All Forum Posts by: Rafael Ro

Quote from @Nicholas L.:

@Rafael Ro

if you are getting numbers from a turnkey provider, they are likely going to be best case scenarios.  and to be clear, that doesn't make them "wrong," or provided in bad faith, it just means - best case. like, no dishwashers breaking over and over for no reason (ask me how i know about that.)

 if you look through the forums, you'll see posts from other folks who bought turnkey properties, and then got crushed by a long vacancy period or a rough turnover...

not trying to be discouraging, just realistic.

Thank you Nicholas. I think the issue here is that my post is way too long and people just don't have that type of time to read through it.. I'll have to keep that in mind moving forward when seeking advice. 

Big picture - I'm definitely trying to "simplify" it, and for sure there is more to it. But I'm only doing that in order to get a basis for a comparison. 

In terms of the numbers, if I used the numbers that the (very reputable and established) turnkey company gave me in their analysis then the Turnkey strategy would have looked so much better. Based on their numbers, for the type of property I'm using, they are coming up with positive cashflow of about $300 per month (for the first couple of years) and they are claiming a 3.8yr average tenancy. I adjusted everything they said. More maintenance reverses, higher cut for tenancy, used 2yr average tenancy, and I didn't include their suggested rent increases either. As a result that strategy came out to roughly -$100 per month (for the first couple of years). 

I did the same with the broker. The broker is suggesting that they're sending properties based on the 1% rule -- $140k property would rent for $1400. Instead I used $150k. To make this more accurate I should probably increase the maintenance costs compared to the turnkey company because this would not be completely remodeled. 

The reason I am analyzing with slightly different types of properties for those 2 scenarios is so that my initial investment is similar. 

It's a little different with BRRR because it does require more cash upfront, but then in theory part of it would come back so it balances things out. For BRRR I'm padding also -- in my analysis I'm using 100k purchase price + 35k in remodel to get us to ARV of 150k. The broker is proposing a property at 75k with 35k remodel for 150k ARV. 

The idea behind this analysis is that I would follow these strategies for a long time, and scale.. but as far as I can tell, I used realistic numbers as far as the income goes... unless if I'm wrong and that could change everything. That's what I'm trying to figure out.   

Quote from @Drew Sygit:

Quote from @Rafael Ro:

Quote from @Drew Sygit:

Quote from @Rafael Ro:

There is actually a big difference.

The reason is that you cut out the middleman and their margin. So if you buy a turnkey property (they buy, fix up, rent and sell) for 150k you're looking at 1200/month rent, versus 150k directly through a broker can get you 1400/month. 

 There will be no difference in the rent - unless the TurnKey provider threw in a desparate/bad tenant to get the higher rental amount.

With a TurnKey provider, you'll pay more for a property that they have rehabbed, versus hiring your own crews to rehab something.

Yes correct. So in the analysis I put the purchase price the same for 1st and 2nd strategy but the ratio of purchase price to rent is different since the turnkey is rehabbed and tenanted, and so you're paying for their premium. That's why the rent is different.

In other words, if the turnkey provider is selling the rehabbed property for 150k, they're giving it to you tenanted at $1200/month (they price them based on rent), but if you buy a property for 150k direct then you can most likely rent it for $1400/month (since you would likely get a more attractive property [bigger, slightly better location, etc] since there is no middle man). Of course that's assuming you do your research and get a good deal, in all cases. 

With that in mind, are you seeing any assumptions that look off to you, with any of those strategies?

 Market rent is market rent!

So, how is a TurnKey provider going to get higher rent than the market?

What's really wrong with your #1 & #2 comparisons is you assume you'll pay the same price for a property via broker or TurnKey.
- How will the Turnkey provider profit from doing this?
Reality is TurnKey providers price at the top of the market - often even higher. They try to get investors to focus on the ROI numbers they promote, not comparable sales.

I am not assuming I would pay the same price for the same property. That's what I explained in my previous reply. The properties are not the same and that's why the rent is different. 

