Turn-key rental properties can be a great way for out-of-state investors to invest in real estate. The biggest challenge with buying turn-key rental properties is figuring out if the turn-key company is giving an investor accurate information. The turn-key company is trying to make money on each deal, but how do you know if they are going too far and inflating prices or rent? There are steps an investor can take to double-check the turn-key companies figures.
To learn more about turn-key rental properties check out this article here.
Why do you need to do due diligence on a turn-key rental property?
Turn-key rental properties are typically houses that have been purchased by a turn-key company, renovated, rented and have a property manager put in place. Turn-key properties are meant to give an out-of-state investor a way to invest in rental properties that cash flow with little work on their end. An investor still has to perform due diligence when buying a turn-key to ensure the properties are as advertised. The turn-key companies know their clients are out-of-state and they may try to fudge their numbers a bit to make more money on a deal. What can an investor do to double-check the turn-key companies numbers?
How can an out-of-state investor determine the value on a home
I wrote an article here about how to determine value. Even if a property cash flows great, an investor still does not want to pay much more than market value for a home. It is not easy to determine market value from a long distance, but it is possible. The best way to find out what a home is worth is to get an opinion from a local real estate agent. You can also use websites like Zillow or Trulia, but I would not count on them to be very accurate.
How can you find a real estate agent to provide a price opinion?
I wrote an article about how to find a great agent here, but many agents will be wary of providing values to an out-of-state investor. My advice is to be perfectly honest with the agent and tell them you are trying to verify if a price on a home is market value. Tell them your situation and see what they say. You should be able to find an agent or two who will give you ballpark values. You may even find an agent who knows of more turn-key properties in the area.
If you want a detailed value you can even order a BPO (broker price opinion) from a real estate agent. Most REO agents perform BPOs for banks on distressed properties. For $75 to $100 you should be able to find an agent who can complete a BPO report. Try looking on usreop.com, nrba.com or reonetwork.com for experienced REO agents. The agent should have their own BPO form they can use that provides three sales, three active comparables and they should know exactly what a BPO is. If not, find another agent.
How can an out-of-state investor determine fair market rents?
Not only does an investor need to know that they aren’t over paying for a turn-key property, they need to know that the rents are accurate. It is possible a property manager or turn-key company rented a home for more than market rents by charging a premium to an unqualified tenant. You don’t want to buy a turn-key, have the tenant stop paying and then find out the home was rented for more than it should have been.
The best way to determine rents is to call a few property managers in the area. Tell them you are an investor, are buying some homes and need a property manager. This serves a few purposes; it gives you an idea of market rents, the property manager can let you know if a property will be difficult to rent, and you can interview property management companies in case you need a new one.
How to determine if your property management company is good on a turn-key property
The most important piece of a long-distance rental property is the property manager. A bad property manager can cause thousands of dollars in losses through lost rent or a damaged property. This article on how to find a great property manager can help you determine if the property manager the turn-key uses or referred you to is any good. Make sure you ask the property management company what kind of screening process they use to check tenants; background checks, credit checks, references, income and job verification. It is best to let the company tell you what they do and not suggest these screening processes to them.
In some cases it may be difficult to contact the property management companies. A lot of turn-key companies sell hundreds of properties a year and the property managers do not have time to talk to hundreds or even thousands of prospective buyers.
What can you do if the rents, values or property management is off on a turn-key?
The first thing you want to do is make sure you discover any issues before you buy a turn-key property! It will be difficult to get any recourse after the fact, although some turn-keys offer rent guarantees and buy back programs.
If you discover a problem before you buy a property, talk to the turn-key. Tell them what the issues are and see what they offer. The more facts and information you can back up your numbers with the better. You may be able to negotiate a better price or have them help you find a new property manager.
This is a great time to see how customer service oriented the turn-key company is as well. Will they work with you and try to come up with a solution or become defensive? If they won’t try to help at all, then you have a great idea of how good they will be to work with after you buy a property and there is a problem.
Buying a turn-key property is not as easy as finding a turn-key company and giving them money. You need to double-check their figures as well as the people who work with them. For a free, customized report on turn-key rental properties, please fill out the form below.