Turn Key Investments
Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes
Turn Key Investments
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Investor · Manitou Springs, CO · Member since 2016 · 57 posts · 25 votes
10yI'm still on my journey to purchase my first turnkey so take this with a grain of salt. 14% ROI seems surprisingly high for a turnkey. Don't forget to add in vancancy rate, turnover fees, maintenance charges and CapEx. I would do as thorough review of the actual turnkey company you are using as I would the property. Here are some questions I have gathered together from the forums and blogs to ask turnkey companies:
- Are you an investor?
- How many investors do you work with?
- How long have you been in the business?
- What has been your biggest mistake as an investor?
- Do you own all facets of the operation?
- Do you actually own the homes you are listing?
- Do you defer maintenance?
- Do you manage the properties?
- What is included in the listed price? Cash Price?
- Do you have renters in all your homes?
- What’s your normal lease term?
- Do you have a rent guarantee?
- Do you have any other warranties?
- What percentage of your customers are repeat buyers?
- Can you give me a list of referrals?
- What’s your property management fee?
- What’s your placement fee?
- What’s the average stay of tenants?
- Average vacancy rate?
- How many properties do you manage?
- How many did you turn over last year?
- What company is financing the homes?
- What happens to my property if that company goes bankrupt?
- What’s your appreciation rate based on?
- What’s your rent growth rate based on?
- Do you have any special programs in place to keep tenants happy?
- What is your process for keeping owners up to date?
48 Replies
- Investor · Manitou Springs, CO · Member since 2016 · 57 posts · 25 votes10y
I'm still on my journey to purchase my first turnkey so take this with a grain of salt. 14% ROI seems surprisingly high for a turnkey. Don't forget to add in vancancy rate, turnover fees, maintenance charges and CapEx. I would do as thorough review of the actual turnkey company you are using as I would the property. Here are some questions I have gathered together from the forums and blogs to ask turnkey companies:
- Are you an investor?
- How many investors do you work with?
- How long have you been in the business?
- What has been your biggest mistake as an investor?
- Do you own all facets of the operation?
- Do you actually own the homes you are listing?
- Do you defer maintenance?
- Do you manage the properties?
- What is included in the listed price? Cash Price?
- Do you have renters in all your homes?
- What’s your normal lease term?
- Do you have a rent guarantee?
- Do you have any other warranties?
- What percentage of your customers are repeat buyers?
- Can you give me a list of referrals?
- What’s your property management fee?
- What’s your placement fee?
- What’s the average stay of tenants?
- Average vacancy rate?
- How many properties do you manage?
- How many did you turn over last year?
- What company is financing the homes?
- What happens to my property if that company goes bankrupt?
- What’s your appreciation rate based on?
- What’s your rent growth rate based on?
- Do you have any special programs in place to keep tenants happy?
- What is your process for keeping owners up to date?
- Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes10y
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes10yKiran Alisam have you verified that rent with a property management company?
- Real Estate Investor · cleveland, OH · Member since 2010 · 80 posts · 16 votes10y
The numbers are about right, except taxes seem a bit low. I have a couple dozen single family homes in Maple Hts. Its a great investment in my opinion. I rent to mostly section 8, my rent range is 875-1000 per month 3-4 bedroom homes. The homes are mostly 1950's bungalows that are very easy to repair and usually costs are manageable, even a new roof will only run you about 4k. The city inspections are a bit aggravating but a minor hurdle.
- Real Estate Broker · Portland, OR · Member since 2016 · 97 posts · 90 votes10y
@Kyle Myers that is a great list! I'm thinking of assembling a team (agent, property management, appraiser etc) instead of going the turnkey route. I live in LA so I would be doing this from a distance and likely do a trip to shake hands and meet in person once I have prospects for each team member. Do you think this is realistic? or is turnkey the way to go?
