Is investing in turn-key worth while in the current market

28 Replies

With property prices rising in the recent years, it seems like most turnkey companies cannot provide worthwhile returns. Most of the available properties I have seen recently quote an 8% cash on cash return, but after including vacancy, repairs and cap ex the returns are closer to 3-4% even in the best markets. I know the repairs and cap ex costs will be low in the first few years, but they should be included especially when the cash flow is below $200 a month since any repair/turn over could eat up a year's worth of cash flow. 

I guess my question is: Should I keep saving until the market conditions get better and I can get some better deals or buy right now? I know this is a tough question since no one can predict the future and no one knows when prices will drop again, but I just want to get people's thoughts on this. 

Note: I live in an expensive market and have little time with family and work to find deals in my area. I also do not have the expertise or the connections to do so here, which is why I am looking at other markets that have better returns. 

Are you buying with all cash?

If you are, I would suggest becoming a private lender with your cash until a future date when property sales level off or drop. You can always buy a good deal if you find one. But until then, it's a great return without tenants and toilets stressing you out. Plus, as a lender, you make all the rules on your loans. It's common to make 8-15% returns secured by a first position mortgage, property insurance, lenders title insurance, and someone else doing all the work.

Happy Investing

Derek Dombeck

I'm a multifamily syndicator, and I've also made a significant number of investments on the Limited partner side of multifamily apartment communities.  Similar tax benefits with no work.  Along those lines, I'm starting to learn about note investing...I don't know enough about it yet, but I'm happy to share what I've learned so far!  In short, I think that there are ways to make truly passive income in real estate, and the best options always come down to the market conditions and the specific deal.  

This is a great feed of information, am glad that I am able to view this information considering I am in the same market of location. I am really enjoying to read all these great forums.

@Felipe Ocampo I started out buying ten of these turnkey rentals.

Robert Kiyosaki has a saying, "there are three sides to a coin".

People argue that its a good time to buy or bad time to buy. For example "mfh” is overheated or commercial is getting killed by Amazon and e-commerce. I think these are mental justifications by tire kickers not to do anything.

Sophisticated investors live on the edge of the “coin”. They buy deals out our reach of amateurs due to the lack for network/knowledge. These opportunities are undervalued, with undermarket rents, with value add opportunity.

They are patient and don’t stray from standards that make them get crushed in a market correction. (Cashflow from other investments make this possible) They invest following the macro and micro trends and don’t gamble on gimmicks such as guessing where Amazon’s next HQ is going or where the hurricanes just crushed a market.

The trouble is a new investor you don’t have the knowledge or network to be able to tap into retail deals.

How about investing in REITs. Less riskier and headache than HML

https://seekingalpha.com/article/4153517-equity-reits-bargain-prices-asymmetric-opportunity

@Derek Dombeck these numbers are with financing. With all cash, the cash on cash returns would be even lower. I have about $40k right now. Do you have any recommendations as to who I should contact for private lending? Although that might be risky if there is a correction in the near future. 

@Holly Williams Thank you very much. I will contact you to see what opportunities are available. 

@Dominic Courtney welcome! Biggerpockets is a great community to learn and get your questions answered. 

@Lane Kawaoka with the current market conditions, I think you are right. The sophisticated investors with the experience and connections are the ones getting the deals, which is why I started thinking that maybe I should hold off for a year or two and see what happens with the market. A lot of investors are predicting a correction in the near future and it would be a great time to have cash and buy as many properties as I can. 

@Virs Esar I will also look into REITs to potentially "park" my money for a while. Although I don't know much about them. 

@Felipe Ocampo I think it can be a good way to start, that’s what I did. I’ve bought a couple in the last year. Depending on the market and the interest rate you get, I think with financing your return should be 7-9 percent.

@Caleb Heimsoth turnkey companies that I have talked to claim returns of 7-9%, but I have been running numbers and after adding in cap ex, repairs and vacancy, which they do not do, the returns seem to be closer to 2-4%. Are you getting 7-9% after adding these expenses in? 

yes I’m getting 8-10 percent with those factored in.    

Originally posted by @Felipe Ocampo :

With property prices rising in the recent years, it seems like most turnkey companies cannot provide worthwhile returns. Most of the available properties I have seen recently quote an 8% cash on cash return, but after including vacancy, repairs and cap ex the returns are closer to 3-4% even in the best markets. I know the repairs and cap ex costs will be low in the first few years, but they should be included especially when the cash flow is below $200 a month since any repair/turn over could eat up a year's worth of cash flow. 

