Are you interested in turnkey real estate investing, but not sure if it will actually make you money? In an effort to answer that question, I’m going to give you the down and dirty details on 8 of my turnkey investments, so you can study the potential results. I’ll also analyze my investment’s total returns, and measure them agains the S&P. Let’s see if turnkey real estate investing is a winner or loser!
Now for those of you who are either very experienced or impatient or both, you can…..
…if you prefer. Otherwise, I have written a somewhat lengthy setup to the analysis, so that everyone can get a sense of how I see real estate as a part of the bigger investing picture.
Let’s start by quickly defining turnkey real estate?
Since you are reading this particular post, it’s probably likey that you have a basic understanding of what turnkey real estate investing is. But, just in case, here is a quick recap….
Turnkey real estate investing refers to buying a piece of property that comes rent-ready, and often with a tenant already in place. It usually comes from a company that provides a full service for real estate investors.
Here’s what a turnkey provider does: they find the properties, rehab them, get them rented, sell them to you (the investor), and then manage the property for you (at least while they remain in business!). A nice tidy “turnkey” investment package.
There isn’t much you need to do personally, other than to find a good turnkey provider and BAM, you’re in. Sounds pretty straight forward, right? Well….maybe.
If you want to learn more about the basics of turnkey investing pros and cons, you can take a look at this article I wrote…
Why am I qualified to give you information on the topic of Turnkey Real Estate Investing?
1) I have invested in 16 properties total, and currently own 8.
2) I have invested in 4 standard “turnkey” residential rentals and 4 “semi-turnkey” residential properties. So I know the process of how to invest in real estate passively (or relatively passively).
3) I do complete (no “gimmes”, no lying to myself, no “well that doesn’t count because…”) financial analysis on all my investments and can tell you how they have all performed, what worked, what didn’t, and why.
4) I am going to lay out all those financial results in this post, so you can see for yourself.
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What are our goals with turnkey real estate investing (or any investing for that matter)?
This is an important question to ask because it directly relates to determining if the financial results of your real estate investments are….well…good enough.
I think the main reason people invest is RE is to produce “retirement wealth.” And I have to say that I mostly looked at it, in those particular broad terms, early on too…when retirement was a long way off in the distance. But, now that I’m a little older, and trying to work less, I’m a bit more concerned with “cash flow”…but not always.
The real danger in applying those broad terms is that they can limit the precision in which you look at the investment. My feeling, after spending much time analyzing, is that ultimately you need to be focused on the total return of the investment, and essentially what boils down to the IRR (Internal Rate of Return). It’s the only accurate measure of performance.
I mean, what’s the point of having great cash flow, only to find 5 years later that your house is destroyed and no one will take it off your hands unless you pony up for a major unforeseen renovation?
Or, in another scenario, you make 200/month in cash flow for 2 years, only for your turnkey manager to drop the ball and wipe it all out by not getting it rented for 5 months on a turnover! (Yes, this literally just happened to me…fun stuff.)
What is a “good” IRR for real estate investment(s) anyway?
Calculating the actual total return, or IRR, over a period of time will allow you to also calculate the Compound Annual Growth Rate (CAGR) of your cash investment.
Why do we need to know the CAGR?
Because looking at the CAGR is really the only way you can measure your investment performance against other available investment options.
So when we ask, “What is a good IRR for real estate investment(s)?” we should be looking at alternative investments and comparing our CAGR results to them—like the “Stock Market” as the prime example.
How do we compare real estate investing with stock market investing?
The most basic well-known stock market CAGR would be that of the S&P 500, which over its entire history has produced a CAGR of roughly 10% per year (when reinvesting dividends).
So naturally when it comes to our turnkey real estate investing (or any RE investment), we would want to best that benchmark to declare a “good” IRR.
That said, it’s a slightly tricky comparison to make in that the S&P 10% performance is “the best average” for different periods of time over its life. Its performance varies GREATLY, depending when you get in and out.
In order to accommodate for this difference, we can look to the “experts”. Most respectable financial advisors and/or firms would tell you to hope for a 7-8% CAGR from “the market” over time. And they would likely give themselves a raise (along with a hearty pat on their own back) if they produced 5-6% for you!
What is our target CAGR?
Therefore, in turnkey real estate investing, or any other real estate investment, we should have our target CAGR set at 7-8% and above for a “good” IRR. Hopefully, we will match that 10%.
It’s also worth noting that good stats in all 5 return-producing components of a turnkey real estate investment should always result in a good IRR. But keep in mind that focusing just on one category, cash flow for example, may prove to bite you in the ass in the long run.
How will we analyze these 8 turnkey real estate investing properties?
I felt it would be good to take all of the results (I outline below) and combine them, both by market and in total. Then I report the average percentage of cost category vs. total income.
This is important because the “make or break” categories when doing analysis are: repairs and turnover/vacancy. I wanted to show what a wide selection of properties was averaging for these specific categories.
