How accurate are these numbers to buy turn key investment property?

Question

I'll give you some averages I was told and please tell me if any of them are incorrect of if I'm missing anything.

Example property value: $100,000 
1. Down payment - 20% of purchase + 4-5k in closing costs = $25,000
2. Property management fees - 9% of rent collected + 1/2-1.0 months rent collected as placement fee for tenant = N/A
3. Upfront repair costs = $16,000 (this is what I was told) 
4. Fees for locating investment property - N/A (they make their money on the sale of the property) 
5. Commission fees - N/A
6. Cash reserve requirements - determined by lender, most likely will want 6 months of PITI in reserves when you close = my estimate is $6,000
7. Other expenses - ballpark of 15-20% of gross rent goes towards maintenance & vacancy = N/A

Total = $47,000

This is just an example I used with the information I was given. I want to know how accurate my estimate is so I can focus on getting my first rental property. I'm well aware it's cheaper to buy rental property yourself as I grew up in a family who had rental property since I was little.

Thanks for your help!

Joel Owens · Answer

Peter to reduce rental turnover you either have to have a place with the bottom 50% of asking rents for the area or really nice finishes so tenants will pay a premium and want to stay long term.

You have to weigh getting that extra 50 to 100 a month being at the top of the rental market versus losing months of rent to evict and recondition.

For that reason I do not like being at the top for rent rates in my market.I am not at the bottom but not at the top.

For good tenants safety and the landlord fixing repairs in a timely manner is usually what is on the tenants mind when looking for a landlord.

J Scott · Answer

I'd venture to guess that even in the turn-key world, averages are meaningless.  That said, it looks like the operating expenses you're assuming aren't too far off.

The one big item I'd add into the "expense" category (though technically not an expense in accounting terms) is capital costs -- these are the long-term costs you'll face to keep the property well maintained.  For example, replacing the roof and HVAC every 20 years, replacing the hot water heater every 8-10 years, etc.

Also, you're ignoring the turnover costs you'll face when tenants leave (painting, replacing worn flooring, etc).  While this is likely included in the 15-20% you have for maintenance/vacancy, I would up that number to closer to 20-25%.

Overall, you should expect your expenses, vacancy/rent-loss and capital costs to be somewhere in the 45-55% range over the long haul (do some research here on "the 50% rule" for more info).

Chris Clothier · Answer

Peter -

I am glad to hear that you are speaking with Marq and that the rehab costs are not included.  That is something that, with a turn-key purchase, should already be done for yo so it is not out of pocket.  I am very familiar with Jacksonville and they are very good people who are absolutely trying to do business the right way.  Selfishly I would love to do business with you, but the Jacksonville group is definitely high quality.  I am not as familiar with Tom although we have met together and discussed his business model.  I believe he will treat you right based on his integrity.  So it sounds like you have located some very good groups to speak with before moving forward.  I wish you the best of luck and again I am I glad to hear that your understanding of costs was not correct.  Everything should be done for you and you should never have to front the costs of renovation in a turn-key situation.

All the best,  Chris

Peter Haymond · Answer

@Chris Clother- Chris these numbers are actually directly from Marq but I incorrectly put in rehab costs because I thought I had to pay those out of pocket when I spoke with him. I'm actually considering Memphis Invest and/or the Jacksonville Wealth Builders for my monthly cash flow goals.

I know from listening to Than's videos that you own about forty something plus properties in several states and that's certainly a goal I would like to achieve through your business if possible.

I live very close to Tom Wilson who specializes in a similar business model but I like the property management you have set up at your business.

Thanks for the insight everyone.

Chris Clothier · Answer

Peter Haymond - I know this post is from a few weeks back, but I just came across at the bottom of another thread and I wanted to add a major point that may have been missed.

It is very difficult, if not impossible, to get a loan today on an investment property purchased without work being done.  In the scenario you laid out, you cannot get a fnma 20% down loan and then do $16,000 of renovation unless the property is already in liveable condition.  IMO, you should never purchase from a Turn-Key company that lays out a scenario like this.  They are operating, it appears, on your cash.  The only other information left out on your post was how they deliver other services.  Are they using 3rd party vendors for renovation and management?  It can make a huge difference in the performance of your property and how accurate your expense calculations turn out in the end.  Management is really the key for holding costs to a predictable and calculable number each month.

Mike Jakobczak · Answer

Mike Hasemann Looks like it's from a company that doesn't buy the property itself but gets the investor to buy then also pay for the rehab.

I'd most likely find investors that already have done the rehab and purchase the finish product form them.  This will drop your total money in the deal to whatever your lender needs s a down payment. 20% (20,000) + closing

Some investors will give you a discount on the purchase price since they most likely wont need to put any marketing into the property or list it on the MLS.  Also some Investors will even have these rented for you from day one of purchase.

Mike H. · Answer

I'm a little confused as to how it can be a "turn-key" investment if they're asking you to pay the rehab costs.  Also, if the property value is 100k, there's no way you should be coming up with 47k out of pocket.

The real value in turnkey investing is that the rehab is done so you don't have to come up with so much out of pocket. It should be 20% of the total purchase price for a rent-ready (or already rented) property.

If you're not getting that, you're not getting the value of a "turnkey" investment.  The only way this route makes sense is if you're getting a ton of equity capture. If not, I would keep looking for another turnkey investment company.  You want to spread your money out over as many properties as possible.

The other option is to find an investor that can find your deals and manage everything (rehab and leasing) and pay them a fee (3 or 4k plus the prop mgmt fee). That way you get the benefit the equity capture for today's prices.

How accurate are these numbers to buy turn key investment property?

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