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Do the Markups on Turnkey Properties Kill the Deal?

by Ali Boone on February 16, 2013 · 70 comments

  
Turnkey

Absolutely not! Are you crazy?

Ok, wait, that was a little rash. It’s kind of hard to yell about something without at least offering a justification for the statement. So I’m going to offer you an analysis on turnkey prices so you can understand what is really behind the prices of these properties.

The two biggest objections I hear to buying turnkey rental properties are:

  1. The margin between the listed price and what the seller actually bought it for is way too much!
  2. I could buy a similar property for much cheaper!

Before I counter both of these, you need to understand that I don’t believe turnkeys are for everyone. If you are extremely handy, or have a phenomenal team of folks who can handle properties for you, or if you just want to be more involved in the process than totally hands-off, turnkeys are not for you. It makes much more sense that you go get cheaper houses and do the work yourself.  I may even be envious of you that you are in a position to do that, so congratulations and go have fun with it. For those of you without those resources (or desires) though, hopefully I can make you feel better about paying more but not feel like you are getting ripped off.

The Reality

Yes, turnkey properties are more expensive. And yes, people involved in the process are making money off of your purchase. Hello, it’s business. Without business, none of us would eat or have a place to live. The guys selling the turnkeys, that is their business. But other than making money, what else does a business do? They provide a service. So before you worry about how much everyone is making, you need to understand what service you are getting for your money. Only then can you make an educated decision about whether a turnkey is for you. Lucky for you, I can break it all down.

Dissecting a Turnkey Rental Property

If a property is labeled “turnkey”, it means (or it should mean) that the property has been fully rehabbed, tenants are already in and paying rent, and property management is in place to handle the property. Sounds easy, right? Anyone can do that, right? Yes, technically anyone can do that. Let’s compare how you can do this yourself versus what the turnkey guys can do.

  • Task: Find a property.

If you don’t find a property at a good deal, you’re wasting your time. Making money is the point, right? Preferably you find an excellent deal, not even a good deal.

What you do: Common methods for finding a good deal on a property are: buying foreclosures, buying short sales, shopping at auction, or finding motivated buyers willing to sell at a discount for whatever reason. You might resort to the MLS to look for properties.

What the turnkey guys do: Most often, turnkey providers buy properties in bulk. Meaning they don’t buy one house, they buy 500. Anything bought in bulk tends to be priced lower per unit, so you can get a house for much cheaper when you buy 499 more of them instead of just that one. Turnkey providers also shop at the auctions as do the individuals. Lastly, when buying discounted properties is your full-time job, you tend to have a lot of connections in that field. Turnkey guys know people who know people who know people, and therefore they can snag good deals no one else ever knew about.

  • Task: Rehab the property.

The extent of the rehab necessary to make the property functional and/or nice will vary. It could vary from only needing cosmetic work to a property having to be completely gutted and redone. Anything over just cosmetic work is going to require professionals.

What you do: If the work is only cosmetic, you probably do it yourself. No biggie there. For bigger jobs, you will most likely need a general contractor so multiple jobs can get done.

What the turnkey guys do: The turnkey providers have crews who work only on the properties bought by that provider. Essentially all of the work is done in-house.

  • Task: Find tenants and property managers.

This task is broken down a little differently because you have two choices of doing this yourself: 1. Be the landlord yourself or 2. Hire your own property manager to do all of this for you. Versus the turnkey provider who does the finding of a property manager for you. But to keep going with our flow of differentiating, I’ll compare you doing all the work yourself (not hiring a property manager) versus the turnkey guys having management do it.

What you do: You advertise for tenants, screen them which may include credit checks, reference checks, background and criminal checks, and income verification. You provide all of the legal documents for the tenants to sign and must make sure you are in compliance with all state rules. Then you collect rent each month, respond to repair calls as necessary, handle the turnover of a move-out, and if an eviction has to occur at any point, you have to handle the legal process for that.

What the turnkey guys do: The property managers do all of the above for you. The cost is usually 10% of the monthly rent. So for a house collecting $1000/month in rent, you’re looking at $1200/year. There is no extra fee for using the turnkey provider’s manager over your own.