This will give you some real world data to refer to when estimating these categories for your next investment. That’s a huge advantage.
Some additional notes on my analysis….
1) As you will see in my charts below, I account for every single turnkey real estate expense, and there are “no gimmies.” Therefore, when we compare the CAGRs, we are looking at pure returns only. I have already factored in all of these real estate related expenses.
2) The only number that is not 100% precise is the tax effect…but it’s close. Because of the amount of properties I have and variations on my total income, it’s nearly impossible to get a precise number here per property. I feel like I’m on the conservative side though. And everyone’s tax percentage will be a little different.
3) If the house has not been sold, I am using a best estimate on current retail sale value as of 12/31/19, based on Zillow as well as a quick-ish comparable sales review. But of course, all sales commission and closing costs are factored into the estimate. Additionally, for unsold properties I am giving cash flow numbers through the end of 2019 because this will give the fullest annual picture.
4) In terms of cash flow and principal pay-down, even though I have a 30yr mortgages on all my properties, I was paying most of them down on a 15yr amortization. That obviously reduces cash flow, but conversely saves on interest and increases amortization equity…the long term benefit of which is an improved IRR.
5) For the rent received, I actually log rent for all months that the house is vacant, but I offset that with a vacancy expense for the same amount in the turnover category. The reason I do this is because I want to know what percentage of the rent was lost due to vacancy.
6) For the S&P same-time comparison I am using this handy S&P returns calculator I found online. Full disclosure: I am relying on this calculator to be correct in making my comparison. I just didn’t have the time to drum up a quick S&P 500 historical returns calculator, that you can pick any entry and exit for. Ya know, I just got busy.
If you want to get super granular on the expenses (I know some of you do, because you are sadists…haha), my plan is to make a specific post for each property where I break down some of the expense categories even further.
So each property header links out to that post on the blog. Not all of those posts are complete as of today (4/16/20), but I’m working on it.
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Analysis of 8 Turnkey Real Estate Properties in Three US Markets
Kansas City Real Estate Investing
Kansas City has had its ups and downs. The financial stats are good in that market, but the various teams I have worked with have ranged between…well…”kinda not the best” to “pretty bad.”
Here is the final analysis on Belmont, that I have summarized a nice total results layout. As you will see I’ve provided a detail for the IRR and Cash Flow.
Looking at this, you can see most of the money made was amortization equity. Meaning, while my cash flow stunk, at least some of that cash was really going toward equity. But since equity is not available as cash until you refinance or sell, it needs to be tracked separately.
This property was sold in 2018 after two years. I bought it from a turkey company in Kansas City, then when the initial tenant decided to move, we spruced it up a bit, and sold it on the retail market for a very nice profit.
This property was, frankly, just cursed. It suffered multiple turnovers and quite a few expensive repairs. Man I really hated this house!
As you will see I suffered a whopping -10K in negative cash flow while owning this property. And since I didn’t live anywhere near it, there was nothing I could do to improve the situation (except be a crazy emailer and caller to the property manager, which probably hurts more than it helps).
Luckily, on the last turnover, it got rented on a 2 year lease, with a 26% rent increase. This increase allowed me to sell at a higher price, to another investor, to just get it off my hands. (Being I live in FL now, I wanted to move some equity down here where I can mange the properties.)
Memphis Real Estate Investing
This property was another big winner! I got a very good price on it, for the quality of the neighborhood, then caught a good upswing in appreciation. After an initial 18 month lease, the tenant said they would only stay if I lowered the rent, which I declined, so they left on their own accord. I promptly did a 15K rehab and sold it retail for $69,500 more than I paid for it. Nice!
Scottsdale has been a little rough. It’s had negative cash flow on a 15 yr amm, but on 30yrs it would be slightly cash flow positive. Appreciation has been great, but as you can see it had two turnovers in 3 years. It also has had a good amount of repairs.
Cavern has actually done well on both a cash flow and appreciation front. These number are as of Dec 19, but as of April 20, I have the property on the market. I did a $12,500 spruce-up for the sale, and have it listed for 160K. (For the sake of the analysis, I’ve given it a 150K sale price, just to be conservative.)
Austin Real Estate Investing
Property 7 – Rawhide Dr Austin, TX (SOLD)
Rawhide was my only multi-family property to date, with two units. It had a couple turnovers early on that hurt cash flow, but after that it was pretty steady. I also refi’d this property twice, so otherwise it would have been cash flow positive. But again, appreciation was good, and I paid down a good amount of principle over 9 years.
Newberry was shaping up to be one of our biggest wins, because we bought it at the bottom of the Austin market in 2010. We also managed to get into this house for under 5% down. Thats why the cash flow is so bad, but keep in mind we put about 30K less down then usual. This house more than doubled in value in 9 years, but we had to put more money into the final renovation for a top of the market sale.
