BUYING INVESTMENT PROPERTY TIPS
Below are the top 4 things you need know before buying investment properties or turnkey real estate. The NOI will always look juicy on paper, but it’s not what you gross but what you net.
Who is the property manager for the turnkey properties? If you live out of state or not in the area make sure the property manager is qualified and legit. If the property manager isn’t responsive to his tenants you will have high turnover which will create vacancies and your return on investment will be extremely lower than the rosy picture that was sold to you. Also, if the owner is managing his own properties he probably doesn’t have a management cost (8%-10%) on his net operating income to increase the value of his properties. If this is the case you would need to add in a property management fee to the expenses before making an offer on the properties. Furthermore, who is going to count the quarters out of your washing machines and deposit the full amount into your bank account. How are you going to track if he’s depositing the full amount and not “skimming.” Good property management is the number 1 thing you should vet before moving into a new market.
Don’t buy in a war zone or a bad neighborhood. The returns can look juicy on paper, but your actual return would probably be much less if the tenant doesn’t pay rent. Google the zip code and look at the demographics before purchasing. The C,D F neighborhoods always look good on paper, but won’t perform like the A, B neighborhoods. Call the local police department and get a crime heat map or speak with a local police officer on the phone. Believe me they will give you an unbiased opinion of the neighborhood. You can also look on street view and see if there is overgrown grass or boarded up homes with property preservation. Another favorite of mine is look on street view and see if you see an X spray painted on the house or building from the city to tear it down.
Don’t get too excited. The investors who are trying to sell you the “turnkey easy to manage real estate portfolio” might have thrown anybody in the rental units without a good screening. For example, you purchase a portfolio that looks good on paper and a few months later they start to have a hard time paying rent. Now you have lawyer costs for evictions, nobody paying rent, the property manager is charging you extra (junk) fees for the hassle, and they possibly spoil the other tenants. What’s your ROI at this point?
When buying a turnkey real estate porfilio make sure they provide you with all financial documents related to the portfolio.The goal for the seller is to pad the net operating income to increase the value of the portfolio. For example, if you purchase a real estate portfolio during the summer months the seller probably won’t disclose the snow plowing that needs to be done in the winter that will affect your net operating income. (Seasonal utilities) Ask for the trailing 12 months if possible. Sometimes the turnkey properties get rehabbed, rented and listed quickly, so it might not be available.
Key financials for turnkey properties
- What is the rent value ratio of the property? This means if the property is selling for 400,000 should be producing 1% of that value in gross rents which in this case would be $4000.00 a month. Another easy way to do this is to take the gross rents of the property and multiply by 100 to see if it calculates to the 1% rule.
- What are the gross rents that are collected on a monthly basis.
- Gross income. Is the property producing any other income other than the monthly rents? Does the building have laundry or other vending machines on the property. Can it be increased?
- Gross operating expenses. What are the previous owners paying and can they produce a trailing 12 meaning 12 months of expenses? What are the bills and repairs for the building(s) that you’re buying?
- Debt to income ratio. How much can you borrow against the gross rents.
TURNKEY PROPERTIES FAQ’s
Q:If these properties are so great why are you guys selling in the first place?
We buy underperforming properties and reposition in good neighborhoods then move onto our next project. We take the capital and move it in a 1031 exchange and purchase more real estate to produce good cash flowing properties.
Q:How do I know it’s a true cap rate?
Unlike other investors selling residential SFH or residential commercial portfolios we have copies of all costs related to our buildings. We also don’t sell on projected rents, but current actuals. We might suggest that you can move rents higher in the next 6-12 months when leases come due, but do not sell based on those numbers.
Q:How are the neighbourhoods and where are these buildings located?
These buildings sit in a very safe part Boardman and Campbell Ohio. We encourage you to call the local police department to get a crime heat map.You can also look the addresses up on Google Street view and look around the neighborhood and see for yourself.
Q:How are the tenants?
The tenants are working class that include school teachers, police officers and other reputable professions. We do not rent to section 8 tenants from the Youngstown Metropolitan Housing Authority or any other government subsidies.
Q:Do you have any section 8 tenants in your buildings?
No, we do not have any section 8 tenants. Our target audience are local professionals looking for an elevated lifestyle in the area.
Q:Is there any upside left on these buildings?
