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