0:10 What are turnkey rental properties?
2:03 How to find turnkey rental properties for sale
02:54 Cash On Cash Return
05:15 Actual turnkey rental property deal review
07:26 Rental property management
09:02 Best markets for turnkey rental properties
12:31 Rental property loans
14:22 Rental property inspection
00:10 Hello and welcome to the OfferMarket Podcast. I'm your host, Daniel Sperling Horowitz and today we're going to be talking about turnkey rental properties. So what are turnkey rental properties? It's actually really interesting, if you're a rental property investor. You can buy properties that have tenants in place already that are cash flowing with minimal to no deferred maintenance in terms of things that need to be addressed in the near term to maintain the property. And this makes a great investment. It's predictable. It is uncorrelated to, let's say, other assets like equities on the stock market.
00:55 Before we get into everything that we know, essentially a brain drain on turnkey rental properties. I just want to go over the agenda for today. We're going to be talking about how to buy turnkey rental properties and finding deal flow for turnkey rental properties. We're going to be talking about deal evaluation, cash on cash return, free cash flow, net yield. We'll be talking about an example turnkey rental investment that I made earlier this year. What I learned from that experience, we'll be covering the best markets for turnkey rental properties. So I think there's an important answer to that question, if you're looking for the best markets to invest in turnkey rental properties. We'll talk through property management, which is extremely critical, especially if you're an out-of-state investor. We'll cover financing turnkey rental property investments and that's it for the episode.
02:03 So let's jump into how to buy turnkey rental properties. How to find turnkey rental properties for sale. Now you can be a member of a Facebook group or a series of Facebook groups. You can subscribe to wholesaler buyer's lists -- in many cases, there are properties that are in good, solid condition that have tenants already in place those tenants are performing. I would consider that a turnkey rental property. If you want a more organized way to find turnkey rental properties, you can subscribe to Deal Flow on Offer Market, our investment property marketplace. We have a good amount of turnkey rental property inventory currently, and I'll provide a link to that in the details section.
02:54 Now, how do you evaluate turnkey rental properties?
02:59 And actually one thing I forgot to mention in terms of how to find these deals. There are also regional turnkey rental property providers that you can network with and access their deal flow as well. And I recommend doing that. How do you evaluate turnkey rental properties? It's no different than investing in any other buy and hold rental property. In my opinion, cash on cash return is the most important thing. So how much free cash flow are you generating? Net of all of your expenses, including depreciation. You name the expense, property management fees, vacancy, maintenance, taxes, insurance, your free cash flow at the end of the day. What percent return is that on the amount of cash that you're laying out to purchase this property? Now, that number will vary based on whether you're buying the property unlevered without a loan just in cash, or if you're buying the property with a loan. So that free cash flow is really important. I think at the end of the day, turnkey rental properties are ideally situated to markets where there is good, strong free cash flow. The kicker, the icing on the cake would be the appreciation for the underlying asset in that market.
04:32 Net yield is something that I think about a lot as a way to compare turnkey rental properties or any rental property to other prospective investments. So your net income after all of your expenses over the current value of that property. Now how does that compare to bonds? How does that compare to dividend, paying stocks or ETFs? How does that compare to other potential real estate investments that you could be making? And that's a good way to standardize the attractiveness of an individual asset.
05:15 I really wanted to talk about turnkey rental properties next week is Thanksgiving. So there's a pun there, but it's something that I am really interested in. And earlier this year we purchased a turnkey rental property in East Stroudsburg, PA. And you might be asking why East Stroudsburg? It's because the numbers were really attractive. We heavily researched the market and found it to be really attractive, especially in this COVID work from home environment, being in the Poconos and only an hour and a half away from Manhattan. It also has a lot of economic development, especially with ecommerce fulfillment.
06:06 So we decided to pull the trigger after doing our due diligence and we bought a property for $105,000 in cash. All in it costs about $108,000 just under that. With closing costs and inspection. The property rents for $1,250 a month, the tenants were already in place. In fact, they renewed when we purchased the property. The numbers are very attractive, so our cash on cash return in the first year is on track to be over 10%, just about ten and a half percent the cap rate, which is an important metric as well, which is your net operating income over the purchase price of the property and any investments that you're making in the property. The cap rate is 11.21%, and our goal for this property is to keep it unlevered and just collect free cash flow. Month over month we're making about $980 net of our maintenance and other expenses.
07:26 Now, what we've learned from this investment and just something that we should share with you is the importance of finding a great property manager. I love property management. In my home market here in Baltimore, I manage all my properties. For investments that are out of state, if you are an out of state investor, get yourself a great property management company. I consider them an important part of your real estate investing team. They charge fees that are pretty straightforward. Typically, it's 5% to 10% of monthly rent. 8% seems to be like a sweet spot they charge for leasing the property, usually 1/2 month's rent. Sometimes it can be higher. And for renewing existing tenants, there could be a small fee there, and then there may be some additional related maintenance fees.
