Bartlett/Memphis Turnkey Analysis (38134)

7 Replies

Hi,

Currently analyzing a 4/2 in the Bartlett area.  It is in the neighborhood of Blackwell/Yates St. and the Zillow estimates the surrounding houses are around 115-125K for that kind of property.  The county assessor says the property is worth around 108K in 2014.  Not sure if anyone knows how easy/hard it is to find a tenant in that area?

Looks like turnkey bought it at around 72K.

https://www.redfin.com/TN/Bartlett/3105-Yates-St-3...

They are trying to resell at 119K.

Crunching the math at 8% vacancy, 8% repairs, 9% property management fees, $100 CapEx (too much?) I get around $55/mo for cashflow (renting at $1150/mo)--if I discount CapEx it is about $155/mo.

If I get it at 119K and it appraises for somewhere in the mid-120s, I don't really get much instant equity; though this is a long-term turnkey property that I'd hold so I'm wondering how important that is (it'll be appraised again when I sell in the future anyway)?

I guess another question is: for turnkey A class rental properties, what are some criteria that have worked well?  

I currently have cash flow at about $100+ a month (ideally $200+), CoC at 7%+, income-expense ratio at 1%+, and 150K or less for the house. No idea if I'm too strict or too lax?

Lastly, do I need to be concerned about short-term exit strategies on a turnkey?  Seems like I should be happy enough as long as I rent it out and get some cash flow and down the line if it appreciates too much then I'll be needing to sell.  Though not sure what to do if I grab a turnkey and the PM cannot find a tenant for months?

Thanks in advance for any answers!

Short term exit strategy and buying Turnkey almost dont go together.  Turnkey providers are selling to mainly long term buy and hold investors.  I might want to reconsider if you had to sell fast.  I can tell you for a true Bartlett home, under $120k is a pretty decent home.   There is a home next door that is smaller that sold for $114k to a retail home owner so there is decent retail happening in this area.

I have never heard of the owner of this home.  They did take out a $90k total loan to cover the purchase and repairs.  My only concern based on looking at the old pictures is did they make all the necessary repairs?  I also think the value is in the $120k range.  

I think by the time you take all those factors into account like you are they will make any deal look like it wont cash flow.   

I did a quick financial scenario on this home and just looking at straight gross figures assuming 30yr, 20% down 5% interest your at about $325 in cash flow.  Factor in your vacancy and repairs and your at $141 per month.  Considering its true Bartlett in an A area, this is not too bad.  

Good luck

@Angelo Wong

I like that you've already defined your investment criteria. 7% CoC is a bit low for me as I'm not investing in class A stuff.

In my opinion your CapEx number is too low. I put at least $150/month aside for all the big stuff. The place was built in 1972, so I'm guessing it is due for a few upgrades in the very near future.

If you've got a PM that will work for 9%, keep them employed.  Standard where I am is 10% plus a small bonus when they find new tenants.

This doesn't look like a great deal from the outset as it violates the 1% rule.  But you might be able to pick it up for 90-95k and make some money off it.

Happy Investing either way.

I think the value of this home is probably in the mid 120's. It is hard to gain equity via the turnkey model if the home is rehabbed correctly, especially in the suburbs. To do it correctly is expensive and by that, I mean pulling permits on all the electrical, gas and mechanical, vinyl plank flooring in the high traffic areas, upgrading the carpet above the cheap investor grade, new counter tops, ceramic tile, addressing all external issues including the fence and external buildings and tons of other minor details. If you are going to pay retail value (which there is nothing wrong with that), you want to make sure it is renovated to retail for the area, otherwise you really will be upside down. Appraisers really do not consider the nature of the rehab on homes like this, rather they are looking at price per sq ft, year built, size, etc. Looking at other comps and the pictures with those comps off the MLS, at the very least you want updated vanities in the bathroom, new counter tops, ceramic tile, nicer faucets, ceiling fans and something besides carpet in the living and dining room and den.

As for the area, this is certainly "A" class.  Right now is a hard time to rent Bartlett as schools are important to tenants and most are not moving now.  Our Bartlett homes are taking longer then our Memphis homes to rent.  Moving forward, we are not allowing our suburb leases to expire in the months of October to January 31st.  You will get more quality apps in Bartlett and the tenants from what we have seen from our 30 or so Bartlett units take care of the place and they stay longer.  I personally own 2 in Bartlett and always looking to add to my portfolio in that area.

