Buying rental properties in my area has gotten more difficult as market prices have increased. I have seen only a couple of listings in the last six months that meet my criteria for a rental property. With it becoming harder and harder to find great rental properties, I have started to consider buying an out-of-state, turn-key rental property. Not only do I think it may be a good investment to buy a long-distance rental, but I refer turn-key companies to the readers of this blog and I could give a first hand account of buying a turn-key property.
What exactly is a turn-key rental property?
People have different definitions of turn-key properties, but this is what I feel a turn-key rental is. A property that is repaired or in very good shape, rented on a long-term lease and managed by a reputable property management company. Turn-key rentals properties allow an investor to buy out-of-state property without having to find a Realtor, property manager, contractor or a great deal.
Even though turn-keys are rented, managed and repaired, investors still have to complete due diligence on turn-key companies. There is no guarantee the property manager, contractor or turn-key company is doing a great job.
Would a turn-key rental property produce the same returns as a local property?
A turn-key rental property may not produce the returns I am I used to, but that doesn’t mean it would not be a good investment. Turn-key properties provide good cash flow, even though you are not buying them below market value. I would prefer to buy properties below market value in my area, but if I can’t find any, it doesn’t do me much good to wait on the sidelines until the market changes.
Because it is tough to buy turn-key rentals below market value, my returns would not be as high as they are now. From what I have seen, turn-key properties range in price from $30,000 to $200,000. The lower priced homes tend to hit the two percent rule for rent and the higher priced properties are around the one percent rule. I usually see over 20 percent cash on cash returns on my rentals on top of the 20 percent or more equity I gain by purchasing cheap. The returns with turn-key rentals would be in the 10 to 15 percent range.
Is it wise to diversify your rental properties?
I wrote an article that talks about why I do not diversify my rental property purchases. My argument was that I get so much better returns by buying the same market, because I am a real estate agent and I can get great deals. But if I can’t find enough good deals in my market, that eliminates a big part of my argument against diversification. A property in another state would certainly diversify my investments. If two markets produce similar returns I definitely think it is wise to diversify your investments.
Why buy a turn-key rental instead of find my own out-of-state rental?
I would love to be able to find an awesome market with great rentals, that I could buy below market. The problem is it would take a lot of work to complete the process. I would want to research any area I bought in thoroughly, which I would do with a turn-key as well. If I didn’t buy a turn-key, I would also have to find a great real estate agent, property manager and contractor.
I would have to visit where I invested multiple times before I could buy anything. I would want to meet the people I was doing business with and see the neighborhoods where I was buying. The difference with a turn-key rental property, is I trust the companies I have been in contact with and I trust they are hiring the right people. They have been in business for years and have repeat customers, which is also a great sign.
When you are trying to find a real estate agent, contractor and property manager you do not know if they have the same mindset as an investor. The turn-key companies are catered just for investors.
When you buy a from a turn-key company you are paying a premium to get a houses that is rented and managed. The turn turn-key company wants to be compensated for finding a property manager, tenant, contractor and making it turn-key for the investor. The question is whether it is worth giving up equity by purchasing a turn-key rental at retail value (or slightly higher).
I do not have a lot of extra time with my flips, real estate team, the blog and three-year old twins.
Would I buy an out-of-state rental property without seeing it?
It is tough to give up control of anything. It took me a while to hire an assistant, because I was worried about someone making mistakes. It turns out my assistant completes tasks better than I do and it was one of the best decisions I ever made. Over the years I have learned I can’t do everything myself and the more help I have the more successful I am. Buying a rental property without seeing it would be giving up a lot of control!
I have bought houses without seeing the interior when I bought them at the trustee sale. I still saw the exterior and knew the market so it wasn’t quite the same situation.
The most similar thing I have done was buy the Lamborghini without seeing it. I did sit in a Lamborghini Diablo to make sure I fit, but I had never driven one before I bought my Diablo. The car was in Washington state and I am in Colorado. I did not have time to fly out and see the car and I ended up buying it without driving it or seeing it in person.