Have a preference yet? You may be able to judge just from that breakdown whether you prefer to buy a turnkey property or do everything yourself. Maybe you are still unsure, so let me really drive this one home and then address the costs.

The Bang You Are Getting For Your Buck

What I didn’t point out in the above comparisons are the good and the bad of each. A quick summary of each of the same tasks mentioned above:

  • Task: Find a property.

The foreclosure and short sale process can be very uncertain and take forever.  Auctions are extremely competitive and if you don’t know what you are doing, are at all inexperienced, and/or don’t have a significant amount of cash in your back pocket, the big boys (oftentimes the turnkey providers) are going to trample you. Finding motivated sellers can be done in multiple ways, but it can be very time-consuming. All of these options just scream a lot of work and time. Most often, the properties sold by turnkey providers have a lower initial baseline price than anything you can find on your own and you didn’t have to do any work.

  • Task: Rehab the property.

Anything done in mass will be cheaper. Not just with finding good deals on properties, but with rehabs as well. The turnkey providers use standard paint, carpet, flooring, trim, you name it. Since they have so many houses that need these materials, they are able to buy materials in mass and therefore at discount wholesale prices. Guess what, you as an individual can’t get those prices on materials (unless you have a brother-in-law who works in the Home Depot warehouse). So the material costs required to rehab and maintain a property are cheaper for the turnkey guys than they ever will be for you by yourself.

Another way mass comes in handy is the turnkey guys live to fix these houses up. It’s all they do. Therefore, since they do so many, the crews are able to get the rehabs done significantly faster than most general contractors. That saves on major labor costs. One of my favorite turnkey providers in Atlanta has a rehab team that averages only five days for a complete rehab. Tell me what individual you know can do it that fast.  And yes, they are high-quality rehabs.

  • Task: Find tenants and property managers.

There is a reason the term “slumlording” exists. Dealing with tenants can be horrible. I would never want to do it myself.

Back to the Buck

Now you understand all of these things, how does that tie back in to cost? Because I love PowerPoint and drawing, I’m going to give you an illustration I made myself of the cost differences between a do-it-yourself (DIY) property and a turnkey property. The subject property is a cheaper-end house that needed a decent amount of rehab.

Graph

The totals come out to be $55,900 on for the do-it-yourself (DIY) property and $60,500 for the turnkey. In this example, the price didn’t turn out to be too dramatically different whereas some cases it could be tens of thousands in difference, usually because of a difference in level of rehab. When all the rehab costs are on you, you probably tend to skimp out a little on the quality or what you have done just because it’s a rental and it doesn’t need the nice stuff.  The point is not to debate actual allocations but more to show you what those different allocations are. For this example, you have:

  • Initial Purchase. The price the property was acquired for.
  • Rehab Costs. Cost of the rehab.
  • Seller Profit. I told you this. Of course the turnkey provider makes a profit, it’s his business. And he really took a lot of work off your shoulders, so he deserves the profit.
  • Access Costs. If you buy a house on your own, you will pay a real estate agent fee to whoever found the property for you (I kept this cost extremely minimal for this example). If you buy a turnkey, because most of these are private channels, someone had to get you in, and whoever that is makes a referral fee of some sort. Oftentimes however, there were multiple chains of who knew who and more than one source has to split that one referral fee. So yes, your purchase does include their fee, but remember- if it weren’t for them, you wouldn’t have this property at all (there’s no way because most turnkey providers won’t work with random individuals)! And they may not have made as much as you think they did because don’t forget, they had their own underlying costs to do the business in the first place.
  • Guarantees. Some turnkey providers offer a rental guarantee for some length of time (often a year) meaning if the property is vacant for any reason, you still get paid the same monthly rent. While paying this extra ~$2,000 or so is kind of lame if you don’t have any vacancies in that time, it is also extremely handy if you do! You could easily be out way more than $2,000 in a year due to vacancies. Consider this fee like insurance of sorts.

One more monetary factor with doing the property yourself and going the turnkey route is the difference in resulting cap rate. I’m going to put that graph side-by-side with a graph I created for stress. Yes, stress. While a monetary number may not be readily known for stress factor, I guarantee you it’s worth something! Think of the cost difference between the two methods above, and then top it off with cap rate and stress differences.

