm always assuming 10% PM fees.  Insurance quotes are something I'm working on right now - no hard numbers yet, so I use a placeholder number that should be in range.  Taxes I get from the county website when available (which it is for the house in question).

Thank you for the advice re: obtaining comps in the area, I'll see about reaching out to a major brokerage for them.  Obviously, if my amateur comp numbers are wrong, it changes the whole complexion of the deal (for better or worse)!

With this budget you could make better in KC area

for $110,000 you can get two SFRs decent condition 1960s construction that each rent for $850.  This is what i see in Raytown, South KC, Grandview, Belton all the time.  In a nutshell - no deal.

@Julie McCoy for me it's clearly a NO DEAL.  I think  the sweet spot for cash flow properties is $45k- $75k with rents $700-$900.  Listen to Ali Boones podcast on www.turnkey-reviews.com about higher end rentals.  They can be harder to rent at times.  It's not like California over there.  People can get a mortgage for cheaper than the rent.  If someone can afford $1100/month chances are they could or would buy a house limiting your rental population for that property. PM me if you would like to learn more.  I have been doing this for almost a year now and can share my mistakes and experiences for you to learn from.  Thier is more to know than people think sometimes.  It may seem simple at first but as you grow as an investor you start to learn how complex investing can really be. If you want to hear my story I did a podcast on turnkey-reviews.com and one on the Joe Fairless show at http://joefairless.com/blog/podcast/jf349-how-to-find-a-lender-to-suit-your-investing

@Account Closed I've definitely seen deals with better numbers, but as I'm hoping to build a portfolio of B+/A- properties I'm trying to be particular about the types of properties and neighborhoods I choose.  As mentioned to Joey, however, that's a double-edged sword!  

In general, my mindset about all of this is a work in progress - while I intellectually recognize that what renters in the Midwest want is different from what I in California think they want, changing my assumptions (and feeling that my new assumptions are accurate) is not easy!  So everyone's input is helping me with that.  And perhaps while I'm still a beginner I should focus more on keeping it simple.  

Originally posted by @Julie McCoy :

@Account Closed I've definitely seen deals with better numbers, but as I'm hoping to build a portfolio of B+/A- properties I'm trying to be particular about the types of properties and neighborhoods I choose.  As mentioned to Joey, however, that's a double-edged sword!  

In general, my mindset about all of this is a work in progress - while I intellectually recognize that what renters in the Midwest want is different from what I in California think they want, changing my assumptions (and feeling that my new assumptions are accurate) is not easy!  So everyone's input is helping me with that.  And perhaps while I'm still a beginner I should focus more on keeping it simple.  

 All I'm saying is that it's Raytown.  So don't bet on it being or staying A-.  Look in Lees Summit, Blue Springs, Raymore, Johnson County KS for those higher properties you seek, if you plan to spend in the six figures area, not Raytown.  Raytown is full of $50k properties that can be solid rentals. IMO.

@Julie McCoy

Here in the sprawling matropolis of Mobile Alabama the market for higher end rental properties of say $1,300 per month is for the most part, non-existent. On the other hand section 8 pays around $900. That's not all bad though. This means most decent neighborhoods here can bring $1,000 to $1,100 per month and since the REO's are still pretty loaded with foreclosures. One can still find cash flowing properties pretty easily.

@Cliff Harrison Agreed - something like this in Lees Summit or Blue Springs would be a totally different prospect than Raytown.  (I wouldn't get as nice of a property, I'm sure, but the upside would be greater)

I've decided I need to walk away from this one, and think a bit more about aiming for middle of the road in appropriate neighborhoods.  Thank you all for your input, it's been most valuable!

Seems a little spendy for the area, I think you could do better with your budget, as others had suggested, and sounds like you've realized.

@Julie McCoy while you look for your next possible property I would encourage you to network with local property management companies who can assist you with knowledge of the area, comps (rental and ARV), etc. You can find property managers here on BP or trulia/zillow just look for rental listings in the area you are buying. Good luck!

No deal. If you want appreciation then this property at $99K with other like properties selling at $70-$85K is already over ARV.

@Cliff Harrison I agree 100%. Most of the northland could be included in the desirable areas to find a solid SFR as well.

@Julie McCoy I think you made a wise decision to walk from that "deal"

Originally posted by @Drew Francis :

@Cliff Harrison I agree 100%. Most of the northland could be included in the desirable areas to find a solid SFR as well.

@Julie McCoy I think you made a wise decision to walk from that "deal"

Desirable is relative but there are much better areas to buy at 100k pricepoint.  To me the 50 to 60k pricepoint is the sweetspot big cashflow and much better tenant quality than 30 to 45k houses.  Also note that 55k house will be sold at 70k by a turnkey company.  I am starting to think of offering a service to help out of state buy and rent kansas city after i finish my acquisition phase in 2016. 

I don't see this as a "great" or even a "good" deal. As an investor the goal is to buy properties for less than market value. From the initial look at the numbers it looks as though you'll be completely locked into this property with no equity and thus no flexibility.

I'm confidant that with more time and effort you can find a much better opportunity in Kansas City.

Just my rookie .02, I hope whichever decision you make is a blessing for you and yours. 

I think you should request actual MLS sold comps from the provider. And when you get them, make sure you map them out and see they are houses really close to the house you want. Once you confirm that they can not provide this, then you walk away.

If they can provide proof of sales like that then its best you get a contingency to walk away if the appraisal is no good.   And if you get that far, and the appraisal does not come out, then walk away.

The easier solution is to just find another turnkey with better deals.  I actually just put my first KC turnkey under contract a few days ago and am super stoked about it.   I will be writing all about it on my blog probably in a week or two.   

I had a conversation today with @Mike D'Arrigo who walked me through a lot of Kansas City in general, and this neighborhood in particular since he is familiar with it, and we discovered something interesting - this particular property appears to be in a lovely tiny pocket of very nice homes, but is surrounded by homes that are not comparable (e.g. it's something like an A- house on an A- street surrounded by B- properties).  So overall, it sounds like a bad deal, but on a street-by-street level, the numbers look like they hold up.

Now, that puts a whole new spin on things, but doesn't eliminate all the risk, of course.  The upside is I no longer feel like the TK operator is trying to pull a fast one, and I feel more comfortable with the numbers presented.  However, I do still feel like there's elevated risk involved because by sitting at the highest end of the retail/rental market in the area, finding and keeping tenants will be problematic.  

As someone just starting out and looking for something stable to invest in, I still feel like this isn't the right deal for me.  But it likely will be for someone.  And now I'm not going to cut ties with the TK provider because I no longer feel I'm being taken advantage of.

So that is how I think this story will end!  I certainly appreciate everyone's input and advice, and hopefully I'll be back with another deal very soon.

I am new to the turnkey business and reading all of the posts is so helpfull. Just saying thanks

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