My turnkey property

Happy #WellTailoredWednesday! This week will mark the 3-year anniversary since I purchased my first property, a turnkey single-family home, in Kansas City, Missouri. Listen to this podcast episode I was featured on to learn more about how I found the property! After receiving a lot of questions from prospective investors on my purchase, I thought it would be helpful to show the lessons I learned after owning it for the past 3 years. Let’s dive in!

To quickly set a baseline, here are the purchase details of my turnkey property:

Purchase Price$80,000
Appraised Value$80,000
Monthly Rent$900
Gross Annual Rent$10,800
Interest Rate4.625%
Loan Term30 Years
Down Payment with Closing Costs~$20,000
Monthly Mortgage Payment~$478
Monthly Cash Flow After PITI, CapEx, Vacancy Allocation, etc.~$250
Projected Cash-on-Cash Return15%

1. Picked a Better Submarket

My thinking at the time: Since this would be my first property of hopefully many, I wouldn’t take much risk and speculate on appreciation. Instead, I would focus on a property that cash flows at least $200/month.

What I should have done instead: Looked at Neighborhood Scout and conducted further research on finding a better submarket to invest in.

Location, location, location. Everyone knows that that’s the golden rule of real estate. I believe I picked my market, Kansas City, for the right reasons, which include:

However, I neglected to pick an optimal part of town by choosing to invest in the Independence submarket. And while Independence is a safe area, it is more of a cash-flow submarket with little appreciation potential. It’s a “B” neighborhood, if you will. There are not a lot of employers moving in and around the areas, there are no major developments being built, the list goes on. If you ask many locals, they’ll recommend Grandview, Raytown, Northland, Blue Springs, and other areas of the city that are “B+” to “A-” type of neighborhoods that are seeing more appreciation growth.

2. Worked with a Local Lender

My thinking at the time: A national lender will have broader reach and economies of scale to give me a lower interest rate and lower closing costs.

What I should have done instead: Found a local lender who I can build a relationship with for the long-term.

My lender was Chemical Bank, which is a national lender that’s been around for a few years. They were easy to work with and quoted me a favorable rate at the time. However, if I knew I wanted to stay in this market for the long run (I do), I should have picked a local bank or credit union to build a relationship with. Fostering that relationship would have potentially led to favorable lending terms such as lower rates, closing costs, and the ability to get more creative financing down the line.

3. Negotiated the Purchase Price

My thinking at the time: Since I was buying the house as a turnkey product, I just assumed that the price of the property was final.

What I should have done instead: Figured out what purchase price would meet my returns criteria and then negotiated down to that price.

Believe it or not, I didn’t try to negotiate on this property! Biiiig rookie move! The appraised value from the previous December was $92,000. I was buying for $80,000. So I had $12,000 built in equity already, right? WRONG. The market changes quickly and the value of my property dipped down to $78,000 soon after I bought it. I should have negotiated with the provider to buy the property for 10% – 15% off appraised value.

There are iterations of the turnkey model, but here’s a general overview of how turnkey providers make their money. They:

  1. Buy the property off a wholesaler or bank when it’s in a terrible condition — Say ~$25,000 for my property (Not verified but let’s use this as an example)
  2. Rehab it to make it functional by renovating the interior and exterior: roofs, water heaters, electrical, kitchens, etc. — ~40,000
  3. Find a tenant, screen them (or so they say), and sign them to a lease.
  4. Add a property management (PM) company. Sometime the turnkey provider does the property management in-house (this was the case with me) and other times they outsource it to a 3rd-party firm.
  5. Decide what profit they want for the property, either as a percentage or dollar figure, and market the property at that price — $80,000 (a $15,000 profit)

So in theory, I could have negotiated all the way down to $65,000.01 in order for them to have still turned a profit. Thankfully, the property has appreciated a little bit since then, though not as much as I would have liked it to. This is a function of the submarket — see point #1 above.

Everything is negotiable.

Some smart investor out there.

BONUS! Bought a Duplex Instead of a Single Family Home (SFH)

My thinking at the time: It’s my first property. Buying a single family home today > Waiting for a “good” duplex deal to come across my plate tomorrow.

What I should have done instead: Start with a small duplex or triplex (contingent on price) and skipped over SFHs.

This is probably one of the more controversial debates on BiggerPockets: to begin investing in smaller properties or to go big. And it was a decision I thought about a lot during my analysis process. It was only when I went through a vacancy for 4 months in 2019 did I realize the value of having multiple units. Multiple units = multiple sources of rent inflow = ↓ the risk that a tenant will not be able to pay your mortgage.

For new investors, I recommend being patient and saving up a little more so that they can qualify for a property with more than one unit, such as a duplex or triplex.

Closing Thoughts

The goal of this post was to help aspiring real estate investors get out of the dreaded “analysis paralysis” phase and to take action. Turnkey properties, while not entirely risk-free, can be a great way for busy professionals to invest in real estate without having to build a team from scratch. I’ve learned a lot from my turnkey investment and it jump started my passion for real estate. While there are some things I would have redone, as outlined in this post, I have no regrets with moving forward with the purchase!

Thanks for reading and please let me know your thoughts in the Comments’ section below!