Graph2Graph3

A turnkey gives you little to no stress. Doing everything on your own will inevitably give you some stress, or if you’re like me and a perfectionist, a lot of stress. Time is the other factor. With a turnkey you are spending no time on the investment other than that required to do the paperwork. Doing everything on your own could take up to weeks of your time when you look at combined hours. How much is your time worth?

So bringing this all together. I’m obviously an advocate for turnkeys, but again, I don’t think they are for everyone. A lot of people I know enjoy the process of finding properties on their own, managing the rehabs, and dealing with tenants. If that’s the case, have a blast with it and do your thing. If you are more like me, I hope you are less hesitant now about whether or not you are getting “ripped off”. As long as it is a reputable turnkey provider, you aren’t getting ripped off. You are paying for services, not spending money that goes into someone’s pocket with no purpose.

I can draw more graphs if you would like.

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{ 70 comments… read them below or add one }

Jim Pratt February 16, 2013 at 1:52 pm

Ali, in my case, I buy REOs: 50 cents on the dollar, good location, good layout and rehab myself. The value of property usually doubles, $300 a month positive cash flow- average and have a property manager in place.

I can buy twice the properties and make a lot better cash flow then buying turnkey properties. I like rehabbing, by doing it myself, save about 30% to 40% on total purchasing cost and NO HOAs.

Example: Turnkey- list price- $200,000, cash flow- $50- $75 a month.
REO – purchase price- $100,000, rehab $25,000, cash flow- $250 per month.

For someone who is young, ambitous and short on money, REOs is the way to go. Or if you just want to increase your assets and cash flow faster, your ROI is a lot higher!

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Ali February 18, 2013 at 1:52 am

Hey Jim, you definitely sound like you are the perfect candidate to not have to worry about turnkeys. Sounds like you are doing awesome work!

I do want to clarify on your numbers some for anyone else who is reading- On average, the $100k turnkeys I work with produce somewhere in the neighborhood of $600-1000/month for an all cash buy, or $150-500/month if financing. The numbers are very market-dependent though, so I’m guessing you are in a totally different market than ones I’m familiar with. Your REO returns you mention are on the minimum for the turnkey returns in the markets I’m used to.

Last thought, if someone is short on money, turnkeys are easier because you only have to come up with the down payment and closing costs (assuming you qualify for a mortgage), rather than down payment, closing costs, and rehab costs. Turnkeys are good for newbies too so they get a feel for how investing works, the easier way, then can build up to doing rehabs themselves.

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Jim Pratt February 18, 2013 at 8:00 pm

No doubt, your market is a lot better than mine. My average cost to purchase and rehab on a three or four bedroom home is $85,000 and average around $300 a month positive cash flow. Unlike a turnkey property, after I get it rented, get it refinanced and do it again. No money out of my pocket.

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Ali February 18, 2013 at 10:03 pm

Hey Jim, sorry, I think I’m not reading your last line right… are you saying you buy a cheaper property, rehab, and then thanks to the rehab you have equity that you can get a loan on and use that money to buy more? So the equity above what you put into is the money you are referring to? If I understand that right, yes, that’s definitely a cool thing to do. Some of the turnkeys can do that as well, just depends on the market.

Jim Pratt February 19, 2013 at 9:24 am

Ali, these are not cheap houses, their better than average. Three to four bedrooms, 1600 square feet plus, good location on a corner lot. Purchase the properties for all cash, rehab, get it rented and then refinance. I been able to get all my money that I have in them back with excellent cash flow. By offering all cash I get them at 50 cents on the dollar, fix them up and rented within thirty days. They usually appraise for double what I got into them. Did the last five this way.

Matthew February 16, 2013 at 3:50 pm

Hi Ali,

Great article! Any recommendations for companies sell turnkey properties? This is definitely something that sounds appealing.

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Ali February 18, 2013 at 1:54 am

Hey Matthew, I can definitely hook you up with a lot of the companies I have access to. The only thing about them though is they get a bit irritated with me if I send a ton of people to them who aren’t actively wanting to buy. They aren’t as much the mentoring-types or hand-holders (not saying you need either of those), but rather they just focus on selling because they do so much of it. So either I can answer questions for you or talk to you more about them on the side or if you are actively wanting to buy, you can give me a feel for what you are thinking of buying, how much money you have, will you be financing or not, etc. and then I can send you over.

