Looking to invest in out-of-state markets. What questions to ask

[Steve Holly]

 I’ve been a real estate agent for nearly 10 years but I’m going to start investing. I’m surprised how much of a different perspective is needed for investments versus residential real estate sales. Anyways, I am planning on talking to a few different agents in a few select markets. Since these will be markets that I am unfamiliar with… What would be the main 3 to 5 questions that you would ask to better understand if that market is a good investment opportunity? 

[Clayton Mobley]

@Steve Holly I agree with @Jeff Schechter and others regarding full-service turnkey as a solid option for OOS investors. Full disclosure, I am also in the Turnkey business (President of Spartan Invest), so of course I am biased toward the niche. That being said, your question is a common one on BP, and I know there are a lot of mixed feelings about TK, and specific providers vary widely, so I'll try to give you some guidelines for what you should be asking and a few things to look out for.

Regardless of where you live or what market you're considering, it is very important for all investors (new and seasoned) to ask the right questions to weed out the bad seeds (and there are plenty) when selecting a provider. It's just like picking a stock - if you don't do any research, look at the income statements, study past performance, and the stock you pick is a dud....who is really to blame? It would be great if there were no snake oil salesmen and you could trust everything you read online, but it just isn't the world we live in, so due diligence is the price you pay for a successful passive investment.

A few general notes: Steer clear of anything that guarantees tenancy terms (can't be predicted or promised) or excludes any expenses in their ROI calcs. Most importantly, learn all you can about the key metrics that are used to measure success in TK investments (ROI, lease terms, maintenance rate, occupancy rate, turnover, etc.), what they mean and how they are calculated. Then ask any provider you consider what their metrics are and how they are determined (do they track them daily, weekly, monthly, do they estimate? that last one should usually be a 'no'). Any TK provider worth your time will be more than happy to lay out their numbers and walk through any and all calculations - and that's probably the most important thing to look for. If a provider can't, won't, or 'doesn't have the time' to talk with you about your questions in a timely manner (like within the week in most situations) then are they really someone you want to work with for the next decade or more?

Look out for used-car salesman tactics (SUNDAY SUNDAY SUNDAY LAST PROPERTY AT THIS PRICE ACT NOW), providers that will only accept cash, not financing, and properties under the $50k mark (there just isn't enough room there for the TK company to make money unless it's a low-tier prop in a questionable area). Stick to solid B/B+ props, at least in the beginning, since they tend to offer more reliable tenants with more consistent cash flow, without losing all appreciation potential. A-class props are better for appreciation plays than cash flow, C/D props look amazing on paper but are a ton of work, folks that do well in that class are experienced investors who usually self-manage in their own market. 

I know this is already long, so I'll just finish with this quick list of some basic questions new investors should be asking of any TK provider they consider. Answers should be prompt, thorough, and data-based (not estimates or 'oh it's really good'). A good provider will KNOW these numbers off-hand.

1. What is your occupancy rate? Do you track it regularly? What is the lookback period (the longer the better)?

2. What is your annual maintenance rate? Lookback period?

3. Do you defer maintenance?

4. How quickly does the typical maintenance issue get resolved? What's your average turnaround time?

5. What do you expect your maintenance rate to do as your portfolio ages and capex items need repair or replacement? (an estimate is ok for this one, of course, but it should be based on the age of the property and the life expectancy of capex items etc)

6. Does your maintenance rate include move-out costs?

7. What is your average net move-out cost?

8. What is your minimum lease term?

9. What is your average length of stay?

10. What is your property management fee?

11. What is your leasing fee?

12. Do you charge any other fees?

13. What is your average time to first lease on a new property?

14. What is the average time between tenants?

15. Can I see an appraisal for the property I am considering? Can I get my own independent appraisal as well?

16. What was done to the property during rehab? Can you see a scope of work list?

17. What is the expected life on new appliances/flooring etc?

18. How is your ROI calculated and what does it include? Can you walk me through the math?

19. What type of service can I expect once I've made an investment? How do I know when rents are paid, when maintenance issues are resolved? How can I see rental or PM contracts to review terms? How do I get in touch with you if I need something?

Sorry for the wall of text, hopefully this gives you a good place to start when beginning your search.

Best of luck!