Reasonable IRR and other metrics on turnkey in 2021

[David Lutz]

The market has changed so much over the last 2 years, I'm finding that posts and other reference points on what's a good deal from a few years ago don't seem accurate anymore. I'm buying turnkey properties from out of state (buying them in California just doesn't work) for buy and hold. I understand that you can get much higher returns buying distressed properties, but that's not something I'm ready to attempt yet. So I have one house purchased and two under contract - with active contingencies so I can still get out :)

Assumptions: 25% to cover vacancy, R&M, CapEx. solid assumption for all the other variables. 20% down with 30 year note at 3.625%. 10 year holding period. B neighborhoods, SFR, IRR includes sale with 6% transactional cost and the annual CF from rent. Tax benefits excluded.

• Greensboro NC: Purchase 137.5K built 1963, Gross Yield 11.5%, "cap rate" 6.9%, CoC 6.5%, 10 year IRR 14.1%

• Martinez GA: Purchase 145K built 1970, Gross Yield 10%, "cap rate" 5.9%, CoC 2.7%, 10 year IRR 13%
  
  Grovetown GA: Purchase 159.7K built 1999 assumes lower maintenance, Gross Yield 9.7%, "cap rate" 6.3%, CoC 4.2%, IRR 14.5%

I should clarify that I don't care about CoC so don't light me up on that. I care about the overall return. Also, I've put in conservative appreciation assumptions in general for area's that have strong economic and population growth. So these deals are very likely to perform better than listed. Obviously I'm saying that because I spent a lot of time finding/negotiating these deals, and they're the best I could do in the current market. I'm just trying to figure out if the issue is that I just suck and didn't realize it, or if the market has really changed that much. One of my current contracts was off MLS and I negotiated the price down, the other had bids over asking but mine was a stronger offer (at asking).

Honestly I'm just second guessing myself a bit now. I know I'm getting some of the better deals available for turnkey in these markets. That doesn't mean they aren't the best of a lot of crap opportunity. At the end of the day I might have been better leaving my money in the Stock Market. Are you guys seeing better deals than this in good second tier markets? Is there something I'm missing? Why they hell are we buying SFR? Disclaimer - this has been bugging me for a bit and it's now 2am, normally I'm more optimistic.

[Chris Clothier]

Originally posted by @David Lutz:

Check that. I know why I'm doing this. My IRR is inflation adjusted. The Inflation Adjusted stock market return is only 4-7% on average. So conservatively these will perform twice as strongly as the market. I'm just wondering if folks are finding better things out there.

David,

I have to say that you seem on top of the way you are putting together your data and have a good understanding of what matters most to you. You know how to run numbers and how to know if the numbers match your expectations.  That can sometimes be the tricky part for investors, but it can also be the part that trips us up or slows us down.  I think that is what you are pointing out and asking for feedback on.

Here is the part I think you re missing that could ultimately push you over the buy line and give you greater confidence.

* It is important to know how to run numbers.  However, it is much more important to know how those numbers are going to be achieved.   

The most important factors in achieving the results you expect will come down to location of the property in a market; how that property is renovated before being put in service; and finally how it is managed.

Many investors pay close attention to transportation services, crime reports, school reports, etc.  They look for neighborhood scores from data aggregating companies.  Some care much less about the actual location within a market and pay attention to a less granular metric like cost as it relates to median home values for a market.

When it comes to renovation, some investors want to buy brand new built homes. Others want to buy homes that have been fully renovated to a high level. Both scenarios should have little to no deferred maintenance and low holding costs (need for less maintenance reserve and Capex reserve, especially in the first few years of ownership). Still, other investors have no issues with buying properties with less renovation work as long as the house is in working order and there is some life left in the components. That lowers the entry barrier, but ups the likelihood of costly upkeep.

Finally, the management really matters.  How is a property going to be managed?  Are there services, systems and experience within the management team geared toward longevity of occupancy?  Shorter occupancies lead to much higher holding costs like maintenance, move-out and lost rent due to vacancy and can lead to higher management costs if you have outside management.

So, those three things all work together.  A property purchased at or above median value will be located in a stronger neighborhood regardless of any other data point scores.  Near median value will still be strong, but may post some issues with attracting the best residents.  A property that has been renovated to a high level with no deferred maintenance, will not only perform better (i.e. - lower holding costs), but will also attract the best residents.  Lastly, by having a superior management team regardless of who is providing it (you or an outside company), you give yourself the best possibility that a property that attracts a high quality resident will stay occupied because the experience they are having is one they want to continue having!  

Residents move out of properties for two primary reasons.  Poor upkeep and poor management.  If you can make sure that these two issues are addressed with any of the properties you listed above, and you should be able to not only meet the expected returns, but possibly if not likely exceed them in the near-term (3-7 years).