It still produced a very solid 11.63% CAGR over a 9 year period, but in the end did worse than the S&P for that time. But keep in mind that the S&P on average has really done 10% per year for the last 100 years, with reinvested dividends.
Final Average Results of Analysis
Part of what drove me to do all this analysis was that all 8 properties, in three markets, have had negative cash flow on a sum total basis (that’s on a 15yr amm. on 30yrs it would have been 6 out of 8). And this has been true even with the fact that 6 of them were purchased at above the 1% rule. The two in Austin were close at about .8%.
One of the main points of this whole exercise was really to get a good understanding of the average costs that eat away at my potential positive cash flow (in the short term), which then affects your Total IRR (or CAGR in the long term).
And to be more specific, we are really trying to get an understanding of average “Expenses & Maintenance” and “Turnover” from the analysis. All of the other cost categories like insurance, interest and management fees are very identifiable in advance.
So here are those averages!
IRR: Now let’s look at the investments’ CAGR as compared to the S&P for same time period.
Ok, so cash flow is often talked about as the holy grail of RE investing. And if your plan is try and live off that cash flow I would understand why. But, in my experience, it has generally has been very low to negative in all cases.
I really don’t see how anyone could live off cash flow from managed properties, unless you bought them at 50% down or higher, or have gotten to the place where you own them outright. Even if you had a very high number of properties, I believe the cash flow would be very unpredictable income.
That said, low to negative “cash flow” doesn’t mean a real estate investment is not making any money. Even at $0 cash flow, it’s making money every month by the principle being paid down. As well as by annual appreciation and tax benefits.
Here’s the bottom line: the only way to know the real performance of a RE investment is to add it all up. This chart shows how each of the 8 investments have performed inclusive of ALL factors.
Please note: these calculations includes 10K of “additonal costs to invest” in the real estate. This would be travel to the cities I invested in, the cost of setting up and maintaining entities to hod the real estate, and additonal tax preparation costs.
This average is also pretty good considering that the period of time this data was recorded happened to be a very unique stretch of time in the S&P’s history. It quadrupled in value in 9 years after coming off a huge recession. Real estate also increased significantly in value during this time period, but it certainly didn’t quadruple. It doubled or in some cases tripled at best.
BUT, even with that going against our numbers, the turnkey real estate investments still beat the the S&P half of the time. This would suggest that under more usual circumstances, Real Estate would more commonly beat the S&P!
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Additional Benefits of Real Estate to Consider
Even though we can look at all of the numbers and feel like we have an understanding of how well our investments did, we can’t necessarily compare the S&P to real estate investing as an apples to apple comparison. Why? There are some additional factors to consider that could potentially make RE a better investment than the S&P. Some of what I mention below are embedded into my returns, while others are more like “added benefits.”
Let’s take a look at how real estate investing differs from stock market investing.
Real Estate Investing vs. Stock Market Investing
Leverage: Real Estate vs Stocks
-You can use a loan and have Leverage working for you. (Usually its 96.5%-75% leverage, or a 3.5%-25% down payment.)
-Leverage in the stock world is called Margin…but it usually maxes out at 50%. And it can be called if the value of your stocks fall to a certain level.
Appreciation & Equity: Real Estate vs Stocks
-You are capturing Appreciation Equity on the full value of the asset (there in lies the value of leverage), while you own the asset (4-5% on average). At 75% leverage, a 5% increase is a 20% actual appreciation on cash.
-You also build Amortization Equity while you loan is being paid down.
-Appreciation in stock would be a Rise in Share Price. (5% on average for S&P)
Cash Out: Real Estate vs Stocks
-You can Refinance out appreciation and amortization tax free.
-You might be able to get a Line of Credit using your stocks as collateral. You can also use your Margin as a line of Credit.
Insurable: Real Estate vs Stocks
-Your RE investment is Insurable for the full value.
-Your public markets investments are Not Directly Insurable. Though your brokerage account is usually insured by the FDIC for 250K…but its only for a bank business failure.
Tax losses: Real Estate vs Stocks
-You can take annual Depreciation of the asset, to offset rental income, on your tax return. But, you have to recapture that depreciation at sale. Still very valuable though.
-You can take a total 25K Allowable Loss on your RE assets while carrying over the rest, without selling the asset.
-You can take a max 3K Allowable Loss from stock sales, and carry over the rest. You can only buy back into the asset 30 days later, without it being a wash sale.
Cash Flow: Real Estate vs Stocks
-RE offers a possible Cash Flow stream. I say possible because unforeseen expenses and turnover can often wipe out a year’s worth of cash flow on a property with leverage.
-Possible cash flow streams are available if your stocks pay higher Dividends. If you go with a high dividend stock, this may actually be more reliable than RE cash flow.
Overall, turnkey real estate investing has produced (mostly) market beating returns for me. I can’t say whether it fits in well with your investment objectives and goals, but I hope I was able to provide some solid data to help you make that decision.