BiggerPockets

A New Model For Turnkey Investment Properties

Monday, November 28

Over the past few months we've noticed turnkey investment companies popping up all over the place.  It seems that everyone has "the best" turnkey properties, and the systems in place to make sure the investor benefits from the long-term performance of the property.  The turnkey model is not complicated, and it is rather simple to replicate.  A typical turnkey investment involves the following sequence:

1. A distressed property is sourced and purchased by a turnkey company at a steep discount
2. The turnkey company renovates the property brining it to a state where it is rent ready
3. A tenant is placed into the property
4. A property management company is installed to manage the property
5. The turnkey company then sells the property to an investor looking to hold a property for the long-term

In this sequence there are several benefits for both the investor and the turnkey company:

Benefits to The Investor

• The investor receives a property that cash flows from day 1
• The investor does not have to partake in the management process to set up the property
• The investor can invest in markets outside of their local area looking in markets that produce higher returns

Benefits to the Turnkey Company

• The turnkey company collects profit immediately upon sale of the property to the investor
• The turnkey company gains the opportunity to sell multiple properties to the investor

The Drawbacks

These benefits are intriguing to many investors, but there are certain drawbacks with the typical turnkey investment property.  The key to successful long-term performance of the property involves proper setup (renovation and tenanting) along with competent property management.  With the typical turnkey investment, the turnkey company simply does not have a stake either of these things.  There may be tenant or repair issues with the property, or the property may not be managed correctly.  None of these things fall on the shoulders of the turnkey company, they fall on the shoulders of the investor.  Furthermore, if there are issues down the road, it can become extremely difficult if not impossible for the investor to remedy the issues because most times the investor is investing from abroad.

A New Model

This is certainly a dilemma, and as a turnkey company ourselves we do not want to put our clients in this precarious situation.  We have thought long and hard on how to solve these issues, and we think we have come up with a solution.  We would like to present a new model for turnkey investments - A Turnkey Partnership.

Rather than sell the property outright, our new model proposes that the investor and the turnkey company partner together to hold the property.  This presents several benefits for the investor and eliminates the full responsibility of the long-term performance from the shoulders of just the investor.

• The turnkey company has skin in the game because they do not profit unless rent is collected.
• By partnering, the turnkey company and the investor share in the long-term risk of the performance of the property.
• By partnering, the investor also benefits by having a partner on the ground with a vested interest in the performance of the property.

We like this new model so much that we're implementing it immediately at Michigan Turnkey.  Furthermore, we believe this new model will set us apart from other turnkey companies for a couple reasons.  For one, most turnkey companies are actually middlemen peddling other people's properties.  This really makes you question the concerns we raised earlier in this article.  They don't have an ownership stake in the properties they are selling, and as a result they cannot partake in such a partnership.  Secondly, we have found that most turnkey companies, given the opportunity, will not invest in the same properties they are selling to their clients.  This again raises critical concerns about whether you should be investing in a company that is not even willing to purchase their own product.

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