This article was originally posted at hipsterinvestments.com in October 2012. See the original post here. Real estate investment markets, including for turnkeys, have changed, but you can check out our Latest Good Deal posts for where and what to buy today!
So most of my investing lately has been in turkey rental properties. Some people discourage turnkeys because the purchase prices are seemingly higher than what they think you should be able to get a good investment property for, or because the calculated returns aren’t “as high” as if you buy a normal property and rehab it yourself.
Well, to briefly counter both of those arguments- if you have the desire to rehab a property yourself, find tenants, and do everything else manually, have at it. But remember your time costs you money.
Why Turnkey Rental Properties?
I do turnkeys because I want to be as hands-off as possible. It’s worth the extra money to me to not only have everything done already for me, but also to know that I have a big team behind my purchase and supporters of it, versus doing a property all by myself with little to no support.
Then, for returns, most often the property you buy with those high returns will end up with less than stellar tenants who will end up costing you a ton in vacancy, repairs, and possibly evictions. Maybe not, maybe you bought a gem, but just remember the returns you calculate before you buy rarely account for true vacancy and repair expenses. *If you buy that $20,000 property, how good do you think your tenants are going to be?*
I prefer the $90-100k houses right now. The cap rates are showing around 8-10% initially, versus 11-14% on the cheaper properties, but believe me…the long term returns balance themselves out. I have properties in both ranges. There are differences. Oh, and none of those numbers quantify my sanity levels either. That’s important.
Where To Buy Turnkeys: Assessing a Market
Now let’s go over market analysis. When you are looking to invest in a particular market, you want a market that is advantageous to an investor. The advantages may come in various forms, but you want a good combination of these advantages. I’m going to give two examples of qualities about a market that make it an investor-advantaged market.
Tenant-Friendly Vs. Landlord-Friendly
Does the state favor the tenant or the landlord? You want to invest in a state that is considered “landlord-friendly.” What does that mean? It means the owner of the property can easily get rid of a bad tenant.
A lot of states are considered “tenant-friendly”, meaning tenants have a lot of rights and the state has a lot of patience for them being delayed on payments (if they are even making them at all). In these states, it takes a horrible amount of time to get a bad tenant out. This is not good for an investor.
Detroit, for example, one of the biggest investment flops in recent history, can take months to get rid of a bad tenant. I know one guy with a house who had a tenant stop paying, and it took 7 months to get that tenant out. Guess what happens during that 7 months? You aren’t making any money. And not only are you not making any money because the tenant isn’t paying rent, the tenant has a heck of a lot of time to do even more damage to the property while they wait to get kicked out. This investor, after that 7 months of no payments, ended up spending $7,000 to fix damages.
Best example of what a good price-to-rent ratio is *not*- Los Angeles. The last townhouse I lived in there cost me $2,250 in rent each month. The owner of the property bought the townhouse for $460,000 (thanks, Zillow). My rent payment to her each month barely covered her mortgage. She had little to no cash flow on a normal month, but what about the months where there were repairs? She was negative cash flow.
Price-to-rent ratio means you want to be able to get enough rent for a property to cover all of your expenses, and then some. One of the best price-to-rent markets right now is Atlanta. I grew up in Atlanta and originally bought myself a house for $165,000. I can only get right at $1,000 in rent per month for that house. That covers my mortgage, but not by much.
Well I bought that property a few years ago (and when I was still real estate dumb). The first real investment property I bought there, a year ago, I bought for $55,000 (turnkey) and I get $975/month in rent. Holy sh#&! So after all my expenses, including the mortgage and estimates for vacancy and repairs, I pull in about $400-500/month. Now do you see the difference? That’s price-to-rent ratio. It better be good.
So what is the general list of things to look for in a market?
- Price-to-rent ratio
- Landlord-friendly state
- A trend that strongly suggests population growth
- A variety of industries so that no one industry tank could hurt the market as a whole.
That is not a complete list, but it covers the big things.
Furthermore, realize the difference between a macro-market and a micro-market. The macro-market is the overall city you choose. The micro-market is where in that city you choose to invest. Those small areas make a big difference too. My suggestion? Neighborhoods and areas that are predominantly home owners rather than renters. Better exit strategies available, more likely for appreciation, and better tenant quality.
Want to start covering your expenses with turnkey rental properties?
Hipster Investments is here to help walk you step-by-step through buying hands-off rental properties that will increase your cash flow every month.