Turnkey properties, what happens after the first year?

[Account Closed]

I'll try to not be generic and over-generalize, but I keep seeing websites and offers for investing into turnkey managed properties who rent out the properties, where during the first year you're promised 10% to 15% ROI's. When I see this "first year" nonsense, it sounds to me like a ponzi scheme, but I want to know what happens after the first year..because no one in the right mind cares about how this starts, we care about how it finishes. So I'm looking for someone nice enough to tell me what happens after the first year, after the "everything is peaches" period, and preferably someone who invested with companies like this before and remained invested for more than a year.

[Jon Holdman]

Well, we've seen a few posts from folks in this situation.  Things that can happen after the first year include:

• Finding out the rent is significantly less than the turnkey seller claimed.  The seller was actually subsidizing the rent.
• Finding out out the house is worth significantly less than you were led to believe.  So, after you discover the rent is not what you expected and decide to sell, you discover you're deep under water.
• Finding out there are ongoing maintenance issues.  That can start before the first year ends.
• Finding out the PM doesn't want to deal with the property anymore and that other PM's won't manage properties in that area.
• Discovering the expenses are more than claimed.  Sellers (not just turnkey) often claim taxes and insurance are the only expenses.  That is "this cash flows - rent is $1000 and your payment will be only $600."  Apply the 50% rule to the TRUE MARKET RENT to estimate your expenses.

Now, maybe none of these will happen.  If you do your own due diligence and find out the reality and not just trust what you're told, you shouldn't have these surprises.

[Account Closed]

@Account Closed

I work for a turnkey company in the Orlando Florida area. When I hear the word promise it kind of freaks me out a little myself. We can promise all we want, but there are unforseen things that nobody can control that can happen just like the stock market. At a 15% return we are factoring in rising rents and appreciation on the property. We manage over 600 properties in the Central Florida areas and 400 of those are in the Deltona area. That area is appreciating rapidly and so are the rents. Check out this article from the Florida Realtors webpage http://www.floridarealtors.org/NewsAndEvents/artic...

Shows a 9% growth in Deltona and Orlando isn't that far behind.

We sell turnkey houses with tenants already in place and those percents in place, but I am not going to promise something that I can't control. What if the tenant steps off a curb and gets hit by a bus, what if the house is struck by lightning (insurance will be in place), what if the government decides that they own all residential properties in the U.S. 

I don't make promises but we are good at adapting and taking care of our clients. If something unforseen happens thats our job to step in and make sure that we are righting the ship to get it back on track. Thats what a management fee is for. Let me know if I can answer any questions.

[Ryan Dossey]

Typically I find the turn key companies to be a joke. No offense to anyone who runs one. I have talked to a guy in my area who runs one and its kind of laughable. Homes with maxed out values in C class areas. 9/10 of the guys who I have talked to that run them are very abrasive. As an investor you should make your money when you buy. 

[Account Closed]

Thanks very much for such quick responses, I'm certainly happy to be a in a community here where people are responsive.  When I emailed a turnkey management property a few months ago, I got ignored for days and then was given a "sorry I was out of the country" response, after I sent follow-up's..and that whole experience turned me off completely.  How can someone claim to be a serious company and take multiple days to answer an email from a potential investor?  So I'm glad to be here in this group.

@Jon Holdman, thanks, very good points, I certainly wouldn't think of all these, as my experience is next to nothing in this field.  Regarding the PM all off a sudden telling me good luck and refusing to manage my property, I'd imagine we'd have something in the contract about this exact situation.  There would have to be a warning period where I'd be given a certain number of days to find someone else, etc..I wouldn't think that a PM could up and go on a whim and leave me in the wind, but that point leads further to the reality that I'd need to get a lawyer to review all the contracts and agreements, because I would not be surprised if such an event would happen.

@Greg Cadwallader, thanks for pointing out the gotchas in this situation.  I happen to be one of those people who can walk into a casino and bet on red 10 times and have the roulette wheel land on black every time, only to hit red after I leave.  For this reason, I'm very careful about these things.

@Ryan D., I see what you mean..based on the bad taste in mouth from that lack of response from that one company I emailed, I'm already getting the feeling that some of these places are very quick at cashing your check but will take their sweet time in answering any emails or actually doing anything in case something comes up.

But the general knowledge that I got from everyone's replies is that don't judge a book by its cover, don't lump all turnkey management companies into one because everyone is different, and do your due diligence.  I have a lot of research to do, but thank you again for the valuable information.

