​Part 3 – Choosing and Analyzing a Turnkey REI property

Part 3 – Choosing and Analyzing a Turnkey REI property

Deciding mentally to go the turnkey route and choosing the right company are nothing until you actually pull the trigger, pick the house that meets your criteria, and buy the house! In this post I will talk numbers. The numbers below won’t work for everyone in every house in every market. Do your own due diligence and check out the specific numbers for your specific REI situation.

The house: 4 Bed/2 Bath 1,680 sq ft built in 1965. It’s located in a “B” clean/safe neighborhood with well-kept lawns. It’s close to the interstate and a plenty of shopping. Renovations include a new roof/furnace/AC. New vinyl “wood plank” floors throughout most of the house with new carpet in the bedrooms and new countertops and appliances in the kitchen. The inside and out was repainted and most of the windows were replaced throughout the house.

Price: $89,000

Rent: $975

Looking through some of the houses “Company 4” had listed on their sites, I came across the above property. Although the property was in one of their newer markets, it was about 30 minutes away from my mom, so I knew the area a little. This made me feel a lot more comfortable ultimately pulling the trigger. Right away, I could see the property exceeded the 1% test (some of you might know this as the 2% test, but I haven’t found that to exist with turnkey properties). The 1% test takes rent divided by price. $975 divided by $89,000 = 1.1%. I know it doesn’t exceed it by much but from what I’ve seen, as long as you exceed 1% you SHOULD be able to cash flow the property. Next, I looked at the 50% rule, $975 divided by 2 = $487 P&I on a 30 year conventional with 20% down at 5% would be $382, for a difference of +$105. So right away with those two quick calculations, I could tell that this house might be a decent investment.

After the initial check of the area and the 1% test and 50% rule, I started digging into more of the specifics. There are plenty of spreadsheets out there to help you do this, but I chose to use this one: http://gainvesting.com/Property-Evaluator.aspx To fill this out effectively you do have to do a little bit of research. The first step was to calculate the property tax. A quick search of the county the property was in followed by property tax rate brought up an average effective rate of 0.75%. If the property is valued at around $90,000 this would make the yearly taxes $675. To get a good accurate insurance rate you really need to call around and get a good idea of what it will be for this specific house. I didn’t do that, I just went with what I saw on some BP forums and rounded up. Next time I’ll call and get a more accurate idea, because based on a lot of different factors, this could skyrocket your costs. I went with $60 per month for this property or $720 a year, but should be able to get it closer to $50 per month. For the other number in this calculator, I used 10% for property management and 10% for maintenance (I lumped in CapEx here because there’s nowhere else to put it in the calculator. I know CapEx isn’t based on the rent like everything else, but I knew that all the big things were brand new so I was comfortable with this number). The average vacancy “Company 4” gave me was 4-5% so I used 7%. I was more concerned with current cash flow, so I didn’t bother changing the appreciation numbers in the calculator, but this is a great tool if you’re looking into buying based on appreciation. All of these numbers gave me a Gross Cash Flow of $282 (or 17% cash on cash ROI if you assume $20,000 down after all the inspections and fees).

All of the numbers were working, so next step was to start looking into the neighborhood. Although I thought I had a decent feel of the area, the last time I lived in the area was about 13 years ago and it was 30 minutes away from this particular neighborhood, so I wanted to be sure it was a good area. I don’t mean to make a shameless plug here, but the Bigger Pockets Book on Rental Property Investment was an awesome tool during this entire process. I was taking the steps to buy this house as I was reading the specific chapters in the book. The particular chapter that helped me out in checking out the neighborhood was Chapter 8 “Location, Location, Location”. This chapters listed sites such as: www.crimereports.com, www.city-data.com, www.usa.com/rank, www.greatschools.org, and www.census.gov/construction/nrc. I found all of these very helpful and didn’t find anything that stood out as a showstopper for the neighborhood. It is safe, has decent growth rate, and about 50/50 in the renters to owners in the area. The schools could be better, but from everything I have read this should not be a show stopper when looking at buy and hold. Another good tool is the Google Maps street view tool. You can seemingly drive around the neighborhood without actually being there.

After running the numbers and checking the neighborhood out I wanted to make sure I wasn’t being gouged based on market price in the area. For turnkey, you will usually pay at or just below market prices for a home. You have to consider that you should be getting a 100% move-in ready, renovated property, with a renter in place. The Zillow “Zestimate” is $88,258 (I know this isn’t completely accurate it’s a good start). Next, I compared the price per sq/ft to comps in the area. The price per sq/ft of this property is just under $53. To find comps I went to Zillow and typed I the zip code to see what was for sale I the area. For the filters, I did 3+ Bed 2+ bath, 1,400-1,800 sq ft, and year built 1955-85. I deselected foreclosures, ensured only single family homes were selected, and selected recently sold as well. A couple of the comps were in the $52 range, but most were in the $60-70 range with the closest house recently sold at $64 per sq ft.

Although I trusted “Company 4” in its listed rent, I wanted to do the research myself. Again starting with the “zestimate”, the prediction for this property is $950. Looking at rental comps in the area, I saw a lot of comps closer to the $900 range. This isn’t too far off, and the numbers still work out at $900 and since it’s a turnkey there are already renters in place at $975. Considering this, I was still comfortable with this property.

All of the above information led me to the decision that this was the right property. Location, price, and company all worked out perfectly. Another benefit is that when I go see the property on occasion I can deduct the travel as a business expense and see visit my mom at the same time. When I change the numbers to the actual number of 8% property management, 5% vacancy, $600 for insurance, and 4.875% on the 30-year mortgage I should actually see a $316 Gross Cash Flow for a cash on cash ROI of 19%.

I know I didn’t do everything completely right with my analysis above, I could’ve gotten a better deal if I went out and found a house and renovated it myself, and the market could completely crash. However, from what I’ve analyzed this property should be a great buy and hold investment providing years of cash flow, loan pay down, and appreciation.

In the next post, I will discuss the closing process. This will include the contract of sale, obtaining financing, shopping for insurance, hiring and inspector, and more.