Questions on turn key properties in Indianapolis

[Fernando E.]

Hi BP crew, Hope you are all well I’m an out of state investor from CA and my goal for 2018 is to buy multiple (targeting 10 this year) small single family homes in the Indianapolis between $50K to $70K with minimum $500 Cash on cash return. Does this sound realistic or blowing smoke? With 1 realtor as my boots on the ground on an area that I’ve not seen, I’m starting to look at turn keys and have reached out to multiple turn key providers here in the BP community. My goal is for cash flow, I felt that if I buy one, I’ll learn by taking action rather than sitting on the sidelines . Only downside I see in turnkey is that it seems there is no appreciation and I can’t execute BRRR strategy since off the bat the property is sold at a higher price (not below 20% market value) and sometimes sold at a price way higher than zillow or Redfin estimate which tells me that the selling price is really high. I will appreciate your input and more so from someone who really made it big and achieving massive success in turn key If that is even possible. Much thanks all!

[Ross Denman]

The 50% rule is rather accurate. We manage homes for hundreds of investors and I believe that they net about 45%-55% of the gross rental income (without figuring financing.) There are multiple things that impact these numbers, but at the end of the day, if you tally an average over 5 years, the net really does come close to 50% across the board. With that being said:

To cash flow $500/mo is easy. To net $30,000 over 5 years is not so easy. At that point, you are taking in to consideration vacancies, make-ready expenses, service work/maintenance, and capex. So to cash flow $500/mo on average over time, you are looking at $950-$1,050 rentals. While they can occasionally be found in the $50k-$70k price point, it isn't very often. The closest thing that I see is finding MLS deals in the $90k's that will rent for $1,100-$1,200. These homes are usually in pretty good shape and you can get in to these for about $20k with bank financing. After financing, most of my investors are netting about $2,000-$3,000 per year (10%-15% COC ROI) and they have a good asset, purchased at a discount, that is appreciating around 3.5-4% of the FMV. Here's an example:

Home value : $110,000

Rent rate : $1,150/mo.

Purchase price : $92k

20% down = $18,400

Closing costs, due diligence, and make-ready costs = $3,000

Holding costs during vacancy (includes 2 mortgage payments) = $1,200

Total out of pocket = $22,600

NOI (55% Gross) = $7,590/year

Financing costs = $5,928/year

Cash Flow = $1,662/year

7.35% COC ROI

Equity from beginning = $18,000

Appreciation at 3.5% = $3,850/year (and still growing each year.)

Sell at FMV at year 5 = $130,645

Total Profit = $8,310 cash flow + $38,645 = $46,955

Less Realtor Commissions = $9,150

Profit = $37,805 or $7,561 annually for 5 years

IRR = 33.45% ROI per year.

This is one of the reasons I prefer better assets as opposed to cheaper assets. When financing, there's not enough cash flow to bother with. Let is stockpile to handle that speed bump down the road. The actual money is in the equity machine that you have created between the discount rate and a desirable property with a retail exit strategy.