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Max April 16, 2013 at 7:34 pm

Ali, could you also tell me about turnkey companies you may recommend?. I’m ready to buy. My mail is maxguerra (at) me.com. Thanks Ali!.

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Ali Boone April 16, 2013 at 11:33 pm

You bet! Got your other message, so just replied to that one.

David February 16, 2013 at 9:49 pm

Hi Ali — you make some valid points. Another point in favor of the turnkeys, and a cost that could be added to the DIY model: Most people want to finance these properties. If the DIY’er goes out and buys a distressed property in need of rehab, it is likely not financeable in that condition. So a common strategy is to use a hard money lender for purchase+rehab, then do a rate/term refi into a permanent loan after 6 mths or so (“fix and refi strategy”). This HM loan is very expensive: 4-5 points up front, appraisal and other loan fees, plus a “yield premium” (difference between HML rate at 12% and conventional loan rate at 4%) of 8% during the 6-mth seasoning period while you wait to refinance. Adding all this up adds another 10% to the cost of the DIY house, versus just going out and buying a turnkey home that can be conventionally financed on day 1.

Also, the conventional loan (Fannie/Freddie) is the only type of financing available to an out-of-area borrower on a single family rental. But remember, these types of loans require the property to be in pretty good condition. So if you’re buying long distance to get into a better cash flow market, and want to finance, buying turnkey may be your only option.

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Ali February 18, 2013 at 1:55 am

David, everything you say is correct! Great perspective on the financing.

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Jim Pratt February 18, 2013 at 8:08 pm

Just a quick note- I just refinance two properties I bought as REOs and rehab, they were 7% loans now at 3.75%.

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Ali February 18, 2013 at 10:01 pm

Ha. That’s amazing! Isn’t lending great these days?

chukwudi February 17, 2013 at 6:23 am

Hey Ali. Good article again. Wanted to know if you have used a Turnkey company before and if you have if you could tell us the returns that you have gotten from the purchase?

Thanks and good writing as always

Chudi

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Ali February 18, 2013 at 1:57 am

Hey Chudi, you bet, and thanks for the compliment! I have only bought my rentals through turnkey providers. The returns on all of them are between 10-14% caps and then higher for cash-on-cashes since they are all financed (either mortgages or private lending). They ranged between $55k-95k on the purchase prices and all bring in $400-500/month after all expenses, including financing costs.

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Edita February 26, 2013 at 3:31 pm

Good numbers! I am yet to achieve that type of cashflow with under 100k down :)
Do you invest in multi-family or single family as well? In my research, multi-family seems to bring higher returns and lower maintenance/expense.

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Ali February 26, 2013 at 8:13 pm

Hey Edita! So far I have only done single-family but I’d love to get multis eventually. The returns on those depend on the types. In the last few years, single-families have had better returns per unit than apartments or the bigger complexes. But with both returns and maintenance, it depends on the property size to say for sure. All of the turnkeys I’ve bought in the last couple years have had great returns, and I’ve never put more than just the 20% down plus closing costs or 50% down with private financing. And the purchase prices were under $100k so not too bad!

Edita February 17, 2013 at 3:58 pm

Great article Ali, as usual!
Do you take into consideration the area and neighborhood also? Or do you just run the numbers? I think knowing the area (EVEN for out-of-town investors) is important, even though you put in a lot of time into learning about it… My husband thinks it’s a waste of time and better to concentrate on numbers only…

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Ali February 18, 2013 at 2:01 am

Haha Edita… hilarious (about the hubby). Yes, I absolutely consider the areas. Numbers in low-income or sketchy areas will inevitably be much higher than in better areas. That’s fine, if you are okay with what comes with investing in those areas, but if you aren’t, be careful. The biggest thing about any rental property is tenant quality. If you buy a property that is scheduled to get 30% returns or something astronomical, but tenants keep vacating the property and causing damages, you could be -30% real quick. So I do say yes, absolutely know the areas, but that doesn’t mean you can’t invest anywhere you want to either. Just be up and prepared for what you are getting into if the area isn’t as nice. Hope that helps?