I guess my question is: Should I keep saving until the market conditions get better and I can get some better deals or buy right now? I know this is a tough question since no one can predict the future and no one knows when prices will drop again, but I just want to get people's thoughts on this. 

Note: I live in an expensive market and have little time with family and work to find deals in my area. I also do not have the expertise or the connections to do so here, which is why I am looking at other markets that have better returns. 

 There are plenty of great deals in the Midwest still! Where have you been looking?

@Tom Ott I have been looking in Memphis, Indianapolis, Houston, Atlanta, Jacksonville, and Charlotte.

@Felipe Ocampo cap rates are very low right now. It is worse with single family, because many of the best rentals are starter homes. There are many first time buyers chasing these types of properties, which has driven prices up. People buying a home for their primary residence could care less about cap rates. Turn key providers need to charge more for the service they provide. If someone looking for a primary residence will pay $180,000 for a property, the turn key won't sell it to you for $170,000. They need to make money.

The advantage of turn key is they make it easy, so you pay for convenience. Could I cook a meal at home for less than going out to a restaurant? No doubt my meal would be cheaper, but sometimes I am in a hurry and don't want to put all that time into cooking a meal. That is kind of where turn key fits in. 

Originally posted by @Felipe Ocampo :

@Joe Splitrock so would you recommend holding off until the market cools down a bit?

It is hard to predict when or how much the market will cool off. I would just be very careful what local market you buy in. I would rather overpay in a good market than underpay in a bad market. Real estate is all about location. Your property will rent faster and at a higher rate if it is in a high demand area. What determines demand? Jobs, schools, crime, quality of life, etc. 

@Felipe Ocampo Depends on what you are using for your soft costs figures.  To me those figures should be flexible considered, depending on the quality of the rehab & property, the location, and the track record of the property management division of the turnkey company.  I look for PMs  & properties that have very low vacancy, few evictions, and average tenancy of 2.5 years or better.  There is no question that it is getting more difficult to buy turnkey from trustworthy companies that have good deals that will cash flow.  Realistically with conventional loan of 20-25% down, it is likely going to be in the 8-11% cash on cash for the best turnkey deals in good areas.

Originally posted by @Felipe Ocampo :

@Derek Dombeck these numbers are with financing. With all cash, the cash on cash returns would be even lower. I have about $40k right now. Do you have any recommendations as to who I should contact for private lending? Although that might be risky if there is a correction in the near future. 

@Holly Williams Thank you very much. I will contact you to see what opportunities are available. 

@Dominic Courtney welcome! Biggerpockets is a great community to learn and get your questions answered. 

@Lane Kawaoka with the current market conditions, I think you are right. The sophisticated investors with the experience and connections are the ones getting the deals, which is why I started thinking that maybe I should hold off for a year or two and see what happens with the market. A lot of investors are predicting a correction in the near future and it would be a great time to have cash and buy as many properties as I can. 

@Virs Esar I will also look into REITs to potentially "park" my money for a while. Although I don't know much about them. 

I'm looking into Rich Uncles REIT, it's a commercial property only REIT. Google Rich Uncles LLC, I'm waiting for SDIRA money to roll over before dropping money into it. I have PeerStreet and Lending Club, but the returns are no higher than 8% and usually, 4-7% and of course taxed as ordinary income.

Originally posted by @Joe Splitrock :

@Felipe Ocampo cap rates are very low right now. It is worse with single family, because many of the best rentals are starter homes. There are many first time buyers chasing these types of properties, which has driven prices up. People buying a home for their primary residence could care less about cap rates. Turn key providers need to charge more for the service they provide. If someone looking for a primary residence will pay $180,000 for a property, the turn key won't sell it to you for $170,000. They need to make money.

The advantage of turn key is they make it easy, so you pay for convenience. Could I cook a meal at home for less than going out to a restaurant? No doubt my meal would be cheaper, but sometimes I am in a hurry and don't want to put all that time into cooking a meal. That is kind of where turn key fits in. 

Great analogy, I will use the meal at home one from now on. 

