Help with deal analysis - turnkey rental

[Abhishek Agarwal]

Please help with the deal analysis. Here is the link to the report: https://www.biggerpockets.com/analysis/rentals/95216d60-1063...

This is my first turnkey rental investment. I am just getting started, so not sure if I am missing anything. Please share your thoughts. 

[Abhishek Agarwal]

My prelimary research about this property showed:

465% population growth in the last 20 years in Calera, Alabama. Crime index is really low. Healthcare and construction are the biggest industries. 

Rental Comps for the zip code are high.

1. Found following information about building permits on City Data: https://www.city-data.com/city/Calera-Alabama.html
2. 2022: 125 buildings, average cost: $155,700
3. 2021: 216 buildings, average cost: $156,200
4. 2020: 322 buildings, average cost: $144,500 2019:
5. 213 buildings, average cost: $147,600

Regarding Property appreciation: This property was sold last november for 269K and there is a similar property on this street that has been sold for 289k on March 12th that is last month. So now the builder is selling at 314K, which is certainly on the higher end. Although, Redfin estimates this property in the range of 269K to 320K so seems to be on the higher end of the bargain. 

Is it possible to get an independent appraisal done on the property ?

[Bruce Lynn]

I don't know about AL, but looks like a very small town to me.

What's driving the growth?

What are the demand drivers?
Is there much of a rental market or is most owner occupied?

If you are thinking about buying at $350,000, but average prices are around $150,000, you'd be double the average or more.  I'd think you'd want to be closer to the average range to hit a bigger target market.  At $350,000+ you might be in the top 10% of rentals, which is not where most investors want to be.

I don't think I would just look at growth rates in a small town and determine that is where I want to invest without knowing a lot more about that town.  In a town of 15-20,000 what healthcare industry can they have?  Call the city development person and see if you can find out what is driving the growth and if they expect it to continue.

Maybe it is a great bedroom city and lots of people commuting to Birmingham?

Do you know the city, know anyone that lives there, ever visited?  That might be your next step.

[Abhishek Agarwal]

Thank you for your detailed response @Bruce Lynn. I think the point about twice the average price is accurate. I pulled back from this deal some time ago for similar reasons. This is a new construction house and the builder is selling at a premium, but the price appeared to be highly inflated. Also this opportunity came through a turnkey rental company so there was additional premium baked in and as an out of state investor, I was not planning to visit there and don't know anyone who lives there either. I was not getting any solid signal about rental occupancy rate either and from a property appreciation point of view, I felt there was hardly any skin left in the game for me. So for all these reasons, I did not feel comfortable with moving ahead. 

[AJ Singh]

@Abhishek Agarwal

any reason you are not looking where you live. You need to grow your portfolio to 10 plus in out of state investing on leverage to make anything decent at todays interest rates. A new house is no guarantee that a bad tenant wont trash it. 

[Abhishek Agarwal]

@AJ Singh I live in the bay area and can not afford to invest in the area. That is the reason for looking out of state. I agree that I will need a portfolio of 10+ and that is my goal in the long term. My initial criteria is to look for newer built houses to minimize maintenance and upfront cap expenditure on major items like HVAC, Roof, Foundation etc.. Looking at some old houses like 1920s or 1950s, I am not sure how much will they hold in the next 30 to 40 years. For my long term goals, I am thinking for the next 10 to 30 year time frame for my ownership. From that perspective, buying a 100 year old house is not making sense. On top of that there is always going to be that risk of a bad tenant. But overall, I think newer built houses will absorb the abuse better. 

[Wilson Lau]

I see that you have management fees set at 8% and interest rate of 4%. Have you verified these info? Interest rates are running at 7%+ for investment properties these days, and some of these PM with 8% management fees usually have other fees tied in.

I would suggest at least have a chat with some local realtors/investors to familiar yourself with the neighborhood and growth potential. 

[Abhishek Agarwal]

@Wilson Lau thanks for your response. I had put 4% interest rate, because the turnkey company was offering a deal for rate buy-down upto 4%, which was paid by the builder. Can you please elaborate more about hidden PM fees in addition to 8% management fees ?

[Engelo Rumora]

Quote from @Abhishek Agarwal:

@Wilson Lau thanks for your response. I had put 4% interest rate, because the turnkey company was offering a deal for rate buy-down upto 4%, which was paid by the builder. Can you please elaborate more about hidden PM fees in addition to 8% management fees ?

Hey mate,

Property managers tend have quite a few hidden fee's.

For example:
Tenant placement fee
Lease renewal fee
Maintenance up charge
Eviction up charge

Granted, PM's gotta make some money also but just ask for the PM agreement if the fee structure isn't transparent enough on the property managers website.

Just my 2 cents.

Thanks 

[Abhishek Agarwal]

Quote from @Engelo Rumora:

Quote from @Abhishek Agarwal:

@Wilson Lau thanks for your response. I had put 4% interest rate, because the turnkey company was offering a deal for rate buy-down upto 4%, which was paid by the builder. Can you please elaborate more about hidden PM fees in addition to 8% management fees ?

@Engelo Rumora thanks for sharing this. Really helpful. 

Hey mate,

Property managers tend have quite a few hidden fee's.

For example:
Tenant placement fee
Lease renewal fee
Maintenance up charge
Eviction up charge

Granted, PM's gotta make some money also but just ask for the PM agreement if the fee structure isn't transparent enough on the property managers website.

Just my 2 cents.

Thanks