Cash-flowing turnkey property in today's market?

Question

Newbie investor here. I'm focusing on turnkey properties because I'm seeking a passive (or as passive as possible) RE investment. I have about $150k to invest, which is currently sitting in a savings account (4.4 % APY), waiting for the right opportunity. My tentative plan is to start with one turnkey property (putting 25% down) and see how that goes before committing to more. That said, with today's interest rates, I'm not seeing any significant cash flow once all the numbers are in place on most of the sample properties I've looked at. Not sure if I'm looking at this correctly, but it seems that I'm better off leaving my funds in the savings account for the time being. I may also be suffering from "analysis paralysis," so I'm seeking guidance from greater minds.

Thanks!

Marcus Auerbach · Answer

@Adriana Collado Hudak - buying for cash flow has gotten tough, even in markets like Milwaukee, which has been known as a high "cash flow market". But after 8 years of high single digit appreciation and currently high interest rates this is no longer reality.

I used to buy project houses in good areas and then BRRRR them, but have migrated to buying turn key (they still need some work usually to bring them to our standard). The market is so tight, that you don't get enough discount for bad condition; someone will underestimate the repair cost and overpay. I usually end up putting 25%-30% down to get to a 1.2 debt coverage ratio, which also ensures a little bit of cash flow.

Cash flow has been overhyped on BP and while we have seen some spectacular success stories in the last decade, but now we are getting back to normal, which means RE is normally not an ATM, to live for free and travel the world.

REI is building long term wealth via principle pay down (that alone is about 3% per year leveraged 3x or 4x depending on your down payment), then you have hopefully appreciation (but over the long run you can pretty much assume at least 3% just based on inflation and finally tax shelter. If you add it all up, thats still a very good investment, even without cash flow.

The issue I have with CD's is that at the moment you get 5% for 6 months, but only for for a full year and 3% for 18 months - which goes to show that banks expect lower interest rates down the line. They are not willing to give you 5% for a full 12 or 24 months (or 5 years like they used to!).

Problem with that is, that as soon as interest rates go down in a meanigful way, guess what happens to competition and home prices. We have multiple offers already with 7.5% rates, if rates come down back into the 5's it's going to be nuts. And if that conincides with the spring market, we will have the perfect storm!

Adriana Collado Hudak · Answer

Your points are accurate and well taken. I appreciate the insight and look forward to connecting with more like-minded investors.

Bill B. · Answer

You’re over $500/mo cash flow already. Put it in a 5% cd and you’ll be over $600/mo. I don’t think you’ll find a rental that cash flows a guaranteed $600/mo. I don’t know how a cash flow investor can find a better deal than the bank on anything but the cheapest properties in the country. Or some kind of low money down assumption and a prayer the bank doesn’t find out.

Evan Hopple · Answer

Hi Adriana! Buying a property closer to turnkey is always the safest bet on your first RE investment. You can easily find deals in certain Midwest cities like Detroit, Baltimore that cashflow great on paper but evictions/vacancy will become a full time job. Columbus, OH offers cashflow opportunity with the upside of appreciation. Building out your core 4(Agent, Property manager, contractor, lender) is the first step you should pursue before you settle on the right deal for you

Arif Sheikh · Answer

Welcome to the world of real estate investing, and congratulations on taking the first steps, even if it feels like you're navigating some uncertainty.

Your approach of starting with turnkey properties to keep things passive is a smart choice, especially for someone new to the game. It's good that you're considering putting 25% down on your initial property to manage risk.

Regarding your observation about limited cash flow in today's market, it's crucial to remember that real estate investing isn't just about cash flow; it's also about building equity and wealth over time. If your primary goal is passive income, you might indeed face lower cash flow in the short term. However, as your property appreciates and rents potentially increase over time, your investment can become more profitable.

Also, keep in mind that while your savings account offers a decent APY, it doesn't provide the same wealth-building potential as real estate, and inflation can erode its value over time.

As for your choice of turnkey providers, researching companies like Rent to Retirement and Midsouth Home Buyers is a good start. Read reviews, talk to other investors who've used their services, and ensure they have a track record of delivering on their promises.

Lastly, don't worry too much about 'analysis paralysis.' It's common among new investors. While it's essential to do your due diligence, there comes a point where taking action is equally important. Start with one property, learn from the experience, and adjust your strategy as needed. You're on the right path towards achieving your long-term goal of replacing your income with real estate returns.

Feel free to ask more questions and keep learning from this community; there's a wealth of knowledge here to support you on your journey!" 🏡💼 #RealEstateInvesting #NewbieInvestor

Ruchit Patel · Answer

Congratulations on saving that much money. If you don't need cash flow to live, I would simply focus on doing a deal with good people in a good neighborhood. With time, it will make you more money.

For passive investment, yes, turnkey is a good route, I also started that way.

Which company you are using, if you don't mind me asking?

Adriana Collado Hudak · Answer

I was considering Rent to Retirement and Midsouth Home Buyers. I'm ok with the lower return for less stress that comes with turnkey; for the moment, it's what works for me. Eventually, I'd like to replace my income with RE returns, but still have a ways to go.

Joe Norman · Answer

Plenty of turn-key, cash flow properties in decent areas here in Baltimore. Not sure what market you're focusing on but if you're Baltimore-curious hit me up!

John Williams · Answer

Hey Adriana, I recommend getting started sooner rather than later. Real estate is very forgiving. You could purchase something with a much larger downpayment (30-50%) and still get some cash flow. I don't think it will be hard to beat your current rate of return (which is probably negative if you factor in inflation).

Bill B. · Answer

I’m saying no LTR will cash flow $600/mo the first year without a ridiculous downpayment, eventually it should. STR is like buying a job. With a dozen LTR I don’t spend more than an hour a month on them. That’s 5 minutes per month each. I don’t know how long STR would take but I assume it would be more. Then there’s the chance that the city or county will make them illegal, or limit you to only one, or require you to live in it while it’s rented out. So the only place you can really risk STR is where it’s wanted/loved. Orlando, the Smokey mountains, most ski towns, myrtle beach, and weirdly, not Las Vegas. Outside of those markets you better make sure either LTR rental cash flows or you can afford the losses.

Cash-flowing turnkey property in today's market?

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