The reason I bought the Lamborghini sight unseen was I trusted the dealer. He had many Lamborghini’s, knew everything about cars and had a great reputation in the business. I was able to talk to other dealers, talk on Lamborghini forums and they all knew the dealer and said he was trustworthy.
There is one particular turn-key company I have met in person and I have a level of trust with them. Many other investors in the industry trust them and they have done a lot of deals. They sold about 600 turn-key properties last year and I know as a Realtor you can’t sell that many properties by screwing people over. This particular company has also helped me immensely with my business, my website and marketing. We have the same mindset, love goals and I feel comfortable they have worked hard to provide value for investors.
The fact that I trust this company is the reason I have seriously considered buying a turn-key property and it would provide great value to the blog.
What kind of returns would I get on a turn-key property?
One problem with buying out-of-state properties is I have 11 mortgages in my name. It would be difficult to finance properties, because my portfolio lender does not loan outside Colorado. Not only would I have to find a Realtor, property manager and contractor, I would have to find a new bank. But the company I would work with has turn-key properties as cheap as $30,000, which I could buy for cash.
From what I have seen the cheaper properties are renting for $700 to $800 a month, which is a pretty awesome ratio. If I use Invest Four More cash flow calculator I come up with about $369 in monthly cash flow. I see about $500 a month in cash flow on the rentals I buy locally with financing and about the same cash investment.
Paying cash for a rental property goes against another of my principles. The returns are higher when you get a loan, because you use less of your own money. However that is when you compare similar priced properties to each other. If I am spending the same amount of cash on a more expensive financed property as a cheaper cash property, then the advantages decrease. If I am not getting enough deals in my market to finance, then I am not realizing that advantage anyway. If there was a way to finance these properties I could have huge cash on cash returns!
Is it risky to buy a $30,000 property?
Many people do not invest in cheap properties, because they have lower quality tenants, more maintenance and are harder to rent. I agree with most of this in my market, but I think you have to look at each market you are in to see what price points bring the best returns.
I could have bought a number of $30,000 properties in my area a few years ago. I did not buy in that range, because I wanted long-term rentals and felt the middle range properties offered better long-term prospects.
I am not perfect and sometimes I wish I would have bought those $30,000 properties, because they are now worth about $100,000 or more! Hindsight is 20/20 and I still don’t try to predict appreciation. I am not saying $30,000 is the best price to buy at or every market will see those gains, but you can make money buying cheap houses. If they have great cash flow in an area with a solid economy then I am not too worried about buying one. This is something I will have to research much more before I buy a turn-key property.
How many turn-key properties do I want to buy?
I have not decided for sure to buy any turn-key rentals. I still have a lot of due diligence to perform and data to analyze.
There are a few markets this turn-key company operates in; Ohio, Florida, Pennsylvania and I believe Georgia. I want to get a few samples of properties they have for sale in those areas and then compare the returns with each markets economics.
If I buy a turn-key property, I will buy one property and analyze the investment for a while to see how it performs before buying anymore. In a perfect world I will see a lot more deals come up in my market and I won’t need to buy anymore turn-keys.
How will buying a turn-key property help Invest Four More?
I refer turn companies to readers of this blog. Many readers ask me what turn-key company I have used and how it went. I can’t answer that question, because I have never used a turn-key company before. I know the companies I refer out are are legitimate, have done hundreds of deals and what markets they are in, but I don’t have personal experience buying from them.
If I were to buy a turn-key property,it would give me much more knowledge on the process and perspective on the investment. I will not be shy on sharing the good, bad or ugly that happens if I buy a turn-key.
In the worst case scenario if buying a turn-key property turns into a huge disaster; at least I will be able to educate others about my experience. It will be very expensive education!
I am going to research buying a turn-key rental property in another state much more. I want to analyze the returns, local markets and if it makes sense to give up higher returns in favor of less work and diversification. If the market I buy in has a stable economy and good rental rates, I think it would be hard to lose money in the deal as long as I complete due diligence on the property.
How can you get more detailed information on specific turn-key properties?
If you would like a custom report on turn-key properties that fit your needs, please fill out the form below. Your contact information will not be given to anyone, except a turn-key rental property company.