Turn Key properties

[Joe Strickley]

This is my first post here (apart from newbie intro'). I thought I'd kick off with a question on investing in units with existing leases in place. To me they have an obvious advantage; you can see what the cap rate actually is, as opposed to a broker telling you what you 'might' get. In these times of higher vacancy rates, it gives you breathing space while you wait a recovery, and it also saves having to find tenants. On the downside, you may be inheriting a headache, as you didn't screen the tenants yourself, access to inspect the property may be a hassle if you have to ask each tenant each time, and just how verifiable are income and expense statements?

I'd be interested to know what positive, and negative experiences others may have had.

[Peter Giardini]

As a general rule, "turn-key" properties to me, always carry a higher price tag for the very reason that there is/are tenant(s) in the building. The seller believe that since there are tenants and they did all of the work to get them, they should get the highest price. The challenges to this approach are many. They include...

1. The overall ROI is usually not very good, as the seller wants a premimum for their work.

2. The opportunities for upside management (higher rents, lowered expenses) are usually not present without significant investment by the buyer. Investments like upgrades to obtain higher rents, or in multi-units separating utilities.

3. Tenants are notorious for testing new owners... mostly by not paying the rent or claiming all kinds of maintenace issues. If you don't know how to train and manage tenants this could be a huge challenge.

I guess the bottom line for me is this... I don't pay full retail for anything... especially if it has tenants in it.

One the positive side buying that right price even with tenants allows the purchaser to deal with tenants and property issues because of the great deal obtained at purchase...

Remember... You profit when you buy!

I hope this was helpful... and best of luck.