Would you buy this turnkey?

Question

Hi BP Braintrust,

I've identified a turnkey and the property looks great on paper (green crime area on Trulia in a decent city, great schools, A neighborhood (per seller), $250/mo cash flow, 7.35% cap rate, and 10.48% cash on cash ROI).  However, we just got the photos and are second guessing the project - https://www.dropbox.com/sh/8s2hq94y6nwlt7u/AAD9Nbs....

Would you buy this turnkey?  I need to decide today.

Thanks for any sage advice you all have.

Laura

William Robison · Answer

Full Disclosure...I own and operate an investment real estate company in the Kansas City area.  We specialize in the hybrid turnkey approach, but we ultimately provide acquisition, renovation and property management services.

Second point to note, I grew up two miles from this house.  I went to the same schools that this house attends.

As a provider, and licensed General Contractor, I can see a few things that the normal investor eye will miss.  In 15+ years of real estate experience, reviewing more than 10k houses, one gets an eye for a few details.

The touches on this house look nice, good curb appeal.  I will also note that the neighborhood is on the nice side...B in my opinion, but I have high standards.

The school (yes, that I attended) now makes me quite nervous.  Greatschools.org now gives the high school a 4 out of 10.  Our investments currently need to be in schools rated 6 or better for most of our suggested properties.

Reviewing the property from photos ONLY...I see a few critical concerns.

#1 - picture 58 of 62 shows the hot water heater.  The exhaust vent goes up, then downward and into the patched wall.  The negative grade is the first concern.  Smoke goes up.  This is trapping carbon monoxide in the vent and potentially getting into the house.  With the patch on the wall, the way it is, its a tough fix.  The only correct way to fix is to get a squatty hot water heater, which costs more, and vent in with an upward draft.

#2 - same picture, same vent going into the wall.  The reason for the patch job has a positive and negative issue.  The HVAC, seen in another picture, is a high efficiency unit.  This means it doesnt use the old style draft (going up the same flue as the hot water heater).  The HVAC uses a PVC exhaust system....a nice feature.  So, whats the issue?  Well, the old flue stack was built to accomodate a hot water heater and a furnace.  Now that it is just for a hot water heater, the home inspection industry will tell you that a new liner needs to be installed for the smaller draft requirement of the water heater.  Nevertheless, regardless of the opinion, I just have a bit of concern about the patch job on the wall to the flue pipe...how good is the connection.  At a very minimum....please install several CO detectors in this house.

#3 - picture 57 and 61 shows 4 floor joists that have been married, scabbed, sistered...whatever lay term you want to use for it.  This is most often due to termite damage in the joists.  The sistering of joists is a reasonable idea, BUT, where is the interior support?  You see, joists need support on both ends, and if long enough, in the middle, maybe more.  These joists were scabbed, and likely sit on the sill plate above the foundation wall, but they dont have support in the middle of this space.  To be engineered correctly, you would need to run them to the center of the house, where there is a load-bearing wall to support the new joist. Not the easiest thing to do, but the only correct way to cure.  Also, make sure there is enough lag support in the sister boards.

Ive reviewed USREEB properties in the past.  This is consistent with what I have witnessed.  Our company has not taken over management of a USREEB property to date.  I chose not to speak about my opinions of their work outside of issues that I can see in photos.  Keep in mind, they are a competitor of ours, in the Kansas City market, so you could say that I am biased, but the pictures show their own.

With any investment that requires $100k+, spend the extra $500 and get on a plane to KC and look around.  It's far cheaper than a potential mistake.  This rule applies with any investment property.

Finally, with the market as hot as it is, pay attention to turnkey providers expense assumptions.  A good rule of thumb is 10% mgmt, 10% maintenance, and 10% vacancy.   Yes, these could go up or down.  Vacancy could go down, and maintenance could go up, etc.  Include real estate taxes and insurance, and determine your own ROI.  Better yet, plug the numbers into the BP calculator to determine ROI, cap rates, etc.

All the very best to everyone.

