Friday, August 21, 2015

Ask These 6 Questions When Buying An Out of State Turnkey Rental

Welcome back!  Today's financial literacy post is based on my experience as an out-of-state landlord with three rental properties in and around the Memphis, TN area.  I bought my first rental property in 2011, my second in 2013, and my third in 2014.  Investing in turnkey rental properties outside of your local area is cash intensive.  You'll need 20% down for a 30-year mortgage.  However, if you invest in a real estate market that has property values more affordable than your own, the reward is a nice monthly coupon you can bank on.

In my case, all three of my rental units cash-flow each month.  But in the world of being a landlord there are always bumps along the road keeping you from a smooth ride to the bank, rents in hand, that begin with a phone call from your property manager.  Below are questions you should ask of turnkey operations (investor relations) you are considering buying from.  Lowering the odds of your unit needing repair or maintenance begins before you sign a contract!

1.  Do you provide a home warranty?  Most turnkey outfits guarantee their rehab work.  It would be rare if they did not.  However, you still need to get the details.  How long is the warranty for?  What does it cover?

2.  Do you offer a rent warranty?  Most turnkey companies will sell you an out of state rental with a tenant in place from the start.  Ask how many months the tenant has in the home before the lease is up!  Also, ask if they provide a rent warranty in the event the tenant breaks the lease.  A tenant has broken their lease on me twice now since 2011.  The first time did not hurt because I still had a few months left in the one-year rent warranty the company I worked with offered.

3.  Are the air conditioning units outside of the home caged up?  Think.  What happens when a home is vacant for some time?  Thieves find out and call their buddies.  I've had a compressor stolen on one of my homes.  It cost me over $2K to get a new one that met the new standards.  The cage I bought for it after the fact was $400.  While having your air conditioning caged up won't guarantee they won't get stolen, it at least makes thieves consider finding an easier score.  From now one, I'm not only asking this question, but I'm also going to ask it be a contingency before close of escrow.  If they say no, then no deal!

4.  Are there trees near the home?  If so, how far and are any in danger of hitting the home should they topple?  I traveled from CA to TN to check out the first rental property I bought.  For the other two, I simply relied on pictures of the home.  Mistake.  This month I got a call from the property management company I have overseeing all three of my units.  The most recent rental unit I purchased has a damaged tree threatening to topple.  The Memphis area had some severe storms this summer.  The first bid from a tree removal business came in at $4000!  The third bid came in at $2,200.  It includes grinding down the stump.  So once again (this is the second time), I have to stroke the payment on all three mortgages so that my rents cover the cost of tree removal.

This is the darn tree they had to remove on my property!

5.  Do you have a property management company you recommend?  This one is huge!  Most turnkey operations either partner with a reputable property management company or they have their own as a division of their company.  In either case, you'll want to ask the management company about employee turnover, i.e., have they had to hire client service managers often, how many properties are assigned to each client service manager, and how do they keep track of previous conversations with clients.  There is nothing more frustrating than having to talk to a different person on the phone more than twice a year.  On one occasion, I had to request I be assigned a different client manager.  Ten percent is a considerable amount of profit to give up on rental income each month.  The service you get isn't always worth it, unfortunately.

6.  Do you do bi-annual inspections?  Some property management companies will offer this service.  They will send you pictures of the home after their inspection and do a summary finding report for you.  I have this service.  The service costs money of course!  It is a trade-off of sorts because you can rest assured knowing the tenant in place is taking care of the home, and being held to the lease's standard.  An inspection can also find things early enough to keep them from turning into major problems for the tenant and for you.

Most turnkey companies do a great job of rehabbing a home.  They know this is a potential buyer's number one concern...the condition of the home, that is.  For the rookie investor, making a cash cow out of your rental unit is not only about fulfilling your cash on cash (COC) return expectations.  It's also about getting an asset with an imaginary force field around the property that is being managed by competent people.  Good luck and feel free to shoot me an email, or comment below, if you have any questions about this post or investing in out of state turnkey rentals.

Thanks for reading!  See you next time.                 

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