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.

Post continued below.

[Alison Michel]

Hi @O'brian Rossi, just wondering, can you share the calculator you used for your analysis?

[Chris Clothier]

@Matt R. - The cost of caging an AC unit is relatively low. I think most get it done for between $200 and $250. That can get you a pretty extensive cage. Many companies and investors simply choose to cage on the front end for deterrent as much as anything else. I think we started last year with right at 1500 properties under management in Memphis and ended with just under 1900 and we only dealt with about 24 ac unit thefts. Theft is simply something that we deal with like any other city and the price of copper and parts make a unit located on the side of a house in front of a fence an easy target. So, no, theft is not rampant everywhere all the time. We do not have gangs roaming the streets with AC units in the backs of their trucks!

I choose to put cages on my properties including my new builds in Cordova and even properties I buy in Bartlett and Lakeland. The price is just so low that I see it as a good deterrent expense. I think a lot of companies in Memphis now view the issue the same way - make our properties look less appealing for theft.

[Matt R.]

That makes sense Chris on the cages. 1900x200 that's a shiat load of cage money but I guess your protecting 1900x1500. I am sure you Memphis guys have this down to a science after a few hundred homes.

That's a funny thought Chris, have you guys ever seen some random dudes rolling with a AC units on their backs, bikes or cars?

Thanks,

Matt

[Chris Clothier]

@Matt R. has probably dealt with a lot of challenges here in Memphis as he was learning the city. Those lessons are all ones that we learned, for the most part and some painfully, back from 2004- 2008. So his horror stories are much more recent...and I would not doubt that he has seen some of the more crazy things.

[Alex Craig]

@Curt Davis just leave a pit bull chained to the AC, or better yet, I wonder how one would be able to purchase something like a Panther.

@Chris Clothier not that you asked, but my 2 cents on the cage situation. Some areas, you need it, no doubt. But in areas where you are asking a high rent, let's say $1,095 and higher in Bartlett, Cordova, Lakeland and Arlington, my personal opinion, it makes the house look and feel like a rental and if I was entertaining friends over, I would be embarrassed. Matter of fact, the knuckleheads I hang out with would never let me hear the end of it. I just see a little more pride with the tenants in these areas and I would rather a high rent property feel more like a home then a rental property. We have never had a unit stolen in any of those suburbs--of course it can happen, but my thought is that theft normally comes from deadbeats who live in the area. With the exception of a few pockets in Cordova, there is just not that much rif raf in the neighborhoods. We had 1 property get broke into twice while vacant in Bartlett and the Bartlett PD installed what looked like a Meter Box in the corner of the backyard with a camera on it. They caught the guy.

Wow....has this thread gotten off track. :)

[Matt R.]

Just some quick and dirty ac unit theft stats for Memphis based on Chris's 1900 sample annualized. Not sure if Chris was talking annual but here are the numbers if annualized.

270, 000 households.

1 out every 80 AC units are stolen

9.2 units stolen per day

3375 units stolen per year.

Some were probably needing replacement anyways:) So free AC removal is sometimes included with your ownership. Even with ac issues, I can only wish I had that kind of priced housing inventory in my drivable space.

Thanks,

Matt

[Chris Clothier]

Originally posted by @Alex Craig:

But in areas where you are asking a high rent, let's say $1,095 and higher in Bartlett, Cordova, Lakeland and Arlington, my personal opinion, it makes the house look and feel like a rental and if I was entertaining friends over, I would be embarrassed. Matter of fact, the knuckleheads I hang out with would never let me hear the end of it.

The knucklehead comment made me laugh so I highlighted it. You make a great point, but to date it has not made vacant days go up or led to a lower rental rate in those areas. Those are two stats that we track though so it should be easy to tell if their is a pushback. So far, so good, but I still think you make good points and could see it both ways.

[Chris Clothier]

Originally posted by @Matt R.:

Just some quick and dirty ac unit theft stats for Memphis based on Chris's 1900 sample annualized. Not sure if Chris was talking annual but here are the numbers if annualized.

270, 000 households.

1 out every 80 AC units are stolen

9.2 units stolen per day

3375 units stolen per year.

Some were probably needing replacement anyways:) So free AC removal is sometimes included with your ownership. Even with ac issues, I can only wish I had that kind of priced housing inventory in my drivable space.

Thanks,

Matt

Not sure on all of the math, but after reading it, i pegged you for an engineer...

And then went back to your profile and man was I way off!!

However, I will probably be a client of yours in the near future. I am out on the west coast all the time from LA area to San Diego visiting with our clients and taking my family for an extended stay is a priority of mine soon. I want my kids to learn to surf and now I know someone who can help!

As for the AC units, I have no idea on your numbers. Just showing that, for our portfolio, which is concentrated in better areas, theft is not a rampant problem. It affects between 1 and 2% of our portfolio and that is both on new renovations and move-outs. So really it is worthless data outside of the context of that one off-topic part of this forum post!

[Alex Craig]

This is why I am not a big fan of cages. I assume just removing the unit if it is in an area that may be susceptible to AC theft. It cost a little more, but it is much more effective. Now granted, that is a crummy cage, but the point is, if they want the unit, they will get it. This was a foreclosed vacant home.

[Matt R.]

Sweet Chris. It would be my pleasure.

Dang Alex. I think the free removal and disposal service plan was included on that one. I guess you can roof them but that's a whole other can of worms.

Thanks,

Matt

[Matt R.]

Cool Chris. The rough in my head math goes like this

1900÷24 = 80 or 1 out 80 are stolen

Then extrapolate to the 270, 000 population and annualize. I am surprised its worthless to you as it's your market and your money. Your controller would be interested I bet.

Thanks,

Matt

[O'brian R.]

Amazing how much great info can be shared in just 1 day! Lot of great points being made here, especially like how side tracked this thread got with the debate of caging A/C units :)

@Jake Kucheck

1) I wouldn’t be surprised. Irvine Pony league baseball? I haven’t met another guy with my first name so yeah, I get that a lot.

2) Turnkey isn’t the be all end all strategy for me. But it’s definitely an attractive option since I’m looking for consistent returns that come with low risk rather than shooting for home runs that come with much higher risk. I know several people who invest in turnkeys for a couple reasons, but primarily because they value low risk investments, have a full-time career, live in an overpriced market where properties don’t cash flow, and are buying out of state where they’re not personally familiar with. All of these conditions apply to me as well, which is why I’m interested.

Though in the long run, I agree with your approach in assembling my own team because I’d learn so much more with this approach and I’m fascinated with RE investing that I just want to be more involved than the average TK investor. I also think being more active in doing my own research, assembling trusted team members, etc. (even with an out of state purchase) would set me on the right path to larger gains in the future. I’ve actually been taking this approach in looking for a property in Dallas/Fort Worth. Problem is that doing this from another state takes a lot of time to assemble the right team that I can trust. And not to mention, I’m new so there’s just a lot I still don’t know. More potential upside going on my own, but definitely greater risk than investing with an experienced TK with top-notch rehab/PM/service that generates modest returns.

[O'brian R.]

@Alex Craig - Great blog read by the way.

@Matt R. - the math looks right to me.

@Chris Clothier - was a pleasure to meet you this weekend as well. Was a great event and opportunity to speak to a handful of investors looking for low risk and consistent returns.

@Alison Michel PM me and I can share the excel sheet I put together.