5 Reasons Why a Turn-key Property Doesn't Always Cost You More.
There's a natural assumption that a turn-key investment property where everything has been done for you and is cash flowing from the start will cost more than if you buy a property that needs some work and have someone fix it up for you. But does it? Surprisingly not always, and sometimes a turn key can cost you less.
Here are 5 reasons why:
1. Turn-key companies have cost advanatges
Turn key companies acquire properties for much cheaper. They pay cash which allows them to buy at better discounts. Additionally, turn-key companies buy for sources not typically available to the average individual investor. The best deals are not found on the MLS. Turn-key companies often buy properties at auction before they become REO's, tax sales, through wholesalers and direct from distressed homeowners. This allows the turn-key company to acquire properties at much lower costs.
They also have lower construction costs. Turn-key companies get volume discounts on supplies and materials that an individual won't get. They save on paint, carpet, furnaces, AC's and roofing materials.
They also get better labor costs on construction because they work with the same contractors and crews. A large turn-key company may provide 100% of a construction crews work.
2. No mortgage payment, taxes, insurance and utilites durning renovation.
It will generally take 60 days or more from the time an individual closes on a property to the time that they have renovation complete and a tenant in place. Meanwhile they are paying a mortgage payment, property taxes, homeowners insurance and utilites on an empty property that is being renovated. This can amount to thousands of dollars with no rental income coming in.
3. No construction cost overruns or surprises
No construction project ever goes exactly as planned. It's rare that there is not some cost overrun or surprise that you didn't account for. There's always the leaky pipe behind the wall or the backed up sewer line you didn't expect.The lnoger the property has sat vacant, the more likely these problems are to occur. These can be costly repairs that can have a big impact on your bottom line.
4. No tenant placement fee
Turn-key properties already have a tenant in place. So you don't pay any lease up fee for the initial tenant. Most property managers charge one month of rent to place a tenant, which puts a big hit on your cash flow. It's equivalent to having a one month vacancy in your first year.
5. Lost revenue opportunity.
Not only do you lose rental income while you're rennovating and finding a tenant, which can cost you 2-4 months of rent to start with, but there is the lost rental income opportunity while you are trying to put a team together in a market and then making offer after offer on MLS listed properties and not getting anything accepted. This can easily be 6 months or more of lost rental income. The chart below shows the true costs of a typical Do-it-Yourself project vs. that of a turn-key property where you know your total acquistion costs upfront. In this example, the DIY project ends up not being any cheaper than the turn-key even before any of the unknown risks.
I should point out that this is only the case with turn-key companies that sell at market value. There are those that do put large mark-ups on their properties and therfore cost significantly more than DIY. Unfortunatley, some out of state buyers in high cost markets see a $75K property that's been rehabbed and assume that it must be a good deal because of the price. They don't realize that that $75K property might really only have a market value of $60K and they end up overpaying.
Here's how to know if your turn-key company is charging over market value:
1. Ask them how many of their investors finance their purchase
2. How many of their deals appraise for less than the contract price
3. Do they allow for an appraisal contingency in the purchase agreement that releases you if it doesn't appraise for the selling price.
4. Do they only sell to cash buyers?
Turn-key companies that only sell to cash buyers or don't allow appraisal contingencies know their properties are over priced and won't appraise. Work only with a turn-key company that has no problems working with financed buyers.
I'd love to hear your DIY experiences and if you saved money in the long run.
