When you think of the term “turn-key,” what does it mean to you as a property investor? No heavy lifting involved? No hands-on dealing with nasty tenants? No emergency calls in the middle of the night? High positive cash flow guaranteed? Think again. If you’ve been sucked into a seller’s touting of their property as “turn-key,” rest assured you need to take a buyer beware stance, and be very wary of any information provided by the seller.
Seller’s income statement
The first data to check out is the seller’s income statement. In an effort to show as high a positive cash flow as possible, you can expect the seller will try to exaggerate income if possible, and/or lessen his expenses. He may also “abbreviate” his actual expenses. Make sure you pore over the provided income statement as meticulously as possible. Any expenses missing? You can expect the major ones will be there – mortgage, taxes, insurance, energy costs (if landlord is responsible) as well as maintenance costs. But are all maintenance costs included? Landscaping? Plumbing repairs? Electrical repairs? Painting? The list can be extensive. Make sure it’s itemized. Then go about actually verifying each expense item with the seller. You must see the actual bills the seller incurred, then check that they correlate to his income statement figures.
In addition, the seller should be including a “vacancy” amount as an expense for when tenants leave. Vacancy rates tend to be in the 10 to 15 percent range of total rent roll. Make sure this expense has not been left off the income statement. Vacancy expense is one of those “hidden” charges many new property investors fail to include in their income statement checks. Tenants are always moving around. So as a landlord, you must plan on some amount of units being vacant for at least a month between the time a tenant leaves and you find a new tenant and update (eg., paint) the unit before the new one is installed.
Rental income verification
Likewise, you also need to ensure each tenant’s rental income can be checked. Do they each have a separate lease, or are any on month-to-month rentals? If the latter, you’ll need to see the seller’s actual deposits of his monthly tenant rent roll. If there are any vacancies, also make sure the seller isn’t inflating a projected rent for the unit(s). Once you’ve been able to verify all the seller’s figures, and agree with them, then you can proceed to the next step in acquisition of the property.
Managing the investment property
Many property investors who like the idea of a “hands-off” investment, and are looking for turn-key property, think that a seller’s managing agent has done a good job, and may continue to run things. But what about the managing agent’s costs for property management? Are they in line? Were they even included in the income statement expenses? And, most importantly, what if the managing agent was a brother-in-law of the seller, and not being paid? You’ll now need to hire a property management company, at an average of 10 to 15 percent of monthly rent roll, in order for you to remain “hands-off.” Keep in mind, “hands-off” doesn’t mean liability-free. One bad tenant chosen and installed by a poor property manager can do tremendous damage to your investment property. And you’ll be totally liable for all the costs related to fixing up and renovating a damaged unit. So your choice of property manager is a key decision…not to be taken lightly. Your choice will be all-important to the overall financial health of your investment property.
One more thing…
Remember too, if you’re considering investing in property outside the geographic area you live in, don’t. You can easily fall prey to scammers. Never purchase an investment property sight-unseen. You’d be simply asking for trouble. And in the same vein, never rely on the accuracy of information given you by sellers of sight-unseen property – whether it’s a foreign country investment, or one on the other side of the country. You certainly won’t want to have to travel to the property in the midst of an emergency. And most importantly, it would be too easy for a scammer to make up data that looks great – like fake appraisals, for example. It’s always best to stick to property in areas you know and live close to – this will ensure you retain an extra layer of security.
photos courtesy of wealthasia.net, longislandbankruptcycenter.com, trexglobal.com, carterrealtyagency.com, tenantscreeningblog.com, digonline.org