Turnkeys don't seem too profitable?

[Ayyub Omer]

Hello everyone,

I've been looking into turnkeys recently, and at first they seemed perfect for a long distance newbie like me. I tried running the numbers though, using a few basic rules of thumb, and they don't seem to make too much money?

You basically pay maybe 20% of the value of the price of the turnkey closing the sale and then selling it later, because of appraisals and inspections, renovations before you finally sell, realtor commissions when you sell, and also the turnkey company themselves might have sold the property for a bit more than someone else might give you for it.

The average amount of time that homes are held is 7 years from what I've heard, so you need to make at least 3% of your property's value a year to cover the closing and selling costs.

Most turnkeys give you about 12% gross rents a year (because of the 1% rule, I guess), and using the 50% rule of thumb you can guess that you'll get about 6% net. From that you subtract your 3% annualized closing and selling costs, and you're left with about 3% net returns a year.

This just doesn't seem that lucrative to me. Am I missing something?

Some things that I thought of:

• The property could appreciate. But it could also depreciate, especially if bought at current prices.

• You could hold the property forever. But this doesn't seem realistic; you never know what the future will hold, and there's no reason to think you'll deviate from the average so much (unless you do have some particular reason).

• You can leverage the property to increase your returns. But the 30 year mortgage rate that google is showing me is about 3.5%, which is actually more than the expected return from the property, and so leverage would actually decrease your returns.

• My estimate of closing and selling costs is too high. Maybe, I don't have too much experience with these things, so 20% could be a bit inflated.

Some of you have a ton of experience, so maybe you can point out things that I've overlooked.

Thanks,

Ayyub

[Ali Boone]

I'm not going to into a detailed argument for why turnkeys can make money because there's no contesting that you'll [in theory] make more buying distressed and doing all the work yourself. I say 'in theory' because that depends on your skill level. A lot of people take on projects like that themselves having no idea what they're doing and end up completely hosed, out of money, and with an unfinished project. Plus, if you're adding in doing all of that long-distance and you are a newbie, that's added risk on top of risk. If you completely shoot yourself in the foot doing all the work yourself--the work not always being as easy as everyone makes it out to be--you're then making less than you might have with a turnkey. Just for some perspective. But then back to the turnkeys--I think you're making some odd assumptions in your calculations.

- the 7 year average hold for a house is for primary home buyers, not investors

- why would there be annualized closing and selling costs every year?

- you need to use actual numbers instead of the 'rules' which you don't actually know if they apply to a particular property or not

- you don't know that you'd do a reno before you sell

- you don't know that you'd even sell (I still have all my original turnkeys with no plans to sell them)

- where are you getting 12% gross rents from?

- what's "deviate from the average" mean?

- 3.5% is certainly not higher than the expected return of a [good] turnkey

- your 20% estimate for total fees paid out for buying and selling is potentially a big stretch. Even if it's true, you're not actually basing it off anything concrete to know for sure.

- all those fees you pay, and all of your expenses, get written-off on your taxes so it's not a straight loss like you're calculating it to be

- a rental property actually has 5 profit centers on it: cash flow, appreciation, tax benefits (huge), equity build via mortgage pay down, and hedging against inflation

You're not off-base exactly in how you're thinking about it, but you're leaving a lot of reality out of your assumptions.