5 Ways Turnkey Companies Inflate Cash Flow Numbers

[Anton Ivanov]

Hi BP,

I see tons of investors interested in turnkey properties lately, so I wanted to share my experience analyzing these deals after buying 4 in the last 12 months.

After looking at maybe 100 or so properties, I can tell you that the vast majority of turnkey providers inflate their cash flow projections. I wouldn't say that they are outright lying, but definitely making a lot of the deals seem better than what they are. 

Here are the top 5 things you should watch out for:

1. Vacancy too low. I don't think 2-5% vacancy rates that I usually see are realistic, especially for B and C class areas where a lot of these properties are located. I use 10%+ for most of the properties I run numbers on.
2. Small maintenance/cap-ex allotments. Once again, many turnkey properties are in lower quality neighborhoods, which attract lower quality tenants that do not take care of the units. Plus, many homes are old (some are just too old), so thinking your maintenance will be 2-5% is just naive (that's only $240-600 per year with $1,000 rent!). Cap-ex is usually omitted all-together.
3. Using past year property tax values. In most counties, when you buy a property, it will get re-assessed at something close to your purchase price and your taxes will go up. Also, if there were any owner-occupied exceptions or discounts, they will disappear. Don't just look at the previous year tax value, use your purchase price and the tax rate to calculate what your actual taxes will be.
4. Omitting vacancy the first year. Vacancy can happen any time. I had to evict one of my tenants 2 months after purchasing one the turnkeys. I don't see why you would not count vacancy in the first year, along with every single year afterwards.
5. Inflated rental income increases. I see rental income increases as high as 5%/year on some turnkey websites. Again, unrealistic for most areas. There are cities that have had flat rents for years, or a 1-2% increase/year. If you have to depend on this increase to make the property cash flow, it's probably not a good deal.

The bottom line is you should always run your own numbers using whatever tool that works best for you. If they come out more or less the same as the turnkey company's website - that's great, you know that they are actually honest and realistic.

But if not, at least you will not be surprised or disappointed 10 years from now, like I've seen in some cases because you were realistic up-front.