Turnkey question - is there real value?? (Math inside)

[Moses W.]

There's something I don't quite understand about turnkey properties. If I buy a SFH from a turnkey company, I know that they've made improvements to the property and the purchase price includes the cost of these improvements plus a profit margin.

If I then rent this property out and it's giving me a net cash flow.  

I'm looking at areas such as Cleveland and Memphis right now and since these areas are not really known for appreciation, my concern is as the years go by, the value of the improvements that I paid for when I bought the property has depreciated.  If I decide to sell the house, won't I most likely be selling at a loss?

Eg., 

1. Buy a house from turnkey company at $80K (market value in this neighborhood is $65k).

2. Rent it out $850/mo.  Calculated net cashflow is $450/month.

3. At the end of 5 years, after wear and tear and in need of improvements again, the house is now worth ~$65K-$70K.  

Let's say it's worth $65K now so does that mean my net gain on this property is actually just $12,000?

Math: 

$80,0000 purchase price - $65,000 value after 5 years = $15,000

# of months of net cashflow to break even: 15,000/450 = 33.3 months

Length of ownership: 60 months

60 months - 33.3 months = 26.7 months of profit

26.7 x $450 = $12,015.

That means after 5 years, I've actually made only $12,015 after you factor in the depreciation of the value of the improvements which is 15% ROI over 5 years. That's only 3% ROI per year!!

Am I out to lunch or does this make sense somewhat??

To make this purchase worthwhile the value of the house would have to stay at $80K and hopefully appreciate.  In these markets, I'm not so sure that will happen.  They'll produce decent cashflow but I'm worried my cashflow will be wiped out by a drop in the value of the property.

[David Faulkner]

Your math is fairly close, but I think the actuals will be worse. I think your cash flow will likely be less than $450/mo with the class of tenant and all the PM, repair, vacancy, etc. you would be dealing with in that price point of property ... how much less depends a lot on the quality of the PM. Here are my estimates:

Expenses:

CapEx (https://www.biggerpockets.com/renewsblog/wp-content/uploads/2015/03/CapEx_Aricle_TABLE_1.png): $250

Vacancy (7%): $60

PM: (%15, 10% management + 5% re-lease+other fees): $125

Prop Taxes (1.6%): $100

Insurance: $30

TOTAL EXPENSE: $565

CASH FLOW (no Mortgage): $285

Also, you did not factor in transaction costs, on both the buy and sell side. Also, you did not back out inflation ... and no, I would not expect prices or rents would keep up with inflation, which is why and how you get a house selling at $65k ARV (well below replacement cost) in the first place. All in, I would expect your return on such an investment you described would be negative. But hey, it would be a great ROI for the turnkey company, PM, and contractors, which is why you see so many providers here pumping them on BP. Congrats on spotting this early ... you've already saved yourself a lot of money, hassle, and heartache.