The Tale of Two Turnkeys

By Tom Wilson

Let  me  tell  you about  two  great real  estate  deals for the busy professional.  Both are single family homes that have been renovated and are offered  as  turnkey  rental  investments.  Investor  Special #1  is  priced  at  $100,000  and  rents  for $1,200—a 1.2% rent ratio. Investor Special #2 is priced at $100,000 and rents for $1,050—a 1.05% rent ratio. Which property do you choose?

One really is a better deal than the other and I’ll let you know why later. However, if instead of choosing, you thought, “I  can’t  make  a  decision  based  on  such limited  information,”  then  you’re  in  the top 50% of real estate investors. In a moment, I’ll help you get to the top of the class  by  understanding  the  crucial  data required  to  properly  analyze  a  turnkey deal. Your test will be to use this information  going  forward  to  make  investment decisions based on information gathered, not on the slickest presentation or the personalities involved.

First,  why  turnkey  investments  are not created equal. To the top tier turnkey property  providers,  turnkey  means  that all the elements of the investment are in place so that all the investor has to do is “turn  the  key”  on  their  bank  vault  and watch the money flow in. Clearly there is more to it than that, but not all that much more.  By  our  (and  I  mean  the  top  providers)  definition,  a  turnkey  investment property has ALL of the following attributes: 1. The provider is in possession of the deed, 2. The property has been carefully selected and renovated with renters in mind, 3. The property has been leased, 4. A property management company is actively engaged in managing the property. After the investor purchases the property, the property manager simply redirects the rent checks to the investor.

Some  providers  call their  offerings  turnkey, but are missing some or all  of  the  four  essential elements.  If  the  company selling you the property does not possess the deed, it is not a turnkey. If  the  seller  has  yet  to complete  renovations, the  property  is  not  turnkey.  If  the  property does not have rent paying tenants, the property is not turnkey. If the seller offers to “look after” the property until you find a  property  manager,  the  property  is  not turnkey.

Now  that  you  understand  the  four  essential  elements  that  define  a  turnkey property, how do you evaluate the myriad opportunities available to you and get to the  top  of  the  class?  By  analyzing  how each deal rates in four major categories: Location,  Property  Condition,  Provider, and Property Management.

Analyze the Location

Location will make or break a deal, and we’re not just talking about corner lot or cul-de-sac. Understand what is going on in the region as well as the neighborhood. The best long-term holds have the following in common:

  • Broad based economy with many different employers
  • Growing population
  • High income,  high  education,  young families
  • Low vacancies, lower than average foreclosures
  • Stable home prices year-to-year (no big swings)
  • Business friendly and landlord friendly local government

Understand the Property Condition

Make  sure  you  are  getting  what  you pay for. Really nice properties attract really stable renters. Pay close attention to the quality of the renovation. High quality equals less maintenance and more money in  your  pocket.  Great  properties  share these common traits-

  • Built within the last ten years
  • No structural problems
  • High quality carpet, flooring, tile, fixtures, and appliances
  • Nice landscape
  • Good floor plan, usable back yard, 3 or 4 bedrooms, at least 2 baths, 2 car garage
  • Architecture that fits into the neighborhood and appeals to tenants and future buyers

Reference Check the Seller

Do  you  really  know  who  is  providing this  turnkey?  Handshakes  make  me  feel good,  but  a  reference  check  makes  me feel better. Do not hesitate to ask for references,  to  check  the  provider’s  on-line reputation, and to screen for lawsuits and bankruptcies.  A  reputable  provider  will happily answer all your questions and has dozens of happy customers ready to sing their  praises.  If  you  come  across  any  of the following, beware!

  • The person you are dealing with is an agent or referral service
  • Any part of the deal seems to-good- to-be-true
  • You don’t get a firm answer about how many of their investors get loans and how often they fail  an  appraisal. A  reputable provider will seldom fail appraisal.
  • You are asked to take over a contract for a raw property  and  cover  all  of  the  unknown expenses for conversion to a rental. The seller says that with a little carpet and paint the property will be rented in 3 weeks.
  • The provider does not own properties in the same area that they are recommending to you
  • The provider does not own clear title to the property (check the county records!)

Interview the Property Manager

Do you really want to question whether you’re  being  overcharged  to  fix  a  leak? Do you want to worry about a lease not being renewed because the property manager  did  not  respond  to  your  tenants?  It is maintenance costs and occupancy that will  make  or  break  positive  cash-flow. This is why competent property management is essential. Just as when selecting a provider, check the references of the property manager. Look for the following-

  • Endorsed by  the  turnkey  provider  and manages the providers own properties
  • Many years  of  experience  and ample references
  • Fees no greater than 10% for up to 4 properties with full service and half of one  month’s  rent  for  new leases
  • Experience managing  the  same type  of  property  you  are  purchasing  (houses,  not  apartments  or commercial)
  • Many other  rentals  in  the  same area so they do not need to make a special trip to check up on your property

Yes,  there’s  a  lot  that  goes  into analyzing  a  turnkey  property,  but it is YOUR money. Ask questions until  you  are  satisfied,  and  by  all means,  visit  the  property  before you buy.

Back to the Beginning

Back to the two investor specials at  the  beginning  of  this  article, which are real case studies. (Names have  been  changed  to  protect  the duped!)

Investor  Special  #1  priced  at $100,000  and  rents  for  $1,200, purchased  by  “Sam.” During  the  loan process  the  appraisal  for  the  property came in short and Sam shells out another $5K to close the deal. After closing, Sam finds out that the rent was a “market estimate” and after waiting for 3 months and dropping the price twice, he finally gets it rented for $1,000/mo.

Within  6  months  Sam  is  notified  that the  50  year  old  house  has  exterior  trim that  needs  replacing  because  the  seller painted  over  rotten  wood,  the  hot  water heater  needs  replacing  (and  there  is  no warranty),  and  the  HVAC  needs  repair. His bill is greater than the net income that was predicted for the first year. The city he purchased in has only one industry, and within a year, the one new UK manufacturing plant that was scheduled to come to town and employ 2,000 people gets postponed  indefinitely  because  of  economic uncertainty in Europe. Adding salt to the wound,  Sam’s  tenant  fails  to  renew  his lease.  Sam  experiences  another  3  month vacancy  and  he  has  to  drop  the  rent  to $900  because  of  the  now  weaker  rental market. Sam is very sorry he didn’t do his homework.

Investor Special #2 is purchased by “Mary”  for  $100,000  and  rents  for $1,050. The house is only 10 years old, comes  with  a  premium  home  warranty, is already leased and the appraisal came in at value. The employment in the state is the highest in the country, the city has 25  Fortune  500  companies  with  diverse economies,  the  population  is  growing, rents and values are appreciating. Mary’s first tenant leased for three years. When it did turn over, the property required minimal  make-ready.  It  was  leased  again  at $1,125  before  the  current  tenant  moved out.  The  cash  flow  exceeds  Mary’s  expectations. Mary earns an A+ because she purchased  in  a  top,  low-risk,  metro  and from a reputable provider.

For more information about Tom Wilson,

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