If you are wanting to get out short term, I would focus on area heavily and only invest in "A" class.  The cost to sell is the main thing which makes any investment hard to sell quickly unless you have a lot of equity.  You should budget no less then 10% of the purchase price to sell the home. 6% to the Buyers and Sellers agent, 3% shared closing cost and 1% misc.  Also, keep in mind you if you want to sell on the retail market, the home should be renovated to retail standards, thus why when buying Turnkey, it should be fixed up to retail standards.  Also, at that price, HVAC should be in new condition and so should the roof.  You should experience very little maintenance for the first 3 years on this home, which is an important aspect to Turnkey b/c the first few years should be about banking your cash flow, afterall, you are paying close to retail and with that should come less maintenance cost and hopefully less tenant cost, but the tenant part is for the most part, is a wild card as even the most qualified tenant can lose their job, get divorced, married, transfer, etc.

So long as the home has what I have laid out in the post, I would go for it.  If it does not, I would ask the seller to make it retail ready for the area, using comps in the mid 120's as the standard for the area.

@Aaron Montague  Regarding the 1% rule, keep in mind the property taxes in this suburb are really cheap at $1,623.  Insurance should run around $785.  True A class is harder to get 1:1, but the trade off is that they typically are more passive and long term, beat the #'s b/c of less turnover, better quality tenants and cheaper turn cost when the tenants move out.

@All

I wouldn't buy this place at 119k. At 93k I can get 10% CoC and $200/month in profit.

Here are the numbers as I see them:
% Down Payment 20.00%

Down Payment $23,800

Remainder of closing costs$5,500.00

Total Due at Signing $29,300

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $511.05

Taxes $135.25

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

Cap Ex and Ops $150.00

Insurance $65.42

Mgmt Fee $103.50

Vacancy $93.15

Total Expenses$1,058.37

Total Revenue $1,150.00

Cashflow/month $91.63

Cashflow/year $1,099.55

Cash on Cash Return 3.75%

Thank you all for the responses!

@Aaron Montague - Makes sense. I'll have to double-check if this TK company entertains lower offers since 10% CoC and $200/mo is pretty ideal. Though I'm already expecting to pay a little bit for a premium anyway for a TK, and if they bought it at $72k with repairs of $20k, they might not have incentive to sell it to me at $93k. Edit: Actually PM is probably 8% but I just added another % for misc. fees.

@James Wachob - Sure I'll connect with you.

@Alex Craig @Curt Davis - Regarding the issue of how much renovating they're doing, it looks like they're doing a bunch of work on the kitchen/bathroom as well as some exterior work.  Looks like they might have some wood laminate in the living areas as well -- not sure about the ceiling fan situation, though.  I just got this list from them a few minutes ago:

"The inside is pretty demolished right now. We have pulled out drywall and ceilings in areas of the home that need to be replaced from old water damage. We do a lot of updating due to the age of a home like this, so we have taken out the old kitchen cabinets, thrown away all the old appliances, pulled out all of the old dated light fixtures, removed the flooring (except for the ceramic tile in the kitchen), removed the bathroom vanities (old and dated), etc.

The home already has a newer 30 yr architectural shingle roof, a newer HVAC system, but the rest of the home needs a good overhaul.

Here is what we are doing...

  • Re key home to make new tenant keys
  • Clean up and shape the landscaping and trim tree in rear of home
  • Repair exterior wood - Repaint all exterior siding and trim.
  • Repair gate / fence leading into backyard
  • Replace all kitchen cabinets with new cabinets - Paint white, then antique
  • New st steel stove, dishwasher, and vent a hood
  • New countertops (kitchen)
  • New wood laminate flooring in 2 living areas and hallway - 1st floor
  • New tile floor in downstairs bathroom
  • New vanity and sink in downstairs bathroom
  • Tile walls around tub to replace old tub surround
  • New brushed nickel light fixtures and fans throughout the home
  • New carpet and pad on stairs and upstairs hall and bedrooms
  • New tile floor in upstairs bathroom
  • New vanity and sink in upstairs bathroom
  • Tile walls around tub to replace old tub surround upstairs bath
  • Replace old / damaged sheetrock where needed (mostly downstairs)
  • Repaint all ceilings throughout home
  • Repaint all doors and trim throughout the home
  • Remove all wallpaper and paint all walls standard neutral colors
  • Replace all interior and exterior doorknobs and looks to new brushed nickel look to match lights and fans
  • Replace all cabinet pulls and knobs with brushed nickel to match door knobs and lights/fans
  • Licenced plumber to repair and service all plumbing fixtures / pipes to ensure no leaks
  • Licensed HVAC technician coming to service and clean the heat and air to ensure it is working property."

If I need, say, 6 months before I can rent this out then the project cost is actually 29.3k + 6mo PITI ($750*6) = 33.8k which makes my CoC look lower, right?