Laura Kaspari-Hohmann · Answer

@Jay Hinrichs - thanks this is listed with a company you had good things to say about on the forums. : )

@Benjamin Fredricks  - thanks. This property is listed $40,000 below the Zestimate (I know, not necessarily a number I can rely on), but also $20,000 less than other comparable properties have sold for in recent years, so I'm hoping we'll have some instant equity when the appraisal comes in.

@Tom Ott - yes - this company does all the renovations and they have a property management branch.  I've enjoyed your articles on turnkeys. Very helpful

Laura Kaspari-Hohmann · Answer

@Thomas S. @Dan Torluemke @Greg Moss Thanks for the suggestions on running numbers.

@William Robison Thank you for the really detailed thoughts on the photos.  This is super helpful!

Ali Boone · Answer

What is your specific reason for second-guessing the property?

Greg Moss · Answer

@Laura Kaspari-Hohmann

Laura,

The small issue that i see when looking at a house like this if I ran these numbers for myself is there is very little room for error. With such a thin monthly cash flow you need your numbers to be perfect, and if things end up being higher after investing well then your cash flow might disappear.

Check into will property taxes potentially go up on a new valuation?

will insurance be that cheap etc ?

I would also use a 10% cap ex rate instead of 7% so that will eat into it a little

Cause all of a sudden you might end up with two to three 30-50 dollar increases and then your down to 100 or so cashflow a month when it is too late

I have definitely seen much worse proposed purchases on here, but for myself a 130k property I would probably look for 3-350/m minimum cash flow so I personally would pass on this (in terms of turnkey buy and hold)

Greg

Dan Torluemke · Answer

I would say your insurance will be higher than $50/month, probably closer to $80-85.  And are you sure you can get 4.75% with only 20% down and no points?

Looks like a nice pretty nice home, like others I would be curious why it seems to be priced under market.

Thomas S. · Answer

Based on your numbers it looks OK however your expense estimates are low. Vacancy etc. will be higher and long term you will be in the historic 50% range. I would use those numbers to determine whether you wish to invest. Additionally you do not include appreciation in making your decision in the event you end up selling during a down turn. Never include speculation in make a decision to invest in income properties.

Laura Kaspari-Hohmann · Answer

All - here are my numbers - https://www.biggerpockets.com/calculators/shared/8... Please poke holes, tell me if you think I'm way off anywhere...

@Larry Fried - cash on cash is based on 20% down, 30 years at 4.75%. Purchase price $130k, rent $1350/mo.

@Brandon Leong - Glad to get your perspective on this company.  I was less conservative on vacancy, using 5% vacancy, 5% maintenance, and 7% Capex, but it still cash flows, using your numbers.

@Micah Mcarthur- I have the same question about why they are selling for $20k less than market.  @Alex LucilleI think that's the red flag - I googled the address to see if there was some sort of horrible crime there, but couldn't find anything...  Anyone else have thoughts as to why this might be?

Brandon Leong · Answer

@Laura Kaspari-Hohmann I've flown to KC to meet with the company that you are working with. It's one of their better properties. They are nice to work with, I almost bought a property from them. Through my own calculations, I don't get the numbers you are getting but I use pretty conservative numbers. For me, it doesn't meet my numbers, so I would back out.I use:10% Vacancy15% Maintenance and Cap ExNote that the property tax for this house is pretty high for the KC area. I think that's what eats up most of the cash flow for me.However, it's still positive! So it depends on how you feel about the metrics. Also, check that this place can really rent for such a high number via craigslist and other websites, there's never a guarantee that they find a tenant who is willing to pay at the 'projected rent rate',

Larry Fried · Answer

@Laura Kaspari-Hohmann Judging by the pictures, it looks like some finishing work is still to be done, along with cleanup, which I guess they will take care of no problem.  It is hard to answer you question though without having more specifics on the numbers.  For example does your "cap rate" include something for soft cost projections (vacancy, repairs), and if so how much?

Is your cash on cash based on a 20% or 25% down loan or ?

Purchase price & rent?

I wouldn't call that an "A" neighborhood, but it is all so subjective, one has to understand how neighborhoods are classified by the one doing the classifications.

Would you buy this turnkey?

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