Is this Turnkey a good deal?

Question

I have been in contact with a turnkey provider and found a property that I'd like to get your thoughts on.

Here's some background:

- The property will be an out of state investment (Independence, MO).

- This will be my first rental property (buy and hold forever type of person).

- Neighborhood class: C (this is my opinion).

- 3 Bed, 1 Bath

- Age of roof, HVAC, electrical, plumbing (only says newer, will dig deeper later. My requirements would be that these are new items).

- Recently renovated.

The numbers:

- Purchase price: $54,500

- Rent: $800/m

- Down payment: 25% ($13,625)

- Loan: 30 year fixed at 4%

- Taxes: $60.92/m

- Insurance: $50/m

- Vacancy: $80/m (10%)

- Repairs: $80/m (10%)

- Property Management: $80 (10%)

- Mortgage: $195.14/m

Total Expenses: $537.72/m

Projected Cash Flow: $262.28/m

Concerns and more:

- I am concerned about this working with the 50% rule?

- I'd like to stay in B class neighborhoods, but cannot find any that come close to my $300/m target of cash flow. However, theft/crime seems to be everywhere and I would be taking the necessary steps to avoid someone from stealing my water heater/copper, etc...

- I've noticed that the sweet spot for purchasing cash flow properties is in the $50k - $75k range.

- I'd prefer to invest local (Milwaukee), but the high property taxes and renovations needed are killing my cash flow targets. This is why I am looking elsewhere. High taxes are against my morals...

- My investment strategy is to purchase three cash flowing properties and hold onto them (same market/city). I'd eventually be paying off the mortgage before bigger ticket items need to be dealt with (roof, etc). To do this, going over $75k per property isn't going to work for me. I also would like the smaller mortgage amount.

How does this deal look for a first time investor? One of my other strategies is to purchase a duplex and live in one side, but the high taxes are an issue where I live...

Peter K. · Answer

You live in a market that investors who live elsewhere love to invest in.  Yes, taxes seem crazy here in Milwaukee, but really, they aren't that bad.

Get involved here.  Shop and buy one here, rent it out yourself, learn from others who are doing the same.  Then decide if you want to hand it over to management or buy elsewhere.

My last three, all in 53218 zip code:

#1: $50k purchase priceNew roof, water heater, some flooring, fix up, and garage repairs needed.  All in under $70k.  Rented at $1,115.  2015 taxes were $2,550 on this one.  I'll give you this one--crazy taxes.  But it's in a nice pocket.  I'd rate it a B-.

#2: $28k purchase priceNew roof, furnace, some flooring, and other work needed.  All in under $38k.  Rented at $795.  2015 taxes were $1,031. ($300 more than your example)

#3: $35k purchase priceNew furnace, some flooring, and other work needed (see a theme here?)  All in under $39k (will be putting a roof on for $3,800 in spring) and rented at $750.  2015 taxes were $1,112.  ($380 more than your example)

I'd consider selling either #2 or #3 to you for $54k.  Heck, I'll even cover your taxes for a couple years.  :-)

I see these turn key deals advertised and they aren't for me.  Sure--if you have a crazy busy day job and money but not time to invest, it can make sense.   But I am building a business.  Eventually that can mean training employees to do the work for me at a lower expense than a management company could provide the service for.  But, in order to train those employees, I not only need to build a portfolio, but just as importantly I need the expertise and experience learned by dealing with all the crazy stuff a rental can throw at you.

As a new investor you may look at other people buying and getting properties fixed up and rented and think it looks like something you don't know how to do--so the turn key option looks good.  But remember, we all jumped in somewhere.  I've made mistakes.  I've had some crazy interactions with tenants, bad stuff happen at my properties, paid too much for contracted work, and bought properties that were mistakes.  But I learned from every one of those mistakes.

Dawn Anastasi · Answer

I have no problem recommending someone invest OUTSIDE of Milwaukee and leave more for the rest of us buying in this city!  :)

William S. · Answer

A lot of great responses. Thank you all! I've decided that out of state investing is not for me and will be looking for a local duplex as my first entry point into investing. It's a better fit for me at this point.

Chris Dawson · Answer

@William S. if you are buying a Turn Key property, you are paying a premium for this service and thus will not be able to get the best ROI possible.  There are much better deals in Independence if you dig deeper.

Phil Bottfeld · Answer

Just to Add to Mr. Ramon's comment. Property taxes from an investment property are not personally (Schedule A) deductible on your tax return. However, they are a reduction of the passive income you generated from the property.

For Example

Annual Rent $5

Annual Expenses including property taxes ($3)

Net Income $2

This is just a simple example, we have numerous expense that are both cash or noncash (depreciation or amortization) that can fall under my little category "Annual Expenses".

Property taxes from your personal residence are eligible as an itemized deduction on schedule A of your tax return.

Hope this provides some clarity.

Phil

Michael Calderaro · Answer

William

I'm new to this too but have been looking very closely at Turnkey properties especially out of state where you can get strong cash flows.  If you add in 3% for closing costs to your 25% down payment your out of pocket cash totals $15,260.  You Gross rent minus all your expenses (and I think you're doing the right thing with a property management company) nets you out  $277.89 a month which is a 21.8% cash on cash return and a 10.7 cap rate.   Make sure you fly to MO and visually inspect the house, have an independent appraisal look at it and for God's sake get an inspection done.  That may costs you a plane ticket, hotel room, car rental and fees for inspection and appraisal but if the deal craps out, you're better off losing short money than long dough.  Good Luck!

Cliff Harrison · Answer

Please add $125 per month to your budget for your capex reserve savings account.

If it's in a good location and in good condition it's just a middling deal for KC suburbs.  If it's a little beat up or in rougher area then it might break even until you pay off the debt.

So based on the little bit you have shared, it's anywhere from poor to average, imo.

Cliff

Adam Kozuch · Answer

@William S. What tools/methods have you been using to look at local properties?

John C S. · Answer

Taxea are not high try living in Long Island i pay 10k a year

Carrie Giordano · Answer

@William S. I think it's a great choice to focus local. When you are doing the math don't forget to figure in capex as @Cliff Harrison mentioned.  As someone who only invests out of state (my local area Is too pricey) I will tell you it can be very stressful. Even if you pay a little more close to home in the long run I don't think you'll regret it!

Is this Turnkey a good deal?

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