Turnkey Rental Properties
Turnkey rental properties are good investments, especially if you are short on time. However, there are some pitfalls too. A turnkey rental property may come from a provider, the MLS or any other source. A turnkey property could be fully renovated, ready to rent or currently rented.
I’m here on the ground in the Midwest in glorious Dayton, Ohio. I’ve bought and sold turnkey rental properties, and seen what many people offer as a Turnkey rental. I’ve also bought “turnkey” rental properties in areas thousands of miles from where I lived.
Here is what I have seen and experienced, and how to avoid some of the big problems that come up.
First, you MUST have a good team where you are investing, even if it’s local. Your number one local person is your property manager. They are overseeing the long-term performance of your investment, and are the most important team member to get right. I’ve been ripped off by bad property managers, anything from non-performance, to them actually stealing the rents and security deposits.
Are they licensed in their profession (if required)? Ohio law requires Property Managers be a licensed real estate agent. Are they? I get a surprising number of calls from people with bad managers who aren’t even licensed. Interview several while you visit the area. Personalities differ. Prices vary. Most PMs in our area charge about 10% of collected rent. That gives them a good incentive to keep your property maintained and rented. Your Property Manager also becomes a source for rent amounts, values, and other team members.
Taking even basic steps will save a lot of grief. Check the BBB and Angie’s list. If someone has a ‘D’ rating do you really want to hire them?
Contractors seem to have a whole different ethic when someone is not overseeing them. A good local property manager will keep this in check. I bought a “finished” house from a lady in Florida, who had fantastic pictures showing it the house done. Unfortunately, the “contractors” only painted two walls, then set a small piece of new carpet in the corner for the photo. Several of the bath and kitchen pictures were from a different house. They set some fixtures in place, but didn’t install them. The owner paid them based on the pictures they sent, but nobody local walked through the property. She was not happy with the pictures I sent her. Of course, once the truth was known, nobody could find the “contractor”.
Look for recommendations from other investors and landlords.
Second, you MUST visit where you are investing. There is nothing like getting you boots on the ground and walking the neighborhood. I am continually amazed by the number of people who will spend $30,000, $50,000, or more, on a rental house, but won’t spend $500 on a plane ticket.
Third, pay for a property inspection ($500-$600). You’re about to spend thousands of dollars on a property. Get an independent assessment of the property condition. I tell all my potential buyers to do this too. It’s good business for me and protects them. The last property I sold, as a result of the inspection, I paid $906 to have a roof repair done. I didn’t know about it before the inspection, and I do not begrudge it to the buyer. I told him the roof was already repaired. (It was, but not correctly). If you’re working with a formal Turnkey company, did they do all the repairs correctly and fully? An independent property inspection will tell you.
Fourth, run all the numbers. I see a lot of properties advertised with a claimed ROI, but they fail to account for ALL the expenses: Taxes, Insurance, Management, Maintenance and Repairs, Reserves, Vacancy. Then, independently verify if the numbers given are close to being correct. A small overstatement in the projected rent, and a couple missing or understated expenses can make what looked like a great deal into a real alligator that you’re endlessly feeding.
Determining market value is frequently a challenge, especially in hard hit areas. An appraisal will give you a formal written opinion. An agent can give you their opinion. Using third-party sources like Zillow, gives you data, but will mislead you. You can see the price, but what was the condition? Were the nearby sales all finished properties? Or do they need substantial work? Are these even comps at all? Is it the same school district? All are factors in determining property value.
What do you do in an area where people are buying cheap properties, putting substantial dollars into renovations, but not selling them? All the sales are low, but the values are obviously more. Ultimately, a property is worth what a willing buyer and seller agree it is worth.
In summary, if you are considering a turnkey rental or ANY rental property you need to:
- Visit the location and property
- Check the numbers
- Interview and build a good local team
- Stay involved
- Trust, but verify
Dayton Capital Partners, LLC