A New Kind of Cash-Machine
Traditional Buy-and-Hold. The traditional buy-and-hold approach, although potentially quite profitable, is often paved with landmines, which is why many investment property owners procure the services of a property management company. They pay a set-up and monthly fee to delegate the task of managing tenant acquisition, maintenance, and accounting for the property. While this is a convenient hands-off approach once you have the rental, when purchasing a property, would-be landlords need to have a good knowledge of the market and be aware of the cost of repairs needed in order to purchase it at the right price. They should also do research regarding the costs related to taxes, insurance, and estimate the annual repairs. Your real estate agent and contractor is there to help with this process.
All of this may seem a very hard task for investors, many of whom are needing to look outside their current city to stay in the real estate investment game. No matter what type of investor you presently are, you do not have to be a high-level investor to participate in the expected rental housing increase. There is a real estate boom taking place in the Washington, DC area; however, for a few reasons, it is leaving some investors cash-strapped. First, the costs and competition for young investors is quite high. Young investors are competing with the cash-ready, seasoned investors who seem to always know where the next below market property is coming. Seasoned investors, primarily those who have made the fix-and-flip model their business, may be feeling burdened by the idea of becoming a full-time landlord in city not known for its landlord-friendly tenant laws. As they entertain reorganizing their portfolio to accommodate monthly income, under the buy-and-hold model, to ensure steady cash-flow for their retirement years, these investors may be looking to other regions. Luckily other solutions are available when you are looking to expand or reorganize your real estate investment portfolio, one of those coming down the pike is turn-key rentals.
Combining Forces.Turn-key rental companies make the investment process much easier. They offer properties fully-repaired, ready-to-rent, and already managed by professional property managers. These companies combine the jobs of investment consultant, real estate agent, contractor, and property manager. Because the work required from you is minimal, and can be done remotely, turn-key rentals are a great and simple long-distance investment—no matter your experience level.
Here is how it works.You live in Northern VA. You find, through a Florida turn-key company, a remodeled property that sells for 90,000. (They did the remodeling for you). You have the option to purchase it with cash or with financing. Let’s analyze the two different scenarios:
You pay $18,000 (20%) as a down payment, and including closing costs, your total initial investment amounts to $23,400. Your property rents for $1,050, which means a gross yearly income of $12,600. Considering financing costs ($4,905), property taxes ($1,800), insurance ($500), management fee ($1,188), your net gross income is $4,207, and your cash-on-cash return (net income/cash invested) is 18%.
Purchase With Financing
Your purchase price is $90,000 and including $900 of closing costs, your total investment is $90,900. Considering a gross yearly income of $12,600 minus the property taxes, insurance and management fees, your net gross income will be $9,112 , and your cash on cash return 10%.
Imagine being able to build a portfolio of 10 or more properties through time! Well, you get the picture…
Even if, both, purchasing all-cash or with financing look profitable, one important parameter to consider if you are an investor, is cash-on-cash return. That basically means how quickly the cash invested will come back to you, so you will be able to re-invest it. The higher is your cash-on-cash return, the higher the velocity of your money and the number of deals you can close in a shorter period of time.
Considersations. As you have seen turn-key rentals can be very profitable, there are some pitfalls you must be aware of.
First and foremost, you need to be careful and conservative when you estimate your returns. Vacancies and turnover costs, for example, can slim down your profits pretty quickly. Also, even though the house is in a good shape and professionally managed, sometimes unexpected repairs need to be done. Budget for that, too.
According to Bryan Topscher, from Top Sure Investments, to be successful with turn-key rentals you should carefully select a well-established, reputable company to work with. This is what a good turn-key company should do for you:
- Find the property
- Fix it up
- Place renter (often before purchase)
- Handle turnover and evictions (if needed)
- Handle repairs
- Keep the property compliant with all required agencies and regulation
- Offer a one-year rent guaranty
And these are some of Bryan’s professional tips:
- The property should be purchased with financing – avoid companies that do only cash transactions (lower returns)
- All-cash return on investment should be above 10%
- Financed-return on investment should be above 15%
- Ask for references
- Make sure you can purchase through IRA (some have IRA non-recourse loans)
- Avoid states with income taxes (if you are looking out of state)
- Assume that the property will never go up in value (you are looking for cash-flow, not appreciation)
- Avoid condos because condo fees can go up without notice and eat your cash-flow
- Don’t be at the top of the market with your rent to reduce vacancy (vacancy will kill your returns)
If you want to know more about turn-key rentals, hear live examples and learn other hot investment strategies, please contact Jennifer Topscher or Sanam Vivansia, or stop by the monthly Capitol Investor meeting.
If you have any questions, personal experiences with turn-key rentals, or you simply like our blog, go ahead and share it with us! Seasoned investors are expanding their portfolios, readying themselves for their retirement. Younger investors, those under 40, are taking creative measures to build their portfolio and bring in supplemental monthly income. Turn-key rentals are a great opportunity to get ahead of the next boom in the rental real estate market. We hope you’ll join us in learning more!