- Investor · Manitou Springs, CO · Member since 2016 · 57 posts · 25 votes10y
@Melissa Dorman I think it's very realistic to do a couple times, but what if you need to find someone new? What if you go out there and those people don't meet your expectations? If you do choose that route I would make sure it's somewhere you enjoy visting. Another idea is to partner with someone in the area you're looking at, that way you're not traveling back in fourth all the time.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Kiran Alisam while I wouldn't say 14% is anything to sneeze at, I think its possible to do better with a turnkey. Of course, this does depend on if you are paying cash or financing. Full disclosure, I am the CEO of Spartan Invest, a full service turnkey outfit in Birmingham, AL, but with a traditional 20% down loan on a $93,000 B property, we run just under a 21% ROI. Of course, the figure is lower if you pay cash because your investment is higher, but the monthly cash flow is more than double, so it depends on what you are looking for. Remember that a ratio is only useful if the numbers used to get there are what you want. Focus on solid figures not just percentages. Do you want higher monthly income and have the cash on hand to pay in full? Then a lower ROI may be fine because the trade off is zero debt and no interest payments, just solid cash flow. Figure out your goals outside of just what ROI number you've heard is "right" and then analyze your options based on what meets those goals.
I also want to send a kudos to @kyle Myers, who makes a truly excellent point about asking a ton of questions of your turnkey provider. Especially when it comes to deferred maintenance, a 14% ROI can look great on paper when you sign but then end up being considerably less impressive if you keep losing cash flow to maintenance issues. You should make sure you're asking your provider exactly what types of refurbs they do and what the life is on those upgrades. For example, we do extensive refurbs up front specifically to keep our maintenance costs down long term (an annual rate of 2.6% vs the industry average of 6-8%). This includes new tin roofs, high quality like-wood vinyl floors with an average life of 15 y ears, new HVAC systems and granite countertops. Yes the upfront costs are higher but it makes for more stable and reliable cash flow down the line. You should also ask your provider what is included in their maintenance ratio. Does it include move out costs? If not, that's a number you need to incorporate into your analysis.
I would also second Kyle's recommendation to ask about vacancy/occupancy rates. You'll find out quickly that most providers are only vaguely aware of their rates. We track our occupancy rate obsessively and currently run a 96.1% 52-week rolling average, while,our 13-week average is closer to 97%. Ask your provider what their rate is. If they say something like "oh, it's about 99-100%" then you know they don't really know their rate. Even with an excellent business model and great tenants, 100% is unrealistic because you will lose at least a month here and there to turnover.
Definitely keep that list in mind. Print it out! It sounds like a lot of research but you will be so glad you asked those questions. If a provider doesn't have solid answers that they can back with data, then you should consider moving on. A good turnkey provider should know exactly how their portfolio is performing at all times and be able to explain, with specifics, exactly how any and all expenditures benefit your investment.
Alllll that being said, I wish you all the best on closing your first deal! If you have any questions Bout turnkey, specific properties you want to analyze, or simply real estate investment i general, feel free to drop me a line!
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Melissa Dorman makes an excellent point! It all comes down to what you want to achieve and how much work/time you are willing to put in. No one will argue that it is not possible to increase your ROI if you do things yourself, but the trade off is that you have to manage both people and properties. Too many moving parts can quickly derail your investment and negatively impact your cash flow. Especially if you are planning to fly out to meet each team member, you'll need to incorporate the cost of travel as well as the value of your time ( and really, do not discount how valuable your own time is) into the total cost of your investment. The value of turnkey is in its simplicity.
If your are excited about the idea of researching, hiring and managing a team, not just today but also long term, and you have both the time and inclination to step in when some sort of crisis inevitably arises, then turnkey may not be for you. However, if your focus is on accumulating a substantial portfolio that generates reliable and consistent monthly income, and all the aforementioned are just hurdles you are willing to jump to get there if necessary, then you should give turnkey another look.
In either case, I am happy to answer any questions you might have about turnkey or real estate investment in general. Just shoot me a line any time!
All the best,
Clayton
- Real Estate Investor · North Ridgeville, OH · Member since 2016 · 97 posts · 81 votes10y
Hi,
I invest in buy and hold rentals in the Cleveland market. 57,000 seems high to me even for a turn key property in Maple Heights. The only problem with Section 8 in that area is you are dealing with Cuyahoga county. CMHA which runs the section 8 program for the county is awful. I own three rentals in Cleveland suburbs, but I won't deal with section 8 because of CMHA. I own one rental in Elyria and the section 8 in Lorain county is much easier to deal with. You need to find a realtor who really knows Maple Heights well if that's the area you want to invest in. There are sections of Maple Heights that are sketchy and there are sections that are pretty nice.