[Steve Perkins]

Alexander Morgovsky :

I'm not at a year yet, but Jon Holdman 's points are well taken. All, some or none of these things can happen. Do your diligence and you'll minimize the possibility of these things happening.

You might message Ali Boone . She has several turnkeys, as does @Larry Fried.

[Mike D'Arrigo]

Originally posted by @Ryan Dossey:

Typically I find the turn key companies to be a joke. No offense to anyone who runs one. I have talked to a guy in my area who runs one and its kind of laughable. Homes with maxed out values in C class areas. 9/10 of the guys who I have talked to that run them are very abrasive. As an investor you should make your money when you buy. 

There are good and bad turn key companies just like in any business. There are several right here on Bigger Pockets with very good reputations. I agree that you should make your money going in when you are buying for equity, but that doesn't necessarily apply to a cash flow objective, particularly for the busy person that doesn't have the time or skill. Some of these people would never be able to invest in real estate otherwise. That's when turn keys are a good approach.

[Larry Fried]

Originally posted by @Steve Perkins:

Alexander Morgovsky :

I'm not at a year yet, but Jon Holdman 's points are well taken. All, some or none of these things can happen. Do your diligence and you'll minimize the possibility of these things happening.

You might message Ali Boone . She has several turnkeys, as does @Larry Fried.

 Steve, thank you for the mention.  It's true that all my buy and hold properties I have bought turn key, and the company I bought those properties from has been really good and I think is one of the outstanding turnkey companies in the country.  I have also recently had a property under contract with a different company in a different area, and my experience was not good.  There were so many red flags including very poor communication and construction delays that I ended up pulling out of the deal after a site visit. (note: I had no trouble getting my earnest money back).

I learned a lot from that experience, and really emphasize that no matter what don't take anything anyone says on faith when you are first getting to know a provider.  Build trust through verification and performance over time.  

[Curt Davis]

@Account Closed

Most of the companies who offer the guarantees are selling a product that demands those guarantees as most are cheap homes in questionable areas.   We have never made any sort of guarantees.  A realistic look at what happens during or around the first year:

Some cases the tenants may move out before the lease is up.  Doesnt mean they were not qualified properly its just that no one can control the tenant. 

You will eventually experience a move out which may cost very little or could cost thousands, all depends on how hard the home was lived in.  If you dont make the repairs needed your home may rent a little less then initial. 

Vandalism is another possibility that you can not control.  

The real issue I see is that people think just bc you purchase from a TK provider that everything is going to be perfect and nothing will go wrong and the tk provider is to make sure you never have an issue.  One of the best benefits a real TK provider will offer is when a client has an issue they are still there years from the initial sale of the home to continue to communicate, offer advice, solutions and or suggestions.  The customer service part of this business long term is most critical.  

We have had clients who will have a bad luck streak but will still continue to do business with us simply bc we are there to listen to them, to help them through the issues and do our best to get things back on track.  

[Henry J.]

I only have couple of years of working with turnkey so take it with a grain of salt. I have had good luck working with my PM / provider after meeting her 3 years ago and I'm still working with her on new deals.

Responsiveness is key IMO. If they don't get back to you promptly, it's a red flag.

Double check the numbers - you have to do your own due diligence. In addition to the CMA I get from provider, I usually check the rent and sales price around the neighborhood on zillow just to make sure it's within range. I'm sure people have better tools than zillow so please share your thoughts on that.

I'm old school so I like to meet the person. I send an email with questions to get an idea 1st. Also ask for references with more than 1 year relationship. One more thing - everyone is different so it's important to set proper expectation.

You can't stop people from lying to you but do your homework and hopefully you can eliminate some of the bad apples before your start.

Good luck and share stories when you have some!

[Jay Hinrichs]

@Account Closed

Many times the market tells the turn key companies what properties to buy and sell to the public... example... Take Memphis.. take a home that cost 250k in German town  and rents for maybe 1700 or so... this would be an excellent possibility as your tenant would be white collar and probably pretty solid... But the returns would be very low and the TK company would have few if any takers.. So that product is not offered turn key generally.

The you take many foreign investor or CA investors who basically had no clue as to the difference between ABCD type properties and thought they could buy a 35k home in Memphis and all would be well.. big demand from marketing companies on the west coast for the product because so many can afford it.. So they just provide for demand.. and we know those properties are fraught with ups and serve downs. 