What makes you think the market will cool off soon? Just playing devil's advocate- but this could go on for awhile. Housing is in incredible demand in my area and I don't see building catching up with it any time soon. Although the point of entry is higher when the market is hot, the returns are higher, rents are higher and vacancy is lower. When the market is "cool" returns are lower, rents are lower and vacancy is higher. My best advise is decide what your goals and buying criteria are and be ready to buy property that matches regardless of whether the market is hot or not- do what gets you closer to your goal and be consistent about it. Best of luck!

@Felipe Ocampo Have you run the numbers on self managed investment grade BRRRR condos in Germantown?

@Felipe Ocampo I think your question boils down to timing the market (you might get lucky but not likely possible) rather than the merits or challenges around turn-key vendors.  There are more than a few good points already in the thread but I'll just add...

1.) When "deals are good" will interest rates still be 4.5%-5%?  Or will they be higher?  Not that you can predict interest rates any better than you can predict the housing market.  However, if interest rates rising causes the market to cool a little, the two may become interrelated.  And at the moment it seems like (who knows what will happen) the fed is debating 2-4 quarter point hikes this year.  So I'd guess towards the end of the year you'll be at 5.5%+ on rates.  Just a guess, I'm no economist, and home loan rates don't always move in lock-step with what the fed does.

2.) Can you catch a falling knife?  It's super simple to say "I'll wait until the market gets better" but a.) you don't know when that will happen, b.) it might not happen in a market you want to buy in, and c.) if you think the market is going to drop...and it drops 10%...I'd bet a box of donuts you want to wait until it drops *another* 5%...or *another*10%...

3.) Related to point #2 it's pretty unlikely you'll see housing prices drop and it won't be related to something like a.) interest rate rising or b.) a hiccup in the economy.  If it's an economic hiccup you'll end up less certain about maintaining (let alone raising) rents.  And you might not be so eager to part with your $40K nest-egg in a period of economic strife.

So, anyway, those are my thoughts for a random Wednesday...

Hey @Felipe Ocampo , I think starting out with turnkeys is a good option when you are pressed for time and just getting started out.  I have purchased 4 in the last couple years and I feel like it's a good way to learn the ropes when you strapped for time.   I work as a nurse, have two small kids, and I'm working on getting my real estate license so time is limited right now.  There are some good companies out there that offer good returns.  For me 8-9% cocroi (after vacancy, repairs, cap ex, management) is good enough considering that I'm doing very little to no work in the process.  It feels like real estate investing with training wheels.  The most important thing is choosing the right turn key providers.  Eventually I plan on getting more involved in my local market, but for now, I'm happy with how my turnkeys are working out.  

Hi Felipe,  I would recommend that you think outside the box and create a niche where there isn't so much competition. My niche is short term rentals. My returns are incredible and I'm not competing for small rehab and flip or rentals. I tend to go for higher end rentals (not necessarily expensive to buy) and market them as short term furnished properties. I am looking for lending partners if that niche is something you'd be interested in. 

@Joe Splitrock I will definitely be careful about location. 

@Larry F. I definitely agree that soft costs should be flexible, but I also think they should be factored in. Even if it is a small percentage, because sooner or later you will run into vacancy, repairs and cap ex expenses. I am  being strict with my numbers to make sure I don't regret it in the future. 

@Peter Schuyler Do you think the RIch Uncle's REIT will provide you higher returns than PeerStreet or Lending club? I will definitely look into Rich Uncle's REIT.

@Corby Goade There is no way on knowing if it will cool off soon or not. I guess I think it will cool soon because we have been in a real estate bull market for the past ten years and it just feels like it is time for a correction. I will definitely stick to my criteria and see if I can find something that meets it. If not, I will try some of these other suggestions that people have recommended. 

@Michael Blank I actually did a BRRRRR on a condo in Germantown and am self managing it. Unfortunately, the HOA fees are a pain. Last year they decided to raise mine by almost $50 and the property taxes went up on it by over $800 last year, which ate into my cash flow. Because of this, I decided to look at other markets so I can invest in single family homes that do not have HOAs.

@Andrew Johnson Great points. I will definitely not stand on the sidelines just waiting for the market to drop. I will keep looking for opportunities now because in the future it might be just as hard or harder to find good deals. 

@Virs Esar   or @Peter Schuyler  Can either of you guys recommend a residential REIT? I don't like the commercial REITs because the retail industry is being hurt by online stores like Amazon. 

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