Evaluating the
Numbers how they jack up the cash experience is that 12% is
flow, “cap rate”, and “ROI “ more realistic, if not 15%!!!
Attachment #3 is a typical shortly.) Attachment#4 is a “IRR”, Internal Rate of
turnkey offering circular. How list of common expenses. Return is a calculated figure
does an investor analyze it? Working with the turnkey used to compare alternative
operator and property investments like bonds,
Start with “List Price”. Ask manager, the investor needs rentals, annuities, and others.
the turnkey operator for at to get an amount for each So is “ROI”, Return on
least three closed sales in expense, or a reason why it Investment. Describing
the past 34 months within ½ is not applicable (e.g., no these exceeds the scope of
to one mile. See what you snow removal in San this article, but the investor is
get. If this information is Diego.) Then compute warned that unscrupulous
insufficient, order an outside your own cash flow. Don’t turnkey operators use
“fee” appraisal. This will help take the promoter’s expense and rent
if you are paying cash, but it numbers! manipulations to enhance
numbers. (More on these
these figures to attract
might not be necessary if
you have a lender who will “Operating Expenses” per investors seeking an
be ordering an appraisal of Attachment #4 often run 45 unrealistically high “yield” on
their own. Then make the 55% of gross rents, even on their investment. Any IRR or
seller an offer! Why pay list new or rehabbed properties. ROI above 12% should be
price? If you are given a lower dissected to see how it was
number, dig in and find out obtained. A real estate
“Gross Rent”? Ask the why. It could be legitimate, investment expert should be
property manager for or not, but you need to get consulted, if necessary.
“comparable” rents if the the answer.
“Annual Appreciation”
property is vacant and about
to be rented for you. If there “Vacancy Factor” is a assumptions are often made
exists a tenant, then the rent prime area for falsification. and used by turnkey
amount is probably realistic. The example in Attachment operators to project high
#3 shows 8%, which future returns. A conservative
Expenses is where equates to a bit less than investor would not assume
dishonest turnkey operators one month. But what if the anything. Or, even take into
are apt to take advantage. turnover crews are busy, or account the possibility of a
They underestimate the market is slow, or the decline in rents, or property
expenses intentionally, or code inspector is in training values. We’ve seen these
omit some altogether. This is for a week? The author’s before, haven’t we?
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