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RJ Pepino February 17, 2013 at 7:21 pm

Great article. My business partner and I really believe the best turnkey properties to buy are ones with solid property management.

It also helps when the company you buy from also owns rentals in that area. That way you know that the company is invested in that area.

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Ali February 18, 2013 at 2:06 am

Hi RJ, absolutely. Half-related, one company I worked with in Atlanta, all the guys actually lived in Florida, minus the PM who had moved to Atlanta just to be the PM for the properties. Goes to show it was a good market if they all traveled every week just to get to it!

Where do you guys buy turnkeys, what market?

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Jose Gonzalez February 17, 2013 at 9:41 pm

Hey Ali!
Very well said, turnkeys are the way to go for people that want a stress free investment, some insurance sort of in place but the most important is the time that you dont invest in doing everything yourself…
This week I heard a guy who was proud (actually 2 backed him off) when he found an institution that gave him a 1% return on his money. I was sitting with my dad and just looked at him, of course I didnt say anything agressive but when we came out the meeting, I told my father.. Are they for real? I mean if inflation is at 3.5% just to give a number, their money is loosing value at a double rate and they are proud!
You should write twice a week, I mean really I pick the subjects that I want to read and so far you have been in all of them…
Thanks a lot to make the time to share some knowledge!
Jose

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Ali February 18, 2013 at 2:11 am

Thanks, Jose! Glad to know my articles are catching you. You know, I’d love to write twice a week but I have a hard enough time getting my one article in! I never follow my own advice and write down blog ideas when they come to me, so when it’s time to bust one out I totally blank and often end up with writer’s block. I’ll see what I can do tho :)

1%! Shame on them! I’m a bigger fan of 10-15% myself. Oh, I do want to say this for anyone reading… turnkeys are absolutely way less stress than rehabbing and foreclosures and all that nonsense, but they are still rental properties so they will inevitably have some stress associated. Anytime tenants and property managers (until you find the good ones) are involved, plan for at least a little stress. I only say that because people all the time say “turnkeys sound too good to be true.” They are great, but not flawless. Still have to be on your investor toes.

Great to hear from you! Don’t think I don’t remember us talking about making you a turnkey provider ;)

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Shawn Moore February 18, 2013 at 9:55 am

This is great information, Ali I’ve been researching and I’m ready to dive head first into my first investment. Would love to talk to you about buying a Turnkey property I’ve found in my area.

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Patrick Martinez February 18, 2013 at 10:46 am

Hi Ali,
great article and well thought out. I have a question;If you buy a turn key all cash are there any restrictions in cashing it out per the lender, or does it vary state to state? Bythe way your website is very good and very educational.
Regards
Patrick

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Ali February 18, 2013 at 12:01 pm

Thanks, Patrick, I appreciate that! When you say restrictions on cashing out, are you talking about just pulling out a mortgage on the property you have already purchased? If that’s what you mean, I have known people to do that. There are no restrictions that I know of on the property side, but I can’t speak for the lender side so you’d have to confirm with them. My biggest piece of advice would be to always work with a lender who is very savvy and involved with investment property lending. A Wells Fargo or BOA or someone isn’t going to understand as well and probably won’t offer you all the options.

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Ali February 18, 2013 at 11:58 am

Sounds great, Shawn, I’d love to check it out!

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Kyle February 18, 2013 at 11:10 am

Great article Ali. I am a rehabber at heart and have since focused more on wholesaling to fund my buy and hold purchases.
I sell a lot of turn-key properties. I sell most of these to out of state investors that want easy monthly income. I work in depressed markets around the country and when I can show an out of state investor an ROI between 20% and 30% they get very excited!!
Like you said, it isn’t for everyone, but it sure does have it’s place!!

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Ali February 18, 2013 at 12:02 pm

Hey Kyle, that’s awesome! What are some of the markets you work in? 20-30% is really high, so I’m guessing when you say depressed, you mean reeeeally depressed :) But hey, there is money to be made in those areas, no doubt!

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AJ May 19, 2013 at 2:03 pm

Would love to get contact info for Kyle if possible!

