How do B Class and above turnkey properties numbers work? Please convince me.

Question

Hi all,

I couldn't get the numbers pencil out after looking at tons of B class and above turnkey properties, here's a hypothetical example.

SFH 3/2

Turnkey price: $100,000

Monthly rent: $1,000 (most turnkey providers can hit the 1% rule)

Monthly Expenses:

Property tax : $100

Insurance: $50

Property management: $100 (10%)

Maintenance allowance: $100 (according to the blog written by Eric D. 10% is the minimum 12 “Hidden” Real Estate Expenses That Blindside Investors)

Vacancy: $50 (5% vacancy rate)

Leasing fees: $40 (approximately half month rent)

Mortgage payment: $405 (20% down, 4.5% fixed amortized at 30 years)

Monthly net income: $155 which translate to about 9% leveraged annual return.

This is before income and federal tax. Besides, I have ignored CAPEX and eviction allowance. And My calculation barely break even for turnkey properties in Texas (high property tax and insurance premium)

My question is there are real estate related private equity funds that generate net of state income tax which yield around 8-9% per year, so I'm really in a dilemma to choose between the both options. Or should I go the traditional way and engage a realtor to find good deals?

Mike F. · Answer

I wouldn't overlook that with just the additional principle payment of your $155 a month profit the house is 1/2 paid off in 11 years and fully paid off in 19 years.

At the end of 19 years your property value should have at a minimum doubled as well as the rent should have doubled in value so you've got a $200,000 net worth and close to $18,000 a year in income.

Buy 5 of these properties makes you a millionaire with almost $100,000 of income.

Hard to beat the slow, inevitable march of financial success in by and hold real estate.

Things get even better and get better faster with faster principal payoffs or finding better cashflow.

Hard to beat the slow, inevitable march of financial success in by and hold real estate.

Things get even better and get better faster with faster principal payoffs or finding better cashflow.

Nate Garrett · Answer

@Martin Yung

You said your "leveraged annual return" will be ~9%. This is incorrect. Your cash on cash return would be about 9% with the example you gave.

Your "Internal Rate of Return", or IRR, will likely be somewhat higher than that, depending on several assumptions, esp. regarding the sale of the property and capital expenditures, but I would bet it would pencil out to 15% or so based on the example you gave. IRR includes non-cash items such as principal pay down, tax advantages, etc.

I won't try to convince you that turn-key, class A or B properties will offer significantly greater returns than the stock market. They won't. The barriers to entry for turn-key properties are low enough that anyone that can get a mortgage can do it. If everyone is capable of participating in a certain investment, then the returns will normalize.

So why do people still buy real estate vs. the stock market?

1.) They might consider it less risky than the stock market.

2.) They might want to take advantage of the tax treatment of real estate (passive income losses, depreciation).

3.) They might want to hedge against inflation by owning something tangible.

4.) A host of other reasons, usually peculiar to real estate.

How can you do better than the stock market?

Dig, dig, and then dig some more. Learn about real estate by engaging in it. Study it. Observe what others are doing, befriend them, and learn from them. Minimize your mistakes and protect your principal.

Then apply your time, network and superior knowledge to participate in investments that are inaccessible to the general public and you will (hopefully) generate outsized returns.

Curt Davis · Answer

You will find that for example C and D quality homes will always look like they produce better figures but once you get to A and B, there is a trade off as the numbers dont look as good but the idea is that you have a nicer home, nicer area and better tenants which should ultimately be a better investment long term.

Garrett Gable · Answer

Just thought I would add my two sense. Toledo, Ohio, has a great sustainable B class area. The properties are cheap and the tenants are not going anywhere :) Great place to invest!

Thanks,

Garrett

Rusty Scott · Answer

Andrew, as an Indy investor and resident, I do agree with you. Indy has never been a rapid appreciation market, and I don't see that changing in the future....though we have had about 5.4% year over year median price increases currently, which is solid.

Historically, Indy had always been a very slow but steady market, with 2 to 3 percent growth. The recession threw that out, like everywhere else...but overall our market didn't see big drops....nor did we have big run ups prior.

Certain areas of town have seen very, very strong appreciation in recent years, while others have stagnated.

One Interesting fact...Indy is the largest city in the country that is without any natural geographic barriers...and can therefore grow out in every direction.

Rusty Scott · Answer

Your calculation is basically a cash on cash return only. That's one way to look at it, but ignoring principal pay down is short sighted in my view. Also you are assuming zero rent increase and zero appreciation in your calculation.

A more in depth analysis, you'd probably find an IRR in the mid teens pretty easily for your provided example. That said, most of us try to do better than the 1% rule.

Andrew Cordle · Answer

@Gautam Venkatesan

I can only give you my opinion, as I have not bought in either place. But have looked at RE in both places.

Indy-- I mean you can get a "B Class" rental for under 100k. You will still be in a B class neighborhood, but your entry point will be a lower. BUT I can't say that I think Indy will ever be a high growing appreciation area. Therefore your investment maybe a little more risky.

Memphis-- You will have a higher entry point but I think your overall investment is a little more secure, meaning in the long run I think Memphis will out preform Indy in appreciation. Now between those years you have to choose do you want more monthly cashflow or a long term better investment with a little less monthly cashflow.

I think that @Curt Davis would be a lot better than I in giving you insight on where and when to buy in Memphis.

Again, I am strictly giving you my opinion on two places that I think are great ROI for Turnkey Buyers. One more good thing about Memphis is that if a certain PM never worked out there are plenty of great PMs there to help protect your investment.

Let me know if you have any other questions.

Andrew

Andrew Cordle · Answer

@Martin Yung

I agree with what  @Gautam Venkatesan  said, I would focus on finding different areas were the "B Class" is not 100k.

I am not a Turnkey Rental provider, but if I was going to buy Turnkey Rentals I would look into Memphis and Indy.

I think Indy you can get in cheaper probably, but I think in Memphis you have a lot more security. Again these are just my opinions has I have not bought in either area.

In my area where I have bought my personal rental portfolio I get "B" houses all in for around 60k to 90k. But you have to remember I am buying direct and there is no mark up, so I maybe in a 3/1 for 60k with rent of 950 a month, which is great but I also found the property, oversaw the rehab, funded it all, and then rented it out.

Lastly, check out @Jay Hinrichs and @Brie Schmidt website. As that rolls out more and more you should be able to get a lot of info on their Turnkey Reviews site. I think it will help the real "Turnkey Rental Providers" and hurt the poor ones.

AC

Martin Yung · Answer

Ya those numbers are proforma or past performance. Most funds started after the crash, around 2009. I believe that's how they get higher hostorical returns too.

I have the same feeling as you where 1% rule hardly pencil out.

Aristotle Kumpis · Answer

I'm working with a builder and we have new construction homes at $75/ sq ft. The land was cheap. They cash flow pretty good. So I guess it depends on where and how your find the deal. I personally like B class turnkey properties and those tend to cash flow as well. As long as you can get a 1% rent to value ratio, the deal will cash flow. (unless you have an expensive HOA)

How do B Class and above turnkey properties numbers work? Please convince me.

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