Is this turnkey property a good prospect?

Question

Hi, I thought I would get the turnkey community's thoughts on this property I've been presented with:

- address: 4933 Fernbrook Dr, Memphis, TN

- purchase price: $91,900

- 4BD, 2BA

- single carport

- projected rent: $895

- financed with 20% down, plus closing costs, for around $22K out of pocket.

- estimated $550 PITI

- neighborhood crime rate: low

- quality of nearby public schools: poor

- comps seem to range from $42K - $80K

My initial thoughts are that I should pass on this, as it barely meets the 1% rule, is in an area with poor quality schools, and        lower comps, and only shows a 9% ROI after maintenance and vacancy. But I wanted to see if anyone else has some thoughts?

Curt Davis · Answer

@Charles Moore

Charles, I am a TK provider and also a licensed Realtor in this market and the home is currently listed on the local MLS for only $32,900.  I am guessing the person who brought this to you is trying to find out if you want it first then will buy it and increase the price based on repairs.  I can tell you that the price of $91,900 is so high for this area, I would estimate the rent to be around $850 range, maybe $875.  I would price this home for no more then $77,900 to $79,900 and that would be renovated.

I dont see a deal here unless the price was far less.  This is a home that I would sell so I think the area is ok and the home is ok as well, just not the price you are being offered at.

Might want to check out some other providers in our market,  wink wink :)

Good luck

Alex Craig · Answer

@James Wise I respectfully disagree 100%. A home is a home. Terribe advice to put out here on Bigger Pockets.  That is the thought process of the old dinosaurs in the business who are starting to see their vacancy go up. Now that being said, every market is different and that may be the norm for you market. After all, it is Cleveland, OH where they draft WR's without a QB to throw it to him b/c they drafted a meathead as their franchise QB 2 years ago. I have a personal rental that I tried to flip 4 years ago and when it did not sell, I put it on the rental market.  With being a retail property and renovated to retail standards of the area (tile backsplash, SS appliances, granite, vanity upgrades and several other retail features), I placed it on the rental market with the idea of a 1 yr. lease, then list again.  Within 48 hours I had 3 approved applicants.  Then a year later, I was going to clean it up from the last tenant and list it, but to be safe, I listed it for rent again.  Within 24 hours, another approved applicant, so I decided to rent again, why not as it is cash flowing well. The house just became vacant and I have one showing today and 1 application in house.

Long story short, 4 years ago when I saw the benefit of having rental properties renovated to retail for the area, I did that with all my own rentals and all our Turnkey homes.  The result has been shorter vacancy, less turnover and less maintenance.  A home is certainly not a home, otherwise we all mind as well shop for rental properties on paper and not consider the home.  2 homes side by side, but one home has vinyl plank flooring instead of carpet in high traffic areas, ceramic tile in kitchens instead of vinyl, upgraded bathrooms with ceramic tile and accent tile, newer vanities, designer ceiling fans in living room and master, new counter tops instead of the old dated ones, etc., will perform better.  Experienced investors in Memphis who know what they are doing have started making their rental homes much nicer. I have seen to many investors miserably fail b/c they buy dated homes with old mechanicals and they simply do not make any money on a leveraged purchase b/c their homes sit vacant and they are eaten alive in maintenance.

Those homes off the MLS that are selling for a slight discount below retail are doing so b/c they need a little TLC. I can promise, these homes off the MLS that investors buy b/c they are getting a deal have roof and mechancials on the back side of their lifespan. Replacing those is 40 months of cash flow on a property that nets $250 a month and has not vacancy or other maintenance during that time. I would argue it is 50 months of cash flow lost.  That is not a good position to be in within the first 10 years of the investment.  Also keep in mind, owners off the MLS are not going to fix everything on inspection reports, they will likely only fix the immediate items that need to be addressed.