- 10yIsaac RowePro MemberRental Property Investor · Cleveland, OH · Member since 2014 · 214 posts · 86 votes
57k in Maple Heights? I have a hard time seeing how a property could be worth that much anywhere in that city, have a deal going there now, and have done several transactions in Maple. For me to pay 57k for a house in Maple Heights it would have to be a new build. Every major mechanical brand new, and even then I would probably pass. Just understand that you very likely won't be able to sell that house for quite some time. As long as your ok with that and know your paying over market value.
I always recommend to people using turnkey companies to do there own independent research, or get a local agent to run comps who isn't associated with the deal. Comps can be easily manipulated. They city in Maple is very challenging. You will have city rental inspections as well as Section 8 rental inspections. They can require driveway, new garage, whatever they want. And you can't do anything about it.
Not saying the deal won't work out, but I just hate starting out with negative equity. I only deal with properties where i have at least 10-20% equity so I can get out without taking a loss if needed.
- Dallas, TX · Member since 2015 · 46 posts · 12 votes10y
Hey, I took a look at a couple of properties on your site right now and I have some recommendations to make. It appears that you are running somewhat deceptive financials. The only expenses you are including are taxes, insurance, and property management.
1. You really should include figures for maintenance. I know this number fluctuates, but you even said yourself that it comes out to ~2.6%, so why not include ~3% for maintenance.
2. Capex is also something you can't ignore, I know that 2.6% no way includes large repairs such as roof, HVAC, etc. (even if those things are put in new when you buy it, they will still need repair some time down the line).
3. Your property management figure does not include a leasing fee, something I'm sure the owner will have to consider when making the purchase. I'm not sure if your company is the one managing or you are using a preferred provider, either way, you should include this in your numbers.
4. closing costs...I know these also fluctuate, but they also GREATLY influence returns, especially when financing.
If I include these things it brings your returns down considerably, from over 20% cash on cash with financing, down to about 9%. (And that is including your VERY optomistic vacancy rate of 4% and low maintenance and capex of a combined 5%).
Not saying those properties are bad deals. However, I just wish turnkey providers gave more realistic figures.
Food for thought.
- Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes10y
@Isaac Rowe: Thank you for the insights. i would like to get in touch with you to get more details on the above items you mentioned
i will PM you and we candiscuss - 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Melissa Dorman if you use 50% of rent as operational cost over the long haul you will be just about there.. maybe just a touch better maybe a touch worse.. unless your buying new construction. even with a fully rehabbed home in a B area tenants are tenants and if you have section 8 for sure you will run higher costs..
- Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes10y
Thank you guys for taking your time out and replying,
i will put the numbers as below that iam getting for a turnkey:
Price : 59,900
Rent: 10,800
Taxes:1254
Reserves:500
Insurance:600
Net Annual income:8446
3bed 1bath - 1160sq ft
ROI:14%
Price:$49,900
Rent:$10,740
Taxes:1452
Reserves:500
Insurance:600
Net Annual income:8188
4 bed
ROI:16%
As per the numbers and data from turnkey looks good, so how do i analyse strictly from cash flow?
Thank you
Kiran
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kiran Alisam the rents are gross I take it.. this is somewhat accurate if your going to self manage. and you have perfect tenants who never miss a payment and when someone moves out someone moves in the following day and you never have to pay for a turn over because the unit was left spotless which of course we know that's the norm in rentals at that price point.
- Dallas, TX · Member since 2015 · 46 posts · 12 votes10yJay Hinrichs I know you are the turn-key guru around these parts, so I wanted to see if I'm on track with what I mentioned a few post prior in this thread. Are those additional expenses that turn-key providers don't usually provide? If so, why not? Is it just because they fluctuate and are hard to pinpoint? I just feel like it can potentially be misleading for newbies, not that I'm an expert by any means.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kelton Johnson Know nothing like that its not misleading its keeping up with the JONE's.
if one turn key company understates cost by 0mission.. then the other turn key product does not look so good.. and since many buying turn key are new investors they gravitate to numbers they see and remember.. IE this company gives me 15% this company gives me 16%...
its true those are the returns but its up to the investor to understand there are more costs than just the simple ones as described above. IE tax's insurance and a mere 500 for reserves..
And if you lived there and managed these yourself and stayed right on top of it and did your own handyman work you might get close.
but if your a passive out of area investor then PURE logic dictates that you know you have to hire a PM and you know they charge 10% of rent collected and they charge a placement fee and mark up on maintenance and release fee and keep most if not al lfo the late charge.. or you soon will learn it.