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Jeremiah February 18, 2013 at 11:14 pm

Ali – a great article. Thank you!

Your DIY vs Turnkey approach is logical, but I’m wondering about the economics of a Turnkey (using your definition) vs a retail strategy (purchasing a fixed-up, rent-ready, retail listing from the MLS and locating a property managers/tenants myself).

I get that the turnkey offers the advantage of having renters/PM and in place, but what is the premium that I as an investor pay for that? 5%? 15%? more?

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Ali February 19, 2013 at 2:21 pm

Hey Jeremiah, great question! Actually, in my opinion, the tenants in place and the property management in place is the smallest of the benefits of the turnkeys. Anyone can find property managers (who will find the tenants) and all that… where the real benefit comes in with the turnkeys is the low acquisition and rehab costs. I would never focus on retail rent-readies from the MLS… I guarantee you they are way over-priced for what you can find with either distressed properties or the turnkeys.

I’m not a fan of the MLS period, but I know that if you can catch a property within hours of it being posted, you can possibly find a deal. Those are often going to need work though. So if you want to buy something that doesn’t need work, definitely head for the turnkeys. They will be much cheaper than retail MLS properties. I’ve went out multiple times looking at MLS properties and none of them ended up being deals.

I recommend either going the full DIY method or the turnkey method. For what you would pay for retail MLS properties, you can get better turnkeys for cheaper!

Great question.

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Jeremiah February 20, 2013 at 8:48 pm

Thanks Ali,

If you’re saying that a good turnkey is less expensive than a comparably prepared rent-ready house listed on the MLS, why would a turnkey company go through extra effort to find/place tenants and then sell below market? I may be missing something, but that sounds… unreasonable. :)

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Ali February 20, 2013 at 10:48 pm

Ha. Not unreasonable at all! It’s part of the business model. The turnkey providers usually do the property management in-house, so that means continued income for them even after they sell the property. Fairly easy income really. A couple managed properties here and there don’t necessarily put a lot of buck in your pocket, but thousands of them do! So if these guys are already selling hundreds and thousands (depending on the provider) houses, why not just add the property management aspect in and keep receiving the continued income on them? Putting the tenants and managers in is really the easy part, like I said. So it’s easy money for them. Plus it offers value to the buyers so they keep coming back.

The providers could easily sell these properties for higher prices but it would not be advantageous for them because they would no longer be competitive against the retail rent-ready properties. It is no problem for them to sell under market value because they got the property cheap enough where they still make their desired margins. Another less obvious thought about this too is as soon as they sell them at retail prices, they are going to get retail buyers. These guys don’t want to deal with retail buyers, i.e. primary homeowners. The process to sell to them is stupidly slow, these guys don’t handhold, and they only want to deal with investors. But investors want a deal. So set up like this it’s a win-win for both the providers and the investors.

Jeremiah February 21, 2013 at 7:52 am

Thank you again Ali,

And please know that I have a huge amount of respect for you! This is just something that is near-and-dear to me as we are planning our first out-of-state investment in about 10 months, so I want to get my head around this topic.

Ironically, I think that there are two types of turnkey providers: retail and wholesale. I’ve spent a fair chunk of time looking into turnkey providers in the Atlanta GA market, and they seem to emphasize hand-holding, and really be targeting the retail, small-scale investor who probably needs financing and will probably purchase a handful of properties over his/her lifetime. And while it’s hard for me to say for sure as I don’t know the market real well, their prices feel above similar places listed on the MLS. A very public example that I have a fair bit of respect for is http://www.gainvesting.com/. This feels like a retail turnkey business.

However, if you change the turnkey model to focus on high end/experienced investors and remove the retail, hand-holding, and probably financing components, the model that you described, selling below market, probably makes sense.

Thanks again!!!

Ali Boone February 24, 2013 at 12:36 am

Jeremiah, you are doing great research on this. However, it really doesn’t matter what ‘type’ of rental property you buy….whether turnkey or MLS or retail turnkey versus wholesale turnkey…. All that matters is you get a good property. If you find every property you buy on the MLS through retail and they all have good numbers and are great investments, good for you! If you go the turnkey route, who cares who the company is geared towards. I know the company you mention very well and they are great. They have both seasoned fast-moving investors and newer handheld investors.

