Tag Archives: turnkey

Not All Turnkey Rental Investments are Created Equal

Credit: freedigitalphotos.net

Credit: freedigitalphotos.net


I hesitate to use the word “turnkey” because there is no clear definition of what it means. Sometimes I refer to my real estate investment as a turnkey investment, but that isn’t exactly accurate. Generally, a turnkey property is defined as a house that has been fully renovated and is ready to be rented out. The company that sells this turnkey property usually also manages the property for the investor. The goal is for the management company to handle the day-to-day operations of the property, it takes a fee, and you, the investor gets to sit back and have the remainder of the rent sent to you. This is mostly true for my investment except the first part.

The Hybrid Turnkey Approach

The company I worked with first acted as my realtor in bidding on the foreclosure. Then it acted as a project manager in hiring and managing the contractors in making renovations to the property. The property I purchased ultimately appraised for about $10,000 above the purchase price plus the renovation costs. If you were to buy a pure turnkey investment property, the company would have purchased the property at a foreclosure or short sale, made the renovations, and then marketed the property to potential investors. The key difference is that I purchased the property at the distressed price, whereas an investor of a turnkey property will purchase at fair market value. The turnkey company is a business and needs to make a profit so that is understandable. And I am not saying that buying a rental property at fair market value is unwise, I would just prefer to have some more equity from the start.

I was talking to another newbie long distance rental property investor, just like I am, and he purchased a property for about $55,000, which rents for $850 a month. Sounds like a good deal, right? However, he mentioned that the property he eventually purchased did not appraise for the agreed upon purchase price. Apparently, this is not uncommon in some turnkey investment properties. Appraising a house is not an exact science. It can be pretty subjective. An appraiser will compare the property you are looking to get a loan for and compare it with similar houses that were sold near that property. Generally, a property’s condition is not taken into account so it can be unfair to compare a newly renovated turnkey investment property to a property which has not been renovated.

He said that he was able to negotiate the price lower which made it a “steal” of a deal in his eyes. (Sometimes the seller won’t budge and the investor will have to put a higher down payment to get the deal done) His opinion is that the bottom line is what the cash-on-cash returns are and what his net monthly cash flow each month will be. Granted, those are incredibly important factors but I think it is short-sighted to only look at the numbers and nothing else. And it is definitely what I looked at when I decided to make my investment. But one thing that is also important when making an investment is to have an exit strategy. What if you want to sell the property? Will there be demand by other investors or by those seeking to purchase it as their primary residence? Will you have to take a loss when you sell it? I don’t want to be overly critical of his investment because he might just be a steal of a deal. I just don’t want to take that risk.

Cash flow is #1 but appreciation potential also matters

When investing in rental real estate, cash flow is important. Living in NYC, I hear many people talk about investing in properties here, even though there will be negative cash flow each month. They assume that because of the high demand in NYC, there will be great appreciation and they can then sell it for a much higher price. I’m not going to lie, the appreciation that I’ve seen in some neighborhoods in NYC are pretty impressive. I’m not taking that risk though. What if there is another downturn in the housing market? Will you be able to sustain paying the mortgage, property tax, insurance and for the upkeep. Also, NYC is pretty tenant friendly, so what will happen if your tenant doesn’t pay rent and it takes a long time to evict them?

While I invest for cash flow because appreciation can sometimes be hard to predict, the appreciation potential of the property and the market is still important. The newbie investor I spoke to bought a property that doesn’t appear to be in the greatest of neighborhoods. The numbers will look great because the property is very cheap compared to the what it will rent for, but numbers aren’t everything. You might end up with a property that is hard to sell or that you’re forced to sell at a loss. You might be dealing with more headaches involving the tenants.

Generally, when investing, money is made on the purchase so I would prefer to buy a property at distressed sale prices and fix it up to “force” appreciation. Once again, I’m not saying not to pay market price for a turnkey property or that I wouldn’t do it. I just prefer this route if possible. If I feel a market has a lot of appreciation potential, I would be more likely to pay fair market value.

What do you look for when you’re investing in real estate?

I Bought an Out-of-State Investment Property

house

Living in New York City, I always thought it would be hard to buy a house because they are so expensive, so instead we purchased a co-op which is much more affordable. I was always interested in real estate investing, but I used to immediately think that it would be IMPOSSIBLE! I couldn’t even afford to buy a house to live in, how was I going to buy one as an investment property? I considered buying a co-op to rent out, but there are often very strict rules about renting so I scratched that idea off. I started reading the Biggerpockets forum which is a great resource for those interested in investing in real estate. When the topic of how to invest in real estate when you live in an expensive area came up, a member of that forum suggested that you look a little farther away from where you live. I work outside of NYC so I looked into that area. While the properties were more affordable, the property taxes were very high and ultimately, the numbers just didn’t make sense. Then I read an option that just might work: invest in an out-of-state turnkey property.

First, what is a turnkey property?