Yes, we currently pay the water, gas, electricity and also trash. You can establish Rubs or have the units individually metered. Also, you can also push the rents higher in some of the buildings including the laundry. Be careful pushing costs onto your tenants too quickly because it could backfire and cause vacancies. Depending on how many buildings you purchase do 1 or 2 buildings at a time. Also, be careful pushing rents too fast which could cause a higher vacancy rate. Keep a pulse on the local market and push towards the higher end.
Q:What did we do with these investment properties?
We created a niche group of rentals targeting working professionals in Boardman,Campbell and Youngstown Ohio. Most properties in the area haven’t been rehabbed since the 1970’s and need several thousands dollars of repairs. The better tenants have options, so they will gravitate towards the more remodeled rental units in the better neighborhoods.
Q:What did you rehab or remodel?
Depending on the building below is a list of most common things we fix to increase tenant longevity and increase profits for investors. This obviously varies from building to building.
- Remodeled kitchens and bathrooms including stainless appliances.
- New flooring.
- New windows.
- Energy efficient motion sensor lighting.
- Low cost landscaping.
- Repaired carports.
- Repaired parking lots.
- Boiler if needed.
- Roof if needed.
Q:How do we know that you just didn’t throw tenants into the buildings to sell the buildings?
Great question. Please look at our rent rolls and you will see how long each tenant has been in our buildings. If the building was currently rehabbed, obviously the tenant duration will be shorter. Also, if the building has rents below $600.00 for a 2 bedroom anywhere in the Unites States, just know that you will probably have tenant issues.
Q:I’m going to buy my own buildings and do the work myself or have the work done by my people.
More than likely it will cost you a lot more than just buying our portfolio not including your time and stress. We also rehab several buildings at once, so were able to get a discount on labor and materials do to spending such large amounts at once. You also have to consider when you purchase your own properties there are several steps that are involved that take time and lot’s of money that cannot be financed with the purchase of the property. If you are from out of the area, it is next to impossible to get this task done.
- Acquire the building (Could be difficult depending on the competitiveness of the local real estate market)
- Give 30 day notices to all the tenants. (Some may squat and you will have to evict which costs time and money)
- Find a construction crew that you can rely on much less give you good prices. (The building is bleeding backwards during this entire process. No rents are coming in and all the money is going out.)
- Market the property and get occupied with quality renters quickly.
- Good luck!
Q:Will you guys separate the portfolio for 1 and 2 offs?
It just depends on current inventory levels, and what we have listed. If 2 buildings are next to each other we will not separate those properties.
Q:What have you done to minimize the utilities costs?
In all of our buildings we have installed LED lights on the inside common areas and installed LED lights on the outside with motion sensors. Even some of the carports have motion sensor lights installed. We have also capped all common water faucets and new windows for the winter months.
- Low maintenance landscaping to keep costs down.
- LED lights with sensors on the outside and also throughout the properties.
- Water saving faucets, toilets and shower heads.
- New windows to keep heat in the rental units during the winter months which saves on the gas bill.
- Cap outside water spigots to keep the tenants from washing their cars.
When calling to inquire about the properties, make sure to ask about that specific building.
Q:After I purchase these properties how can I protect the returns?
Once the tenants are paying rent, you need to keep the utilities under control. When we rehab our buildings all common electricity is on motion sensors, the common water faucet locked on the outside, and new windows to save on natural gas in the winter. Some buildings also have energy efficient washer and dryers in the common areas. Also, you need to have good property management in place to maintain the current rent rolls and don’t let repair calls slip through the cracks, or not maintain the building.
Q:What makes your properties different than others on loopnet etc or any others I view?
Most people selling real estate portfolios don’t provide enough information to support the gross operating income, gross expenses and net operating income. We will provide everything to you that involves the properties that we have listed on the MLS or as a pocket listing.
Q:Does Rust Belt Company accept financing for their turnkey investment properties?
It really just depends on the buyer, and how solid of a deal they present to us. Most investors that come to us have 1031 exchange money and need to buy more like kind real estate to satisfy the tax laws.
Q:Does Rust Belt Company shop gas and electricty prices on their properties before selling?
Yes, we always try and lock in low prices for any utilities being used at our buildings. We typically buy fixed rates at the lowest MCF or KW that can be passed on to the new buyers. We also have several accounts with the local trash company and will do our best to help you negotiate the same deal we receive.