And yes, if you are researching turnkey providers, you are probably finding more that do hand-holding because they are the ones who advertise, which is how you were able to find them. There are plenty more who you aren’t going to find information on.

The thing for people to understand is that there are ways other than the MLS to find properties, and most often the other ways are better. On average, any MLS listing has already been passed up by 5-7 investors. I do know flippers though who buy all theirs from the MLS, but every one of those has an agent who stalks the MLS and grabs the good ones the minute they come out. The good properties aren’t still on the MLS after 1/2-1 day. So if there is one that is, there are a lot of investors who have already passed it up, so you might want to wonder why they passed it up. This is more applicable to the competitive markets than the really stable ones, but it’s fairly standard. The majority of the time, the turnkey properties are also going to be in better shape than MLS properties. Turnkeys are freshly rehabbed, MLS properties are not.

I don’t care where you get your property from, I just want you to make sure you get a good one.

Jeff February 19, 2013 at 10:23 pm

Thank you for the article. I enjoyed it.

As a turnkey investor, I have often wondered “am I really an real estate investor”? It doesn’t seem as exciting as rolling up your sleeves and doing it yourself. However, I have been happy to trade off the excitement with the ROI I have received through my 5 turnkey properties (well 4 – 1 has been a slight pain). On the flip-side, I still feel like a beginner. :-)

If I had more time, I would love to explore other REI options but for those of us busy with another career, a good, reputable, turnkey company seems a great way to go.

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Ali February 19, 2013 at 11:54 pm

Well Jeff if it makes you feel better, I think turnkeys are a phenomenal way to call yourself an “investor” BECAUSE all of your income is passive! Isn’t that the ultimate goal? Working (i.e. rehabbing) isn’t passive, meaning you have to work for the money. I prefer to not lift a finger and let the money come my way :)

Where are your 5 turnkeys you have now?

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Jeff February 20, 2013 at 8:20 am

Hi Ali. That’s what I have been trying to tell myself too! ;-)

My properties are in Indianapolis and Memphis. I live in southern California (Orange County).

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Ali February 20, 2013 at 11:36 am

Great markets!!

Edita February 28, 2013 at 12:39 pm

Ali,
do you hire your own property inspector for the turnkey property you are considering to buy or does the turnkey company provide you with an inspection report already performed by a reputable inspector (maybe ASHI certified)?

Thanks!
Edita

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Ali February 28, 2013 at 2:03 pm

Hey Edita! Great question. I always hire my own inspector, even if the turnkey provider has a professional inspection done and offers me that report for free. Even if it is only for my own sanity, having my own inspector is really the only part of the turnkey process that is all mine, with absolutely no risk of bias towards the seller. My inspector is the only person not connected to the turnkey provider in any way, and I always want that outside opinion. Plus so far, my inspector has always found some things theirs didn’t. Not to say theirs was bad, but no inspector will hit everything, so if the provider does offer me their inspection report free, it’s still worth it to me to pay for another one. Then I get more stuff fixed for free and I feel better about it all.

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Mark Gould March 2, 2013 at 4:25 pm

Thank you for the break down charts, especially the stress chart. 10% to the property management company is a great deal to me, to handle all that: finding tenants, managing the unit (s), evictions, maintanence, etc… heck,, Jockeys give 25% to their agent. (I’m a former horse jockey)

I would think that the 10% is tax deductable?

Mark Gould

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Ali Boone March 2, 2013 at 7:49 pm

Hey Mark, absolutely! :) I make no claims to being an accountant and you should always consult with yours for all things writeoff-related, but I absolutely deduct the property management fees I pay on all my properties.

I agree with 10% being worth what you get for it (assuming you have a good manager). For most of my properties that is about $100/month… I can easily make way more than that during the hours I’m *not* having to do those duties myself!

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Sharon Tzib March 6, 2014 at 8:07 am

To be more accurate, Mark, the 10% fee is a monthly management fee. It does not include lease ups. Most PM’s will charge one month’s rent for that. Therefore, when analyzing deals, I use a 12-16% deduction for PM fees (the less vacancy you have the lower the % will be).

