1st Purchase - Turnkey Analysis

[O'brian R.]

I've been looking into turnkeys in Memphis and came across the following 4/2 SFH in the 38118 zip code. Though it was built in 1963, it's had extensive rehab work done in the amount of $22,500. The major work done include: refinished hardwood floors, converted the living room into a fourth bedroom, painted, laid new tile and installed new light fixtures.On the exterior, they replaced any rotten wood, painted, installed new fence, pressure washed, and installed new light fixtures. Also put in a new A/C unit, furnace, water heater, and dish washer. The roof isn't new, but has been replaced in the last 10 years. The property management is handled by a company that the turnkey owns. 99% of the time, they do 2 year leases. PM fee is 9%, full months rent for new tenants, no lease renewal fees, no upcharge when any work or repairs are done, but just charge the cost of the repair. They also get very discounted pricing on major work such as replacing roofs when the time comes.

As for references, this turnkey has been recommended by many fellow investors (even here on BP) and I've had a very good experience with them so far. I'm nearly certain that I can put my trust in this turnkey, but my only beef is with the numbers. The projected returns are extremely dependent on the assumptions being made so I'd like to check with the BP to see who's right.

Using the turnkey's numbers, I may cash flow $160/mo with a 9.5% coc return. With my assumptions, I would only cash flow $63/mo with a 3.8% coc return.

My going in assumptions about the property and financing:

Here are the numbers the turnkey assumed:

I felt the 5% vacancy is okay since they do 2 year leases. Even 1 month out of 24 would result in a 4.2% vacancy so I'm okay here. I know the property is fully rehabbed, but 5% for maintenance just seems low especially when thinking long term (10 or 20 years) and because this property was built in the 60s. Given this fact, I'm assuming 10%. They assume a new tenant every 3 years which is an average between 1 lease period (2 years) and 2 lease periods (4 years). Worst case, I'll assume a new tenant is needed every leasing cycle (every 2 years).

Property taxes is an issue that I'm trying to understand. Based on data from the Shelby county assessor of property, the appraisal value in 2013 was $62700 resulting in city and county taxes that add up to $1220. So they're using the correct number and since the next appraisal is in 2017, their tax number is good till then. Though their last appraisal seems like a low anomaly. From 2009 - 2012, the appraisal was $80,900. From 2005-2008, the appraisal was $80,500. From 2001 - 2004, the appraisal is $75,300. These historical appraisal values would indicate that the 2013 appraisal is on the very low side and I'm thinking that future appraisals will likely be higher and so will my taxes. So for an 80,000 appraisal, my total property taxes would be $1564 as calculated by their county property assessor's calculator here.

As for insurance, I haven't gotten a quote yet but bumped it up just for good measure.

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