I'll give you a specific example of 2 properties to illustrate. 

Property #1 is a turnkey, fully rehabbed 2/1 1000sq ft house in a location that will rent for $1200. The turnkey company will sell this for 150k.

Property #2 is a 3/1 1200sq ft house in the same location that I would buy through a broker. I would buy it also for roughly the same price (it will be in good condition but may require some small fixes for a tenant), but it's bigger and has an extra bedroom so it will rent for $1400.

I could have also ran this model by assuming that I would get the same type of property as the turnkey, but for $125k and would rent for $1200 as the turnkey would. Same idea. 

With that in mind, do you feel that the rest of the numbers make sense?

Quote from @Obed Calixte:

Have you run numbers on actual properties that align to each of the strategies that you've mentioned? If so, if you share those figures it will help the forum give you more insightful feedback.

Also Why are you analyzing to year 15 specifically?

I did. So the turnkey company has a fairly "fixed" formula for pricing. Using that formula (with them, specifically) would get us this kind of numbers. 

The broker shares various deals, but one type of deal is a house that's ready to rent and needs a little bit of work to prep for a new tenant - that's the type I'm focusing on. 

In all 3 strategies it's typically a 3/1 property around 1100sq ft. There are a handful of similar zip codes, specific all in Memphis. 

So these are all based on "this type of property", using various strategies to acquire it - fully remodeled/tenanted/turnkey, decent condition/vacant/direct through broker, fixer/vacant/direct through broker. 

The difference would be in the purchase price, time to get a tenant in and start collecting rent, and maintenance (which would likely be less on the remodeled properties, at least at the beginning). 

The reason I used 15 years is that I wanted to see how it plays out on a "longer" term horizon.. I also personally feel like I may take a step back from my main biz in about 15yrs.. But if all goes as expected then there would be no reason to stop doing this. 

Quote from @Drew Sygit:

Quote from @Rafael Ro:

There is actually a big difference.

The reason is that you cut out the middleman and their margin. So if you buy a turnkey property (they buy, fix up, rent and sell) for 150k you're looking at 1200/month rent, versus 150k directly through a broker can get you 1400/month. 

 There will be no difference in the rent - unless the TurnKey provider threw in a desparate/bad tenant to get the higher rental amount.

With a TurnKey provider, you'll pay more for a property that they have rehabbed, versus hiring your own crews to rehab something.

Yes correct. So in the analysis I put the purchase price the same for 1st and 2nd strategy but the ratio of purchase price to rent is different since the turnkey is rehabbed and tenanted, and so you're paying for their premium. That's why the rent is different.

In other words, if the turnkey provider is selling the rehabbed property for 150k, they're giving it to you tenanted at $1200/month (they price them based on rent), but if you buy a property for 150k direct then you can most likely rent it for $1400/month (since you would likely get a more attractive property [bigger, slightly better location, etc] since there is no middle man). Of course that's assuming you do your research and get a good deal, in all cases. 

With that in mind, are you seeing any assumptions that look off to you, with any of those strategies?

Quote from @Drew Sygit:

@Rafael Ro Why are your numbers different for options #1 and #2?

The only real difference is when you start collecting rent after purchase.

How have you weighed this against the probability of tenant nonperformance?

REALITY: not much of a difference.

 Just wanted to follow up on this one to make sure I understand. Are you implying that a "turnkey company that also PMs" would be better to manage tenants then a regular PM company? And thus we would see less tenant nonperformance with a turnkey company? 

In both scenarios a PM company would be managing the properties. 

The difference is that in the one case you're buying it turnkey and in the other case you're buying it direct. 

Is there something else that I'm missing?

Quote from @Joe Villeneuve:

Quote from @Drew Sygit:

@Rafael Ro Why are your numbers different for options #1 and #2?

The only real difference is when you start collecting rent after purchase.

How have you weighed this against the probability of tenant nonperformance?

REALITY: not much of a difference.