BTW, I am kidding on the Cleveland, OH potshot.  Where they fail in Football they are making up in basketball (for the time being until LeBron bolts again). :)

Jay Hinrichs · Answer

@Charles Moore  if you have not already pop on to Bries website turnkey reviews many memphis providers there have posted their product.. you can compare them side by side.

use the comparison function to look at detailed operating costs.. do focus on property tax's in the memphis market.. properties in the city have   city and county tax's the same property out of the city only has county tax's so cash flow is better as rents don't know city and county limits lines.

as an aside one can go crazy watching what the properties sell for on MLS then seeing them listed for 3X . but remember

Very good TK rehab is 20 to 30k  as stated above new everything.

5K for cost of capital to buy and reno

3k for tax's and clsoing costs

1k for utls.

3 to 7k for commission to west coast marketer if this is being offered through a marketing company.

7 to 15k profit for the turn key company .

so average about 40 to 50k to get it to turn key quality all in.

if it was bought for 25k then the resale price would be more like the other folks are talking about mid 70's.. anything above that there is a fair potential of VERY large profit to the vendor

James Wise · Answer

@Charles Moore

Tons of folks think their only options are a fully renovated turnkey property from a special turnkey provider or a complete gut job renovation. You don't need either of those. A house is a house. You could just narrow in on an area you like, find a realtor/pm, snag some houses in decent condition right off the MLS and then put some tenants in them.

Don't see a need to have to discuss algorithms with anybody. Keep it simple.

Alex Craig · Answer

@Curt Davis I think it is showing active because the listing agent has not changed the status. Buyer closed on it for $25,000 last month.  That being said, there seems to be a very large spread, of course, I have no idea what the rehab is.  I do know that most of the homes do not have a 50k rehab and the listing prior to purchase did not seem to indicate a massive rehab, nor did the pictures.  Being a high crime area, I agree with Curt, I think the rent is $850 to $895 and sell price should be closer to $75 - 78k.  That price would include new roof and new HVAC, along with rehabbed to retail specs and no carpet in high traffic areas.

For $91,900, you can get a very nice homes with new roof and new HVAC in a solid B area.  This home is C class all the way.

Derrick Craig · Answer

@Charles Moore

I would pass on this one WAAAAYYYY Too much for this home!!

Michael D. · Answer

You don't mention all the expenses that you're considering, and you've mixed two important expenses in with your mortgage by giving us "PITI." Better to give the mortgage payment and then separately the Taxes and Insurance.

The comps are important, but keep in mind that in a lot of neighborhoods all the comps are quite distressed, and some distance from "turn-key."

If this is a true turn-key, then it should come with a tenant and management in place. Does it? If not, then it's not a TK, it's just a house you're buying.

Anyway, I'm guessing based on your rough numbers that you cash flow somewhere around $100/mo or so, based on NOI around $500/mo and mortgage payment of $400.

So your CoC is $1200/yr / $22k = 5.5%

$500/mo = $6000/yr, which is about 6.5% cap rate. Not horrible, but not that great either.

TJ P. · Answer

Exactly. I haven't seen any 1% rules that would CF to my standards with traditional financing. Originally posted by @Charles Moore:

My initial thoughts are that I should pass on this, as it barely meets the 1% rule, is in an area with poor quality schools, and lower comps, and only shows a 9% ROI after maintenance and vacancy. But I wanted to see if anyone else has some thoughts?

Clayton Mobley · Answer

@Charles Moore I have to agree 100% with @Jay Hinrichs' numbers. If you say it looks like a hoarder's house they should be doing a huge reno, so that should be up towards the 30k range, depending on how long important maintenance has been deferred. However, even with a massive overhaul up near the 40k mark you'd still be only at 80k, so the 90k+ price tag seems highly inflated. While I have the utmost respect for the folk over at MI, this deal presented as-is should likely be a pass. The value if a high quality refurb is a huge factor when considering a turnkey and shouldn't be discounted. However,  I'd want the provider to give you a specific break down of what is taking the purchase price up more than 360%. if the answer isn't to your satisfaction and the returns don't add up then its time to move on.

Is this turnkey property a good prospect?

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