Is TURNKEY property a good investment ?

Question

Hi,

I am just getting started in real estate investment. I had a inheritance and placed most of it in Mutual funds. I would like to diversify my portfolio and invest in real estate, I live in New York and the real estate here seems to be too expensive, I have a job that require a lot of hours and can’t handle to manage a property, I don’t have time and not sure to have the capacity of going through the whole process by myself.

I would like to start investing with $150 000 in a turnkey condo in Florida that would be managed by the same company that sells it.
For this price, the company offers condos with around 5 to 6% cash flow net, you pay an “investor pack” that’s around 20% of the property and a 7% management fee on the rent.

Do you guys have any advice on my investment ? Is Florida a good place to invest or should I look somewhere else ? Do you think the numbers are right knowing that I’m looking for a investment as passive as possible.

Thank you :)

Davartay Miller · Answer

Welcome to BiggerPockets. @Julien PouchonFirst, my advice to you is to inspect what you expect. This means exactly that. Look at any and all deals closely to access and discover any shortcomings, if any. Secondly, assume and expect the property manager you hire to protect your investment so that you can truly have a passive investment property. I hate to say it but many people have cute sales-pitches, low prices, great processes, but not the data to support it. This comes down to the questions you should be asking in the interview. While 7% is not typical – it doesn't mean this company is a bad manager or they can't make it work, but I would check to see what other fees there could possibly be. Then you would want to compare the others. While John Doe may be offering you 7% management fee, when is due? Is he paid monthly regardless if the property is rented or vacant? What does the 7% not cover is the question you would want to ask so that you can evaluate appropriately. What is his/her vacancy rate? High vacancy rates and high resident turnover are huge problems from many investors and some companies try and make themselves more appealing by overing a lower management fee. The biggest complaint about property managers is they do not do anything to make sure the properties they manage stay rented and the same resident stays longer. As a provider, we get it! And that's why we do not charge our owners when the properties are vacant or the resident is not paying. We do not get paid until our owners do. This means exactly that – this shows you how dedicated we are to providing you what we promise. Once we have rented, collected rent, etc . . . then your management fee is due. Here at Premier Property Management, we go out our way to make sure our properties stay rented with the long-term residents who sign multi-year leases and pay their rent on time. Our average resident stays just under 6 years. Those stats equate to more money in your pocket and less grief. If your fee was 7% and the vacancy rates is high then you are out of more money. DO YOUR RESEARCH! @Chris Clothier posted a great response to this just the other day. Please see his response/questions to ask below: https://www.biggerpockets.com/...

Are you an investor?

Do you own in the exact neighborhoods you are managing?

How many investors do you work with?

Do you own all aspects of the operation?  (or do they hire third party companies)

Do you offer rental or maintenance guarantees? If they answer yes, ask them why. Then ask them if they will put the guarantee on year three.

Do you defer maintenance?

How many properties do you manage?

Do you sell properties and if so, do you own the properties you sell?

How long have you been in the business?

What is your average vacancy rate?

What percentage of expiring leases will renew their lease each month?

What percentage of signed leases fulfill their full term?

What is the average number of days a property is vacant between residents, move-out to move-in?

What percentage of billed rent do you collect each month?

What is the cost of an average repair bill after move-out?

Do you mark up maintenance costs?

What are your management fees?

What percentage of collected rent goes to yearly maintenance on average?

What is your average number-of-months occupancy per property?

What is your average occupancy rate?

What programs do you have in place to keep residents happy?

What customer service programs do you have in place for owners?

Will you call me every month with an update on my portfolio?

How many team members are dedicated solely to providing service to your clients?

If you are an investor, What has been your biggest mistake as an investor? How do you protect your clients from making the same mistakes?

Again, these questions have a bit of turnkey flavor to them, but they work very well when interviewing management companies. Make sure you take good notes and remember how you feel talking to the companies.  Do they give you a sense of comfort like they know what they are doing or are they selling you on low-cost and savings for you?  Companies that do not want to spend time answering your questions are most likely not going to have time to spend with you as an owner, in my opinion.

Best of Luck!

Will Fraser · Answer

Hi @Julien Pouchon, welcome to the BP forums!

This situation screams CAVEAT EMPTOR to me.  Like AJ mentioned 7% is a low fee for property management BUT don't let that fool you.  When the turnkey operator IS the PM you're loosing multiple points of reference and safety checks in the process.  So, if you chomp at the bit on a 7% management fee that leads to a 15% over-market purchase you kinda cut off your nose to save your face.

So, I'd check doubly and triply to ensure that the purchase price is at or below the market value and NOT referenced off of the 1% rule (a strategy I see turnkey operators often use to sell properties to buyers unawares).  If so, and you are okay with the cashflow and the risks and ROI resulting from it then awesome!  If not, there are plenty of opportunities at or above this cashflow rate that ARE based on real values.

As to "is Florida a good place". . .. . well, it's a pretty big state.  There are pockets that are excellent, and pockets that are not.  So, it's all local.

Gregg Cohen · Answer

@Andrew Pokrzywinski - Thanks for the mention!

@Julien Pouchon - Congrats on taking the first step towards building a rental property portfolio!  I think you're on the right track by looking for a market with high rents and low purchase prices rather than New York.  Florida is a big state and some markets are better to invest in than others.

I have been investing in rental properties in the Jacksonville, FL market for over 15 years now and would be happy to help.  It's hard to analyze the property you currently have under contract because there are so many more things to understand than just those numbers.  I do love the fact that you are buying property from the same company that is doing the property management in-house.  Goals are aligned.  This is a must in my opinion if you are an out-of-state investor and you want a passive, enjoyable experience.

5-6% net cash on cash returns sound great but make sure they are including realistic maintenance and vacancy cost expectations as well as all tenant placement fees and closing costs in the purchase.

I've never heard of an "investor pack" and I'm not sure how that factors into your returns so make sure to do your due diligence there.

7% property management fees seem very low.  Industry standard is 10% of gross rents collected.  Just keep in mind that your property management decision is incredibly important and don't just go with the cheaper option.  Make sure they sign long term leases (2 or 3 years) and have a strong track record of renewing leases (70% is our standard) so that your residents stay long term.  That's how you win in rental property investing.

Hope this helps!

Aj Parikh · Answer

Welcome to BP!

I am seeing a lot of investors buying in Jacksonville, FL so there is definitely something there. I like the numbers on the property and 7% management fee is un heard of. Usually its like 10%. Good luck on the investing journey

Is TURNKEY property a good investment ?

Most Popular Reply