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.
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