You will also learn very quickly that NO rental home that is older will over a 3 to 5 year run only cost 500 to maintain that is slum lord style.
And if you do not have next to or brand new major componants IE roof windows HVAC wiring plumbing that somewhere in the next 5 to 7 years you will have a major year costing you 10k or more. just these little tidbits that no one really leads with in their marketing but that are real experinces to those with experience in the space
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kelton Johnson and were you live.. there is Hail and wind damage and your deductible and foundations.. every deal I have funded in your town had or has major foundation issues..
its not if its when .. and of course none of the location turn key companies mention this pesky reality of owning properties were you have major expansive clay soils.
- Dallas, TX · Member since 2015 · 46 posts · 12 votes10y
That's all great to hear, I'm not going crazy when I consider tons of extra expenses on my potential properties. I think ultimately, that is what scares me most about turn-keys, it's not that they are trying to rip anyone off by any means. Of course they want to make their clients money, however, their is no fiduciary duty...they are trying to make money, right? So, if that means not advertising certain costs, then obviously that is what they have to do to stay competitive. But in nature, that mentality from someone you are going into business with is someone worrisome.
I really hope none of this comes off as me bashing on turn-key investment, because they certainly can be great investments, especially for passive investors. But for someone who has the time, knowledge, and patience, I feel there are definitely better bang for your bucks out there.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes10y
Hey Kiran....not sure exactly what you are asking about cash flow. You have listed in there an annual net income number....that in theory would be your cash flow (assuming all of the correct variables are in there). Are you looking for a way to verify that number, or compare it to something? Not sure if this helps or answers what you are looking for, but here's the formula I use when I'm looking at turnkeys-
https://www.biggerpockets.com/renewsblog/2013/01/1...
Maybe that helps. If not, let me know what you are trying to figure out.
I've been working with, and buying, turnkeys for a few years now and I can honestly say that there's really nothing you can't verify about them, especially in terms of numbers. Estimates for vacancies and repairs of course can't be exactly known and can only be estimated, but everything else a turnkey company pitches you, you can verify. I goofed on this with one of my properties big-time, but I didn't know I needed to verify anything at the time. So it's totally doable. I think you bring up a valid point! It's not turnkey bashing :)
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
Originally posted by @Kiran Alisam:
Thank you guys for taking your time out and replying,
i will put the numbers as below that iam getting for a turnkey:
Price : 59,900
Rent: 10,800
Taxes:1254
Reserves:500
Insurance:600
Net Annual income:8446
3bed 1bath - 1160sq ft
ROI:14%
Price:$49,900
Rent:$10,740
Taxes:1452
Reserves:500
Insurance:600
Net Annual income:8188
4 bed
ROI:16%
As per the numbers and data from turnkey looks good, so how do i analyse strictly from cash flow?
Thank you
Kiran
You STILL made no allowance for Capital Expenditure, normal Repairs, or Vacancy costs!
("Reserves:$500" will not cover these)! You MAY get away with it for 1 year (only), but...
- Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes10y
@Ali Boone I have kept the numbers according to the link and the numbers are coming in as
2700 ( net ) on a 56900 property with 20 percent down
Cap Rate of 4.75 percent
Cash on cash 2..7 percent
Now could you help me in figuring is this a purchase i should go ahead
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes10y
@Kiran Alisam (your Cash on Cash typo was meant to read 23.7 percent, but we understand).
Interesting that re-looking your second post, your nets started above $8k. Now, down to $2.7k!?
Will the real net income please step forward?
One of my concerns is: what Lender is giving out (fair interest) mortgages of less than $50k?
Unfortunately, we can't really speak to the accuracy of the "link" you referred to, nor are we in a good position to advise as to any risks you might be taking buying in that exact neighborhood.
A good, local, Property Manager that you TRUST will be a key element to success. All the best...
- Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes10y
these are the values i have taken into account for the property , the original net figure was from turn key provider
Property Price 56900 Rent per Month 900 Insurance 50 Property Taxes 137.8333333 Property Management 90 Mortgage HOA/Mortgage $244.36 Vacancy 90 Repairs 90 Gross Rent 10800 Expenses 702.19 Net Rent 197.81 Net Annual Income 2373.67 - Investor · Erie, PA · Member since 2016 · 63 posts · 4 votes10y
@Jay HinrichsThank you for the insights . what are the guidelines to vet out a proper turnkey other than looking at your website turn-key reviews.com :) which iam currently looking
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