It's because he doesn't understand the numbers, which is why he's trying to form a "one size fits all" set of percentages.  He ends up with a "one size fits all" set of percentages, after he goes through, and bypasses the actual numbers.  This is just another example of trying to take a shortcut...something we find way too often in this day of the need for instant gratification.

Joe, the reason I created this breakdown was to evaluate these different strategies long term. It's my way of processing. The reason I posted it here was specifically to get feedback on the assumptions I made. 

If you say the assumptions are good - great. And if you say that they're incorrect - that's good too. My goal here is to learn and to understand. 

I did try to create a "one size fits all" type of setup in order to compare the strategies. Obviously not all properties are going to be $150k -- some may be 125k and others may be 175k.. but they would average around there. And the rates will of course fluctuate over the years.. but if they go up or down then that would apply to all. Same with the other numbers. They would all be the same "type" of property. 

Some of these numbers are not going to be completely accurate - I understand. But if my "assumptions" make sense, then they should get fairly close, on average. 

This is not meant to be for 1 property - it's means to apply to scale. 

If not this, then what's a better way to accurately model a long term projection? 

I've been stashing up cash for a little while in a HYSA and I really want to make a move, but I want to do it gradually instead of going all in. So I'm trying to evaluate the best method to do this.. I feel like right now is one of the hardest times to find deals, but I still want to start asap and go slow and steady, with a long term plan. Thus the projections and the model. 

Another approach would be to just keep my eyes open for all sorts of deals of any type, and to try and go for it when a great one comes up.. I understand that this can make sense since every deal is different. But in this case I'm trying to zone in on a specific type of deal so that I can focus on that and try to specialize in it. 

You're one of the most experienced people on this forum, and maybe you've seen this one too many times... but if this is not the way then what is? Isn't focusing always better?

There is actually a big difference.

The reason is that you cut out the middleman and their margin. So if you buy a turnkey property (they buy, fix up, rent and sell) for 150k you're looking at 1200/month rent, versus 150k directly through a broker can get you 1400/month. 

Quote from @Andrew Kubik:

I think the strategy depends on what kind of time you have. If you're going to work a stressful w-2 job while investing go with number 1. If you're going to work in a low stress w2 job, go with 2. If you're looking to jump into real estate full time, go with number 3. 

Thank you Andrew. In theory that makes sense.. but how much work is there for me to do in number 3? 

In theory (and I understand that this may be wishful thinking), but if you find a trustworthy broker and contractor, then wouldn't they do most of the heavy lifting? This would be an out of state investment so I wouldn't have boots on the ground. 

If I were to pad the trustworthy broker's suggested ARV by 10%, and the trustworthy contractor's quote by 20%, would you say that I would likely be within realistic range, on average?

Quote from @Joe Villeneuve:

Quote from @Rafael Ro:

Quote from @Joe Villeneuve:

I got about 1/4 of the way down and realized you were just putting in guesses for numbers based on percentages of things with no identification of how you arrived at those numbers. You appeared to be using arbitrary percentages. How you came up with those percentages, you really didn't say. In other words the basis for any analysis you did here ultimately was just guessing. REI is nothing like that.

RE analysis is based on actual numbers using dollar signs, not percentages.  The specific market you find properties in defines those numbers, and they are NOT specific to a general size.  They are specific to a specific market, actually micro-market.  Properties don't define the market, the market defines the properties.  Properties a pieces of the market they are in.

The strategy you use should be based on the market.  Never decide on a strategy ahead of time.  Let the market decide what strategy works in that market.  This means you need to learn how to analyze markets.

Thank you Joe. The numbers are not really arbitrary, and they are based on a specific market - Memphis.

The reason I used percentages for most items was so that I would be able to do as close to an apples to apples calculation. For example, I used 5.9% of purchase price per year for mortgage, which looks random as a way to calculate a loan payment, but if you look at a 150k property with 25% down and a 6.85% interest rate, then your principal and interest would be $737 x 12 months = $8844, which is 5.9% of 150k. So it works out. 

