1. Vacancy Percentage Too Low: Vacancy rates are advertised at around 5%, even in C-class neighborhoods. Don’t take the listed rate as-is; do your own research and use the footnotes we have in our property analyzer. Common advice out there says to contact 2-3 property managers or a property management company and ask them how long it takes to conduct a tenant screening and find a prospective tenant for similar properties in the same area, but obviously, you are going to get bad data because they are trying to sell their services. It is still worth the exercise and worth having that open dialogue discussion. Here are some other top questions to ask your property manager (note: don’t be a bonehead and ask this in a sterile interview environment… just use these questions as a conversation starter. Remember, build your relationship first!). You can also get an indication from rental listings on Hotpads, Facebook Marketplace, Craigslist, Zillow, or Trulia to see how long they have been up.

I personally use at least a 10% vacancy rate for most of the turnkeys I look at. I use 15% for properties located in B- or C neighborhoods. A bit on the conservative side? Sure. But I’m not going to be surprised when it takes 4 weeks to find a new prospective renter. Another way of looking at it is that most tenants stay on average 1-2 years… some will be there 5 months, and the ideal tenant will be there 2-3 years.

2. Omitting Vacancy in the First Year: Many turnkey providers will use a 0% vacancy rate for the first year’s cash flow projections. The rationale is that if a property is already rented out, the current tenant “should” stay there for at least a year, so you will have no vacancies. Better to not run your numbers with this “rolling start” assumption. You know what happens when you assume!

3. Inadequate Maintenance and Cap Ex Allotments: The turnkey company will argue that they have fixed many of the minor property maintenance expenses and have taken care of much of the capital expenditures that will happen in the first 3-5 years. This is just not going to happen… if it does, consider yourself lucky.

We separate maintenance and cap ex projections. As a general rule, assume 1 month’s rent is going to fixing up random stuff around the house. And you can calculate the Capital Expenditures here and come up with an annual estimate. For older homes that are older than 1960 or have Section 8 tenants, you might want to bump that up to 15%. Again, use the footnotes on our Analyzer.

4. Using A Past Year’s Property Tax Numbers: Turnkey providers list last year’s property tax values… the one based on the appraised value before the value-add rehab occurred.

Property taxes are based on the county’s assessed value of the property, and in most states, that value will be equal to or close to the last sales price. When you buy the home, you’re always going to pay more than what the turnkey company paid for it, so its assessed value and property taxes will go up.

In some areas, like Texas, for our apartment buildings, we often double the property tax to account for this. You might be able to purchase the LLC (entity) that owns the property so the taxing authority does not trigger a reappraisal event; however, that loophole does not always work as appreciating areas are getting more and more aggressive to extract revenue via property taxes.

This is all just a part of the game, so we as investors have to run the numbers. In the analyzer, there is a general footnote on what to use, but once you are serious about a property, spend the 10 minutes to better estimate the taxes. Here is how you calculate property tax:

1. Find the county’s property tax records online (they are all accessible to the public).
2. Look at the previous 2-3 tax bills and figure out what percentage of the home’s assessed value is due as taxes each year. Some of these calculations can be rather complicated to follow.
3. Use the percentage and your purchase price to calculate the new tax, removing any exemptions in the process.

5. Inflated Yearly Rental Income Increase: Rent tends to go up in most cities across the US due to economic growth and inflation. But this increase is not guaranteed. Turnkey sellers write in a 3% or 5% rental income increase in all of their cash flow projections. Just because they provide a very pretty PDF report with a bunch of numbers, don’t get excited… It’s really easy to make those reports. An astute investor looks at the assumptions, and in this case, what the annual rent escalator is. 

A good annual rent escalator is 1-3%, depending on the area and the property. On our large apartment syndication, we try not to assume anything is higher than 2%. We feel we are being conservative since many people believe pure inflation is at 3% however, don’t believe all the data you see from the government.