08:25 Try to find a property management company with good reviews, interview them, ask them the important questions around how they operate their business. We have some additional content on how to select a great property management firm. But very important part of this, you are entrusting a valuable asset that you own to a company to manage, and you want to make sure that you're protecting the value of that asset, and you're also optimizing the returns that you're generating from that asset.
09:02 The next thing that I'd like to talk about is what are the best markets for turnkey rental properties? Now I think the appropriate answer to that question is it depends. I think that it's important to have a long term horizon. If you're a buy and hold investor, you want to be comfortable with the market that you're investing in, you want to do your research and really understand, is there a strong degree of confidence that through thick and thin, it's worth owning and holding this investment? I think that another important component is the cash flow profile of that market, and that can change.
09:50 So you'll see markets where there's a rapid appreciation of home prices and rents are probably not going to keep up with that. That makes those markets less attractive to own a rental property, especially to invest in under those circumstances. So it's important to understand what type of cash flow you can expect moving forward. And the appreciation, again is really the cherry on top, in my opinion. Now, other people can certainly differ with that view, and everybody has their own investing style.
10:31 So with that said, there are five markets that I find attractive for turnkey rental properties, and I'm sure there are a host of others and feel free to drop a comment or reach out and bring them to our attention.
10:47 But these are the ones that come to mind. The Greater St. Louis market has a really attractive cash flow profile. We're seeing really compelling deals coming from St. Louis. In fact, there's also a good amount of inventory available on our marketplace at OfferMarket for turnkey rental properties in St. Louis. Memphis, Tennessee, is another attractive market. In our opinion, rents relative to purchase prices are producing good strong returns. Baltimore, Maryland, both Baltimore City and Baltimore County. That's our home market. We're very comfortable with this market. There's a lot of opportunity that we see here in Baltimore. Indianapolis is an example of a market that has gotten a little bit hot from our perspective. But I think there are still good deals to be had in Indy, and it's definitely an attractive long term market from everything that we've learned. Finally, Columbia, South Carolina one caveat is Richland County in Columbia, South Carolina, can be a bit expensive from a property tax perspective for investment properties, if you're not an owner occupied, if it's not an owner occupied residence, I think it's like 3.75%, which is cost prohibitive. So when you run your numbers, be very careful. Make sure you understand what the expenses are going to look like, and property taxes are extremely important in that regard.
12:31 Let's talk about financing turnkey rental properties. So if you have a W-2, meaning you're a salaried employee, you can purchase turnkey rental properties with a conventional mortgage for an investment property and you'll get attractive rates. Definitely a good way to finance turnkey rental properties if you weren't looking to just buy them outright in cash.
13:01 Another option, if you're using financing is no doc rental property loans from a private lender. So what does that mean? It means it's a loan that's provided based on your credit worthiness, your credit score, the assets that you own, the experience that you have as a rental property investor, but not on a W-2. You're not required to have a W-2. This is a very attractive avenue for many rental property investors, and it's really a careful evaluation of that specific deal. How much is it rent for? What are you purchasing it for? What's the cash, I should say, what does the free cash flow look like, the Debt Service Coverage Ratio ("DSCR") for these loans?
13:54 Speaking about rental property loans, quick shout out OfferMarket Capital is our private lending platform, and so our goal is to provide the most competitive and transparent rates and terms for rental property loans, DSCR loan. So be sure to get a quote if you're purchasing, if you're looking for a private lender and the most competitive rates.
14:22 Have we left anything out? Now, I know we've covered a decent amount of ground. I think that the biggest takeaway is turnkey rental properties can make for a great investment.
14:34 I think that it's important to really understand the quality of the property. That does bring that one very important missing piece to this episode. Make sure you have a thorough inspection performed. You don't want to purchase a property that is billed as a turnkey rental property, but it turns out the roof needs to be replaced and other major systems are close to reaching replacement age. Ideally, it's a property that has very new systems and is really going to be predictably generating cash flow over the next ten plus years without any substantial maintenance requirements. It's all about cash flow, and it's really important to make sure you're working with an Inspector who performs a thorough inspection on the property before you commit to purchasing it.
15:36 Now here's the outro. Happy Thanksgiving! Happy turnkey rental property investing research, let us know if you have any questions. Leave a comment. Subscribe to our channel, to our podcast. Check out OfferMarket.us -- you can subscribe to Deal Flow for free, access turnkey rental properties and be among the first to know about new turnkey rental properties as they're made available on the platform.
16:08 With that, thanks so much for listening and tuning in. We look forward to hanging out with you next time and stay tuned, we have some good content planned for the rest of the year. Thanks so much. Have a great day!
16:38 - DISCLAIMER: This episode of OfferMarket Podcast has been brought to you by OfferMarket, a leading investment property marketplace. If you like this episode, be sure to subscribe, visit OfferMarket.us, follow us on social media and spread the word. All investments involve risk of loss. Nothing contained in this podcast should be construed as investment advice.
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