So most TK providers have morphed into better product and returns are in line with risk.

Most turn key providers that have any years at this don't want trouble properties either they don't like failure anymore than the buyers do.

And of course the scenario offered by Jon is very real... and then there are companies that do not run their business's that way.

The bottom line is risk is real in most if not all cash flow markets  Cash flow being described as the ability to make 8 to 10% cash on cash with 25% down.. your job as the buyer is to mitigate those risk by buying the best you can.. or if you want to go rate shopping and buy the highest returns offered.. understand they come with significant down side risks that are very real.... Curt Mentions vandalism.. this is huge in these markets just look at any market were they have central air and if the condenser units are caged then you know vandalism in theft is alive and well.  that's just one little tid bit

[Account Closed]

Thanks everyone, and you're right, the company I just initially exchanged my emails with before stopping due to their lack of response did deal with those bad areas mentioned, with the vandalism, the reoccurring violence on the streets, and that type of thing.  One added benefit to turnkey management companies is I won't have to worry about going into those neighborhoods.  At the same time, I say to myself, why be so afraid to go in there if they're not afraid, what makes them so different.  The other benefit to the bad neighborhoods is the house prices are cheaper, so if real estate does a repeat of 2008, there is not as much room to go down for those houses.  Thanks for all the input.  I definitely have to think more on all the great points before I can arrive to a decision.

[James Wise]

Turnkey provider

Property manager

Do it yourself landlord

All three of these have one thing in common. Bad stuff is going to happen to the rental property that they run. No if's and's or but's.

I am often asked by potential investors "can you guarantee that there WILL NOT be any evictions" I reply that "If we work together long enough I can guarantee there WILL be evictions"

The better the asset the more infrequently bad things will happen. 

You have to weigh the pros and cons. I prefer B & C rentals both as personnel investments and investments for my clients. B rentals cost more and have a lower rental yield but have better tenants and typically retain their value better.

C rentals are cheaper so you can scale quicker but the tenants are more difficult.

IMO B rentals with financing are the best choice for the out of state owner. While my personal portfolio is primarily C rentals with some D rentals spread in there as well. 

[Account Closed]

Thanks James.  One thing also I'd like to bring up is the renovation costs for beat-up properties.  If the PM/Turnkey Manager is going to handle the renovation, I'm concerned that they'll be the only ones making the decisions about what contracts to get, how much to pay, etc.  What I mean is the following.  Say I can get the contractors and supplies and labor for 10 thousand dollars to fix a place up, and the TK company quotes the work at 20 thousand dollars.  For them, I don't think they have any interesting in saving me money, but have interests in getting their own contractors more business.  I'm sure I wouldn't even be allowed to provide any input to the process, or even enter the property until it's finished.  For this point alone, considering I know I can fix houses cheaper and find ways to do it cheaper by shopping for materials for example, the turnkey concept wouldn't be a fit for me.  It feels like TK is more for hands-off people who are willing to go as far as paying and collecting money from the TK manager, but are not willing to get their hands dirty in the process.  For this reason, a lot of money could be lost and left on the table.  At least that's the way I see it right now.

[Jay Hinrichs]

@Account Closed

   your correct and you live in philly there is all sorts of property available for you to buy rehab your self and rent out... Most turn key folks present properties when they are done are nearly done... some do have you buy the house in present condition then rehab it for you.  but most of the west coast sales orgs that sell most of these ,, want the properties done and tenanted before they have their clients. close on the deal.

[James Wise]

@Account Closed:

If you have the ability to get the work done yourself then you do not need a turnkey provider.

That is like a Realtor hiring another Realtor to sell his house then complaining about the commission instead of just selling it himself.

Turnkey guys fill a need, no reason to work with them if you do not have that need. The reason there is a need for Turnkey guys is an investor does not have the willingness, time, resources, contacts or ability to get the "20k" work done for "10k"

[Account Closed]

Thanks, good points.  I agree, and especially in Philly, there all always opportunities like that.  And doing it myself first will give me so much more experience than otherwise.

[Randy E.]

@Account Closed, I think you have created your own little dilemma.  You want the ease of a well-done turnkey experience, but you also want the cost savings of a hands-on investor experience.  I've never participated in a TK deal, but my feeling is you're not going to be able to do both.

If you have the time, knowledge, and confidence to run your own purchase+rehab+landlord investment, AND you want to do all that, by all means, that is the path you should follow.  Or, maybe you want to do all that minus the landlord part.  If that's the case, handle all the other work yourself than hire a property management company to manage your rental for you.

