Experience w/ turn-key rental property investment strategy?

Question

Hey BP,

I'm a realtor in Northern Virginia (just outside DC), and I've been learning about turn-key rental property providers (i.e. rehabbers) in other markets where the rent-to-value ratios are around 1%. It makes sense to me that investing in a bunch of lower-priced, but still A-class, properties for positive cash flow would be profitable and create solid passive income when scaled enough. A few of the biggest challenges would be building a reliable team and not having the first-hand market knowledge.

I'd love to hear about other BP members' experiences, both positive and negative, with turn-key rental property providers in markets like Kansas City, Orlando, Jacksonville, Chicago, Indianapolis, and others where the prices are lower (below $150k for a SFH) and the rents are pretty high ($900-$1500/month). I'm especially interested in hearing from investors who live in high price-point metropolitan areas similar to DC (i.e. San Fran, San Diego, LA, NYC, Miami) who have chosen to invest in some of these other markets.

Any feedback and input would be much appreciated!

David

Jay Hinrichs · Answer

@David Mount  you can buy A class right off of MLS in many of the turn key markets.. they won't be offered by turn key companies because they can't be bought cheap enough to have any kind of profit spread to pay turn key folks and the marketing companies that sell them.

I in fact bought 11 A class homes in Madison MS .. I paid 140 to 200k for them they rented for 1500 to 1700.. they were brand new construction in the best school districts in the state.. Plus I got GO zone tax treatment that was HUGE.. not available now.

but I am selling all my rentals and I have 3 left.. with these I did not need PM as the tenants were top teir I just paid a RE agent for placement when needed and had a handy man.

I had one Totally trashed 40k in damage.. but my insurance covered that one.. the rest have been relativity painless with NO major anything's other than hail damage which of course can happen to anyone.

Its not a bad play if your goal is to own then and let your tenant pay them off.. Mine were cash flow neutral to positive 100 if I was lucky.

so you can do the same in most markets.  50k increase in price point in the mid west is Huge move up in most markets.

Brent Coombs · Answer

@Alex Franks, "Class A" doesn't relate to new vs older. It's about neighborhood.

So, you're saying that these are built in "A" areas, and will return 1%/m gross rent? If true, kudos!

Alex Franks · Answer

Lane I have to disagree Class A new construction. I know of one company that are building in several states. I am building for them in both NC and SC.

4 bed 2 bath garages brand new construction in 90 to 95 % retail areas.

The same company is selling these all as turn key rentals Their plans are 2000 this year. I am on the hook to build 500 here in the Carolina's

Just broke ground on 36 of 68 in SC. May 28th I break ground on 52 just out side Charlotte NC as I told folks for a bit. It is cheaper to build then buy preexisting over priced or lower end assets.

Just my two cents.

Alex

Ali Boone · Answer

Hey David! I live in LA and have always done just what you are talking about. All of my properties are in Atlanta but I've been working with turnkeys in other markets quite a bit. The markets are always changing, but for instance right now Philly, Chicago, KC, and Indy are the hot spots. Which of those (or whichever markets) you pick should be based on comfort levels, interests, return preferences, price points obviously, and then one of the most important is quality of the turnkey provider. Work with a good one, and you're in. Work with a bad one and, well, you can verify the quality of the property at which point the provider doesn't matter but you can end up with a lot of headaches.

Clarification though, very few turnkey properties I've ever seen are actually in A neighborhoods. A's don't typically offer the price-to-rent ratios to allow for cash flow.

Positive experiences: definitely the hands-off factor and built-in expertise with the turnkeys, and the cash flow is great. All of my properties right now are filled, and have been filled for a nice little while now, and cash flow is steady. I've had no major repairs required other than a heating unit went out in one and the replacement was pretty hefty but that one was my fault for not ensuring it was inspected prior to the purchase of the property. The inspector went out but because it was summer, he didn't inspect heating stuff. I should have required him to check the units. Otherwise, only minor repairs required at any of the properties.

Negative experiences: property management, all the way. But two things about that: 1. I bought when turnkeys were a much newer concept and I don't see nearly the problems now with existing companies as I did back then when there were so many brand new turnkey companies out there (trying to figure out how to act right). 2. A lot of it was a learning experience, and I wrote about that learning here-

https://www.biggerpockets.com/renewsblog/2016/04/1...

Hope that helps!

Jerry Padilla · Answer

@David Mount

Turnkey-reviews.com has an abundance of info on turnkey properties and companies. Account Closed is an experienced agent in Cleveland. He is knowledgeable of the area and I have seen clients that we share get great returns on their investments.

Alex Franks · Answer

Yes we are buying left over lots from track builders. So they are retail areas only.  Trust me I get the A product as I was big turnkey guy from 2009 to 2013. NC , SC , Georgia , and Florida.

I told a lot of folks the market tells us what we can do.  Building is cheaper then buying, and yes I know we got some thing here. I expect about 2 to 3 years hopefully . We are basically rebuilding the vinyl villages of 2000- 2004 but only in NC and SC for now.

Our build cost all in is roughly 73 dollars sq ft with land.

160k house renting for $1600

Average price is $130k to $169k and yes 1 % fair to say.

Alex

Nick Stoddard · Answer

@David Mount I don't have any experiences with turn key, but I do see the offerings.

I've seen 1.5% but they are all in "c- or D areas.

I have not seen any turn key properties in B areas, you can get 1.5% if you do the rehab yourself.

I feel like those type of deals are kept in house. This is my observation of the KC market.

Marco Santarelli · Answer

@David Mount

Welcome to BiggerPockets!

That's a great introductory post. I think you have clarity on what you're looking for, but you will be as successful with a wider range of property choices.

I started investing out-of-state from an expensive market (Southern California) back in 2003.   I've made my fair share of mistakes, I've seen the good, the bad, and the ugly.  But I've also had a lot of success and developed a clear methodical system through those successes and failures.

You're on target with your rent-to-value ratio of 1%.  Almost every one of the 10 markets we operate in have a 1% RV ratio or above.  I'm glad to see you're not being unrealistic with your expectations, as some people try shooting for 2%.    The Midwest has been especially attractive to our clients for many reasons.  (You can listen to our podcast about Indianapolis and Kansas City for more information.)    The sweet spot for me personally is between $100,000 and $120,000.  These rent for at least 1% of the purchase price.  Many of our clients purchase the same. It's very important that you have competent and experienced advisers by your side to help guide you through the process in the beginning.  And you want to assemble a top-notch team that will have your back.  Property managers or one of those team members that are critically important.  (You can take the time and energy to ferret out and assemble the team, or shortcut the process by working with a reputable turnkey company.)  One final point.  I have to disagree with one of Ali's comments:  turn key real estate investing is not that new. My company started back in 2004 and we were the second nationwide provider of turnkey properties.  The issues still linger on today.  In the last six months we've fired two rehabbers and two property managers for various reasons.   We vet our partner relationships and have a low tolerance to poor quality and communication.  The bottom line is that problems still do exist.  But that can be mitigated with the right people/company.

Continued success!

Experience w/ turn-key rental property investment strategy?

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