The Hidden Costs of Out-of-State Turnkey Investing

We’ve all seen the listing. It’s a $120,000 house in the Midwest. The pro-forma spreadsheet shows a 12% Cap Rate. The projected cash flow is $400 a month. It looks like a home run.

But two years later, that investor is baffled. They haven't made a dime. In fact, they might be losing money.

Why? Because real estate doesn't happen on a spreadsheet. It happens in the real world, where furnaces break in January and tenants move out in November. The biggest mistake investors make is buying the wrong product and hiring the wrong partners who bleed their profits with "Hidden Costs."

Hidden Cost #1: PM Company's Biggest Profit Center

When you live 1,500 miles away, you are at the mercy of your Property Manager (PM). What many investors don't realize is that the PM often treats maintenance as their biggest profit center.

Here are some real-world examples of exorbitant repair bills. We have seen bills where a simple exterior door repair costs $1,200, or a garage door hit by a car costs $4,500. This is often 2 to 3 times what an independent contractor would actually charge because the PM uses high-priced preferred vendors and then adds their surcharge, or worse, their "in-house" teams just mark this up.

At MO Builder, we eliminate the middleman entirely. We have our own in-house renovation and maintenance team - the same crew who fully renovated your property. We charge the actual cost of the repair plus a transparent 10% fee to cover administrative overhead. That massive difference in cost goes straight back to your cash flow.

Hidden Cost #2: The "Self-Show" Theft Risk

In an effort to minimize their own time and expense, many large national PM companies use "Self-Show" lockboxes. They give prospects an electronic code and let them tour the house alone.

This is a significant security gamble with your asset. When no one is watching, "prospects" often turn into thieves or vandals. We have seen cases where a "tour" resulted in the theft of appliances, copper piping, or even HVAC units, causing thousands or tens of thousands of dollars in losses and insurance headaches.

At MO Builder, we always have a leasing agent present to open the door, walk the prospect through, and secure the property. It costs us more time, but it protects your investment. We don't gamble with your property just to save an hour of our time.

Hidden Cost #3: The "Vacancy Incentive" Trap

Here is a dirty secret of the industry: Some Property Managers make more money when your tenant leaves.

We see aggressive rent hike patterns constantly with some large PM firms, such as unbiased 7% increase across the board for all properties they manage. Their contracts are designed to pay them a small renewal fee (maybe $200 - $400) if the tenant stays, but a full month’s rent ($1,500+) if they have to place a new tenant. They are financially incentivized to force turnover! They send out automatic 7% rent increase notices every year, knowing the tenant will likely get mad and leave. This is why their renewal rates often hover around 50%. Think about this - a yearly 7% rent increase significantly outpaces average inflation, which is absolutely unsustainable.

We know that Vacancy is the #1 Killer of Cash Flow. Here is the simple math. Losing one or two months of rent ($1,500 - $3,000) to gain $100 more a month (which totals only $1,200/year) is a financial loss for the investor. In addition, an investor has to pay the leasing fee, as well as the turn cost to bring the property back to its best shape. The total financial loss can be easily reach $10,000, just in order to gain $1,200 per year. When it is bad time of a year, the vacancy can be even longer. Years of cash flow can be wiped about by a single vacancy.

Therefore, we prioritize Retention over Raises. We would rather keep a great tenant at a fair rate for three years than risk a vacancy every 12 months. Our goal is 100% occupancy, not churning tenants to generate fees. This is the same philosophy applied to our own portfolios in Kansas City.

Hidden Cost #4: The "Lipstick Flip"

Buying a renovated older home is usually a brilliant strategy. You get an asset for significantly less than new construction, yet you can charge comparable rents (maybe only slightly lower). The ROI potential is fantastic - only if the renovation is done right. Many turnkey providers sell "Lipstick Flips" - new paint and carpet over 70-year-old systems. This creates a ticking time bomb, and a bad PM will light the fuse.

Here is another real world example. If a flipper leaves old cast iron or galvanized plumbing under a house to save money, it eventually corrodes and leaks. Water seeps unnoticed for weeks because an inattentive PM isn't doing inspections.

Ultimately, you don't just pay a plumber. You have to jackhammer through the concrete slab foundation to reach the pipe, repair the line, repour the concrete, and replace the flooring. This is easily a $10,000+ disaster that wipes out years of profit.

At MO Builder, we fix what you can't See. We prioritize replacing the "unsexy" things first - electrical panels, HVAC units, and plumbing lines. It is at the core of our renovation strategy. By ensuring the mechanicals are new before we sell, we protect you from the catastrophic failures that destroy other investors.

The Bottom Line: Incentives Matter

A 12% return on a spreadsheet is worthless if your PM views your maintenance budget as their revenue stream or lets your plumbing fail underground. Stop gambling on "cheap" renovations and start investing in reliability.

We build high-quality rentals to minimize repairs, we protect them with in-person showings, and we keep tenants happy to ensure your cash flow stays consistent. If you want to learn more about our properties and services, reach out to us!