70% rule on turnkey property?

Question

As a wholesaler, I am quite familiar with the 70% rule when it comes to selling a distressed property to a flipper. However, I have a lead who is selling a turnkey rental that they are just tired of owning. For a deal like that I certainly don't expect the 70% rule to be in play. My question is, what kind of a margin will a landlord buyer be looking for in a turnkey property?

I'd love to hear your thoughts, especially from folks in the Columbus, OH area.

Andrew Davis · Answer

While the CAP rate is going to be the best way to determine the value there is a 1% rule that is commonly used for rentals. It's really to see if they should be put into a rental calculator for further review. For example, if a place is selling for $400,000 you want $4,000 per month in rental income, if it's getting that then it's worth further investigation.

Ali Boone · Answer

Turnkeys definitely don't use the 70% rule, and they are also rarely too far under market value. The best way to know how to price it is to find out what the current going cap rates on rental properties in that area are and base it off of that. So if 8% cap rate is standard around there, plug everything into the cap rate formula to figure out what price would induce an 8% cap rate. If there is a lot of margin for profit using an 8% cap rate, you can lower the price which would increase the cap rate which would lead most likely to a faster sale. Your choice. But you are going to be kind of hampered by whatever the going rates are. Unless you find a buyer who knows nothing about cap rates in the area.

Darrell Shepherd · Answer

I dont really do rentals anymore, so take this with a grain of salt...if its turnkey there isn't too much of a rule of thumb. The 'market value' is set by people actually buying at that, so if its in great condition theoretically it should sell at that with time and marketing. I'd never pay retail, but there are plenty people out there that do. Saying that, if you are looking for a quick flip to an investor, the larger the margin the better. Around here the rental guys buy mostly on cap rate, and are buying pretty dumb. The hedge funds were fighting each other and got all the way down to 6-8% or so at one time (which is gonna bite them in the ass). They are backing off quite a bit now, but because of all that, all the rental stuff is marketed on cap rate and sellers expectations are pretty crazy. If I were buying my numbers would be pretty similar to Brian's, but I use different math to get there. I just do a rental multiplier (out of laziness). In this market I'd want to buy at 40 times monthly rent or less, but the numbers still work at 50. I'm picky, though, you can market to the people that dont know any better and make more money. Anyway, the whole reason I chimed in was to point out that you are asking what discount to market investors look for and Brian answered with an ROI, which is what an experienced investor will do. Your approach (buying and marketing) should reflect who you intend to sell to.

Brian R. · Answer

When I buy a turn key, I am looking for at least 2-2.5% return a month. So if I buy for 100,000 I'd like to see at least 2,000 a month in rent. It is rule of thumb. I would look at almost anything but to actually buy it would have to have a good history and at least close to that above rule. My 2¢ Brian

William T. · Answer

@Ali Boone Can you provide an example of the rule you are referring to?

Terry Hershberger · Answer

If it is a true turn key property, I generally like at least 10% off retail and it must cash flow minimum 15% ROI and at least 200-250 per month.

Corey Liepelt · Answer

Thank you everyone for your insights. As always, the BP community comes through with great answers!

Will Barnard · Answer

While each market and each investor will be different, landlords will be looking for cash flow typically, thus, the price they pay will depend on what the cash flow is. Typically, it is very difficult to get real cash flow with any unit if you pay full retail, thus, a discount is often needed to obtain that goal. It would be best to look at the gross rent, deduct the expenses (typically it will average 50% of gross rents not counting debt service) and you arrive at your NOI. From there, deducting the debt service would arrive at the cash flow. If there is no cash flow, them the price was too high.

Shaun Reilly · Answer

@Darrell Shepherd makes a lot of great points. To really answer your question you need to see what is common in the market you are working. Some guys will still want a certain discount (which may be 70% but might be less) or they want a certain return or are just looking for a target cash flow. I know I would always want to buy at as big of a discount as possible, but on my rentals if I get the return and cash flow I need I will consider it even if it is relatively close to retail.

Kevin Davenport · Answer

I only buy rentals to hold long term and even if I'm looking at a turn key property, I would only pay 70-70% of retail value. But that's just my strategy.