Basically, a turnkey property is a house that has been fully renovated and is ready to be rented out. The company that sells this turnkey property usually also manages the property for the investor. The goal is for the management company to handle the day-to-day operations of the property, it takes a fee, and you, the investor gets to sit back and have the remainder of the rent sent to you.

But aren’t you scared to buy a property out-of-state?

This is the most asked question when I tell them that I bought an out-of-state rental property. As a matter of fact, I bought it sight unseen. You often hear about real estate investment scams and buying a property out-of-state would make most people feel uneasy. Even after learning about such opportunities, I took a lot of time to learn more about it and do my due diligence before jumping in. I read reviews about various turnkey companies and read the BiggerPockets forums to find people who had invested with those companies. I contacted those investors and asked them how their experience was. When I heard positive reviews from other investors, it put me at ease. I used Google maps, Neighborhood Scout and Zillow/Trulia to look at pictures of the property as well as other information. More specifically, I looked at the crime in that area, the school ratings and what Zillow/Trulia estimates the property to be worth. (This is just a starting point. Don’t just rely on information on these sites) I also figure that since there will be an appraisal and an inspection done on the property, there are some safeguards from a company selling you a dump that no one in their right mind would rent.

Where did I end up buying my out-of-state property?

Initially, I wanted to buy in an area where I at least knew someone living there so that they could check on it if I felt the company which was managing the property was doing something shady. I looked into the Buffalo area because it seemed the properties would cash flow and there has been a lot investment by the state to revitalize the city. However, after contacting a few companies, I didn’t feel too comfortable with them as they were not too great with communicating with me. Also, one company offered me a property in a not so great part of town and I wasn’t interested in being a slumlord. Then, I narrowed down the cities that I thought would make sense and came up with Indianapolis, Memphis, and Kansas City, Missouri based on the economy and employment rates as well as other factors. After contacting the companies and asking other investors their honest take about them, I ended up choosing a company in Kansas City.

While the company I chose to work with sold turnkey properties, they also had a hybrid approach. With turnkey properties, the company will usually buy a distressed property at a low price, make renovations to it and sell it to the investor at retail price. Nothing really wrong with that. It is a business and they need to make money too. Just make sure it’s a fair price. The hybrid approach that the company I worked with used was a little different in that the investor would purchase the distressed property, the company would manage the renovation (for a fee), and then rent it out. I decided that since buying the property at a lower price would give me some built in equity in the property from the start, it might be a better investment.

How is it going?

I bought the property about one year ago. It was a foreclosure and my offer of $60,000 was accepted. I took out a mortgage as well as a rehab loan. The rehab cost about $12,000 so the total price of the rehabbed property was $72,000 and the appraisal of the property came to $83,000. After it was renovated, it was rented out in September 2015 for $850 a month and the tenant has paid timely each month. Some maintenance issues have popped up since I purchased the property, however, I am still confident that it will turn out to be a good investment.

I am still very much a novice when it comes to investing in real estate so I didn’t go too in-depth into the more technical aspects of real estate investing. However, I wanted to write about my experience so others who thought they would never be able to invest in real estate because their local housing prices were so high, know that there are opportunities available in other parts of the country and that it’s possible to invest out-of-state. I also understand that there is always risk whenever you invest in real estate, especially when it is out-of-state. So if you are interested in going this route, make very sure that you do your due diligence. Also, check out the resources below. I read a lot of the following blogs and forums from other more experienced real estate investors when I decided to invest.

Resources for those who are interested in investing in out-of-state rental property

I think the first blog I read which talked about investing in out-of-state rentals was Fi Fighter. He laid out a clear and reasoned explanation as to why he chose this route and why he thought it was a good investment. There are a bunch of valuable posts about this topic, but I highly recommend Why I Invest in Turnkey Properties, and How to Quickly Evaluate a Real Estate Deal: The 1% Rule

Paula Pant who blogs at Afford Anything also has a lot of posts relating to real estate investing. She doesn’t focus on turnkey investing but she does write about managing her rental properties from “around the globe.” She has a fantastic post answering the most frequently asked questions about real estate investing, she has monthly income reports, and recently launched a course about this topic.

Another excellent resource is the Biggerpockets website (I mentioned the forum earlier), however they also have a free beginner’s guide to investing, podcasts, blog, calculators and a plethora of other useful tools at your disposal.

For those interested in turnkey properties, you can check out Turnkey reviews, and you can also get a free e-book about that topic there. It’s a good starting point to find companies that seem to do a good job, but I haven’t seen any negative reviews so I try to take the reviews with a grain of salt.

Lastly, I have been following the Cash Flow Diaries blog as the blogger writes about his turnkey real estate investments and is very transparent about the price, expenses, etc, relating to his investments. An excellent post for beginners interesting in investing in turnkey properties is his post A Step by Step Guide: How to Buy a Turnkey Rental Property.

Have you invested in out-of-state rental properties and how has it gone? If not, would you consider this investment option?