Personally, I have less money than time, so I manage all aspects of my investor experience.  I see the value of Property Management and Turnkey companies for others with more wealth and less time than I have, but it's not for me.

[Chris Clothier]

Originally posted by @Account Closed mentioned several things that can happen.  Truth be told, everything he mentioned can happen with any property an investor purchases.  It all comes down to due diligence and whom you trust for your numbers.  I always say "Take Nothing On Faith".  Do your own research to make sure the data (rent range, value range, renovation work quality, age of systems and verifiable data on property management) you are given is correct.  Do your own due diligence!

Basically, if a company makes first year guarantees  - you can bet that it is going to perform lower every year there after and sometimes significantly lower.  My red flag radar would go up very high when talking to a company that continues to market guarantees.  It is better for you as an investor to ignore year one promises and guarantees (as you said, they are nonsense) and calculate vacancy and maintenance rates into your numbers. 

[Jay Hinrichs]

@Chris Clothier

  in my travels I have seen companies come apart financially by offering performance guarantee's .. especially one's that were doing volume... I get the we will replace a tenant for free... type of warranty... most of the  folks I do business with just kind of have a un written rule type of warranty if little things come up they handle it or go back on their subcontractor to handle it... if things happened in the first 6 months or so.. But they do not gurantee rents... that is a very slippery slope...

[Account Closed]

Thanks for the great replies.  As Randy pointed out, and something which I realized myself, I want the best of both worlds, and that can't happen.  I want someone to do the leg work for me but want them to save me money where they can and do it like "I" want it be done..That's a contradiction in my wants, i.e. I want too much, and it's unreasonable.  It's like if I go to the restaurant and go into their kitchen and tell the cook how to make my meal, that can't happen.  He'll just tell me if I'm so smart I should go home and cook the meal myself, which I completely understand.  Chris and Jay, great points on the "guarantee" concept, I definitely agree with that.  And I'm in that group of people who isn't rich, I didn't get an inheritance from my grandfather and no one ever gave me a hand-out.   Which is why I'm so careful, and which is why I'll spend my time doing as much of this myself as I can, because my time is definitely worth less than the money..just the way it is.  Right now I'm reading articles and blogs to familiarize myself with the lingo and terminology, and then will dive deep into some case-studies and examples..I already see this is a whole science, and has to be approached as such.

[Mark Ainley]

@Account Closed

After the first year?  That should be a huge question for turnkey buyers. 

What happens when the tenant moves out?  What happens when things break that should have been new?  What keeps the management company from not just up and leaving the area like mentioned above. 

It is important to align yourself with a turnkey provider that has similar investment goals as you might.  As a turnkey buyer, you are a buy and hold investor, so who you buy from should be a buy and hold investor in the same areas they are selling you investments in. Also important to get to know the property manager and their culture.  Their investment in the area and their experience in that specific area before you came along.  Learn about their team and what their individual roles are and understand how they make money so you can be confident they have a profitable business without having to nickel and dime you as the property owner.

Lots of turnkey options now a days.  Important to deal with sellers that are the actual investors/sellers and that know the specific property they are selling and not just salesmen from marketing companies around the county.

[Ali Boone]

Thanks for the mention @Steve Perkins!

Hey Alexander. I do own turnkeys and I also work with turnkey buyers now since I bought my own. I think I need a little more context to what is being promised by turnkey providers to you, and how they are promising that. Does "promising" mean they are offering rental guarantees, or are you just talking about the calculated ROI that is intended for the property? And then a big part of that is what is going into that calculation.

[Alexander A.]

I about to purchase my 3rd turnkey and I have not hit a year on any of them yet but I am tracking all of it so when I hit that mark, ill be sure to give you an update at least on my personal experiences.  As long as the property management team is good and the house is not in a high crime area, i dont see why it wouldnt continue to perform.

[Mark Shaffar]

I agree with @James Wise and @Alexander A.

 There is a tradeoff in low up front prices nut higher costs down the road in C neighborhoods vs higher prices up front that are financeable and lower headaches and costs down the road with tenants in better neighborhoods. I bought very low in  St. Paul in 2012 in C neighborhoods and am cash flowing fine but the way I look at it now I think I'd rather finance another 10k or so for say $50 a month and I'm sure I will save headaches and probably at least $50 per month in extra maintenance costs in a better neighborhood.