At this time last year, I never would have thought that real estate investing was possible for me*. It was a type of investing that never crossed my mind and even if it had, I would have laughed at the idea that I could play the real estate game in the big city of New York. No, I’m a small fish and I would be lost in the big ol’ real estate ocean.
Then, I read this post from FI Fighter. My eyes widened. Wow, with turnkey properties in other cities, real estate investing while living in New York was suddenly a possibility! So what is a turnkey property? Let me explain.
Turnkey properties are sold by turnkey companies. These companies set up shop in a location that has a particularly favorable real estate market. They find properties that are undervalued and need repair, purchase them and fix them up. Then, they sell them at a profit. That’s the main way that they make money. I am happy for them to make that money in exchange for handling the rehab of the house. Sure, I technically could have purchased the property and fixed it up myself and saved money, but I have NO clue how to do that, especially in some other city. So, I am happy to pay them the markup.
So, I come along and purchase the house at market value. The turnkey company then takes care of finding a tenant, collecting rent, taking care of maintenance issues that come up, and generally managing the property on my behalf. I pay them a property management fee for that. The idea is that after all fees, mortgage payments, taxes, insurance, and various other costs, the rent I receive will still be greater than my mortgage payment. If that’s the case, I have a successful investment, which is giving me more money than it costs every month (this is known as cash flow). I am also building equity in the property (as I pay off the mortgage, I increase the percentage I would receive if I sold the house).
Pretty simple, huh? Not so fast. There are SO many things that can go wrong. Here is a short list (just a taste of some of the issues that can arise):
- The house doesn’t rent for as much as you thought it would
- The monthly costs are more than you expected
- The house is old and you have to sink thousands of dollars into repairs as the turnkey company didn’t take care of everything that they should have
- The turnkey company can’t find tenants for your place
- The turnkey company finds BAD tenants and they trash your house. You are on the hook for repairs.
- The turnkey company finds BAD tenants and they don’t pay rent. You have to evict them and you don’t collect rent for a few months
- Your insurance doesn’t cover a specific natural disaster
So the moral of the story is: you must do your due diligence. You have to do your research and run all the numbers to make sure you are getting a good deal. I also STRONGLY recommend taking the time to fly out to the city you are investing in and meet the turnkey company. Have them show you their operation and ask them about how they screen tenants and their vacancy rates. Get as many references as you can. You have to believe that this company is good at finding desirable houses as well as finding desirable tenants, not an easy task!
So for the past several months, I have been researching real estate best practices, vetting a turnkey company, networking with other people who invest in real estate generally as well as turnkey properties specifically. And I am proud to say, that I recently closed on a property! It’s the first house I have ever owned, and I don’t even live in it!
While I have done my due diligence, I am very new at this. But I wanted to share this experience with you all, so I will be posting monthly updates (starting in July) that will include a number of pieces of my financial life as well as lifestyle. One of those pieces will be the performance of my first adventure in real estate investing. I am happy to answer any questions I can along the way. And thanks to FI Fighter – be sure to check out all of his posts on real estate investing.
*By real estate investing, I don’t mean REITs, which are great, but don’t provide all the benefits of a buy and hold property.
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