I used arbitrary and small numbers for rent increases and appreciation because the same applies to each of those strategies so I didn't want it to affect things too much. 

And then I used maintenance, tenancy based on what I'm reading makes sense for long term, and a little bit of padding. 

That said, I can totally be off in any of those assumptions - that's what they ultimately are.. guesses.. but they are guesses based on reading a lot, researching, talking to people, and adding a padding that I thought would be "fair" for the items that are not actually factual (ie. insurance/loan/etc). 

This is the reason I made this post. I look at these numbers as somewhat pessimistic -- that's why I'm showing negative cashflow on the first strategy, which is obviously presented as a positive cashflow from several leading turnkey firms. Not saying that they're lying or anything. Just that this was my effort to get as close to realistic as I could. 

Please let me know what looks wrong - I would welcome that. 
  

If you know what the actual numbers are in dollars, then why are you using percentages at the end?  It makes no sense.  Just stick with the dollars.
Also, not all properties in a market are the same.  If you are using what you might think is one market, it may be more than one.  You may have overlapping markets too.
Just stop using percentages.  Work with dollars.  You can use defined percentages, like taxes, because they are a product of a specific percentage applied to property value.  You can use interest rate, because it is specific as defined by the lender, but that's about it.  Everything else should be in dollars, and those two percentages I mentioned above produce dollars,...as in mortgage payment and taxes.  If you calculated the mortgage payment already, then using a percentage in your analysis, you're going backwards.

That's fair. The reason behind the percentages was mainly in order to create a model that I could feed into ChatGPT, which helped me create these projections. 

It would be very difficult for me to keep track of dollar amounts but as %s I was able to have ChatGPT adjust those values as needed... particularly as it relates to items that were calculated based on rent.

I hear what you're saying though. My goal here is to get more feedback like this - especially as it relates to my assumptions. 

I also understand that everything ultimately depends on every individual situation. It's easy to create a model assuming that all is equal, but when done at scale I'm sure there will be winners and losers. So with this I'm just trying to create a decent average point of view really. 

Quote from @Joe Villeneuve:

I got about 1/4 of the way down and realized you were just putting in guesses for numbers based on percentages of things with no identification of how you arrived at those numbers. You appeared to be using arbitrary percentages. How you came up with those percentages, you really didn't say. In other words the basis for any analysis you did here ultimately was just guessing. REI is nothing like that.

RE analysis is based on actual numbers using dollar signs, not percentages.  The specific market you find properties in defines those numbers, and they are NOT specific to a general size.  They are specific to a specific market, actually micro-market.  Properties don't define the market, the market defines the properties.  Properties a pieces of the market they are in.

The strategy you use should be based on the market.  Never decide on a strategy ahead of time.  Let the market decide what strategy works in that market.  This means you need to learn how to analyze markets.

Thank you Joe. The numbers are not really arbitrary, and they are based on a specific market - Memphis.

The reason I used percentages for most items was so that I would be able to do as close to an apples to apples calculation. For example, I used 5.9% of purchase price per year for mortgage, which looks random as a way to calculate a loan payment, but if you look at a 150k property with 25% down and a 6.85% interest rate, then your principal and interest would be $737 x 12 months = $8844, which is 5.9% of 150k. So it works out. 

I used arbitrary and small numbers for rent increases and appreciation because the same applies to each of those strategies so I didn't want it to affect things too much. 

And then I used maintenance, tenancy based on what I'm reading makes sense for long term, and a little bit of padding. 

That said, I can totally be off in any of those assumptions - that's what they ultimately are.. guesses.. but they are guesses based on reading a lot, researching, talking to people, and adding a padding that I thought would be "fair" for the items that are not actually factual (ie. insurance/loan/etc). 

This is the reason I made this post. I look at these numbers as somewhat pessimistic -- that's why I'm showing negative cashflow on the first strategy, which is obviously presented as a positive cashflow from several leading turnkey firms. Not saying that they're lying or anything. Just that this was my effort to get as close to realistic as I could. 

Please let me know what looks wrong - I would welcome that.