5 Things to Consider When Buying a Turnkey House
#1 The 1% Rule
As an investor, you have your own goals when it comes to returns, but most will agree that the rental income from an investment property should abide by the 1% rule or at least.
For example, if you buy a turnkey house for $60,000, it would need to bring in $600 a month. This amount is determined with a simple equation: estimated monthly rent divided by the price of the property. So, for $600/$60,000 = 1%
#2 Choose the right area/neighborhood
In Memphis, TN, we take it from street to street. The location of the house is as important as the house itself. You need to choose an area wisely, making sure that the tenant will want to live in that area.
It is important that you should check the curb appeal, as tenants will be keener to live on a street with nicely painted homes.
Buying a home near a university can be an excellent market. You may want to also have a look at the local school district if you are hoping to rent to families.
#3 Cash on Cash Return
When you buy a turnkey property, you only put a certain amount of cash out of your pocket. Particularly, you come up with a down payment and closing cost.
Cash on cash returns measures your return based on the money you had to put down.
For example, you buy a rental property for $80,000. You put down 20%, or $16,000, plus $2,800 in closing costs for a total cash outlay of $18,800. But that leaves you with a mortgage of $64,000, which we’ll say costs you roughly around $345 a month for a 30-year loan with a 5% interest rate. The mortgage payment drops your annual net income from $9,600 to $5,460.
Your cash-on-cash return for the rental property will be lesser than $5,460 as there are still other costs to consider such as vacancy, operating expenses, etc.
#4 Property Management
Many landlords choose to hire a property manager to take care of everything for them especially for out-of-state investors. Most companies charge 10% of the monthly rent or they have a minimum charge incurred.
When buying a turnkey house, it is important to consider if you are going to manage the property by yourself or with the help of a property manager.
#5 Insurance Cost
Insurance cost is an added factor that should be considered in your profits, so it is important that you must do your due diligence.
You must decide what kind of coverage you want for your rental property. Do you want a smaller premium to pay each month? Do you want to provide coverage for the property of your tenants as well?
Another one to consider if the property is at risk to flood, then you might want to consider opting for higher premiums.
Start comparing rates by asking for quotations. In this way, you have an idea of how much insurance cost would incur and how much it would eat from your profit.