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Todd Wilson March 15, 2013 at 11:17 am

Hi Ali,

What a wonderful article! Would you happen to know if there are any turnkey companies in Phoenix that you could refer me to? I will be ready to buy a few properties this summer.

Thanks!
Todd

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Ali Boone March 15, 2013 at 7:15 pm

Hey Todd! I do know a turnkey provider out there actually. Feel free to email me anytime and I can get you hooked up with. Great properties, but remember with Phoenix, returns are fairly minimal! Phoenix finished out their hayday at least a year ago, maybe a little more. Still good houses though and some positive return, but not a lot.

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Todd Wilson March 16, 2013 at 2:47 am

Thanks Ali! You raise a good point. I am in Seattle now and it is so expensive… but I think if I work hard enough to find a deal or two here, I will be happier in the long run. I will scratch the Phoenix idea and after a lot more research and learning the business, I will look around my own backyard for deals. Thanks for helping my narrow my focus!

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Ali Boone March 16, 2013 at 11:13 am

Good thoughts, Todd. If you ever want to run numbers by me, feel free! I’m not sure I’d substitute Phoenix for Seattle properties, but if you’re more comfortable doing it that way, go for it! Just don’t get negative returns.

Todd Wilson March 16, 2013 at 11:33 am

Just say no to negative returns! :-)

Thanks, I will keep in touch and please keep up with the awesome blog posts!

Todd

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Ali April 8, 2013 at 4:16 pm

Thanks, Todd, I’ll try! And I’m totally envisioning a big protest sign that says Negative Returns with the big red cross through it, like no-smoking signs, and holding it up and shouting “No negative returns! No negative returns!” :)

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daniel April 7, 2013 at 2:39 pm

Hi,
Does anyone have leads for Turnkey companies for MultiFamily Units? Even 2-4 units are fine? Most of the turnkey companies I know deal only with single family units.
I think turnkey is great for the folks like Ali mentioned such people with a job who who do not have the time or the inclination to get involved with rehabbing a property but still want to invest in real estate. Thanks for the post Ali and I appreciate any leads people have.
DK

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Ali April 8, 2013 at 4:17 pm

Hey Daniel, I have access to some killer turnkey duplexes if you are interested. Just message me through here and I can tell you who has them.

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Luis April 22, 2013 at 9:03 am

Ali:
I’m interested in turnkey duplexes too, can you send me the name of the company you use?

Luis

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Ali April 22, 2013 at 11:41 am

Hey Luis, can’t put the name on here but feel free to message me and I can give you details.

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Shari Posey April 22, 2013 at 7:21 pm

You said, “I’m not a fan of the MLS period, but I know that if you can catch a property within hours of it being posted, you can possibly find a deal. Those are often going to need work though. So if you want to buy something that doesn’t need work, definitely head for the turnkeys. They will be much cheaper than retail MLS properties. I’ve went out multiple times looking at MLS properties and none of them ended up being deals.”

Why don’t these turnkey companies put them on the MLS to make more money? Is a turnkey buyer locked into a long management contract or something that would make the turnkey seller more money over the long haul than selling at a premium on the MLS?

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Ali April 22, 2013 at 7:40 pm

Hey Shari, great question! And one I asked myself in the beginning. While it would seem that the turnkey providers would make more money by opening up their inventory to the public and/or listing the properties, it’s actually the reverse.

If they open up the inventory to everyone, they will end up with three new types of clients: 1. curious George’s who will talk their ears off but never buy, 2. Brand new investors who needs months of hand-holding, 3. Primary home buyers who will have to get mortgages and also need that hand-holding and on top of that take forever to decide.

Versus, the turnkeys providers with really good deals can sell their inventory nearly overnight to cash-paying investors who ask few questions and already know what they are looking for. The turnkey providers can sell multitudes more inventory in a quick amount of time to the investors than they can to anyone they get from listings. A lot of providers I work with now won’t even let anyone get a mortgage because the process is too long and they have too many other buyers beating their door down trying to buy them up.

With all that said, that is not to deter brand new investors who do need the hand-holding, because a lot of the providers will work with them, but there is a line between legitimately wanting to pursue buying and just being annoying for the kicks of it. Promoters help a lot with hand-holding too to take the load off the sellers.

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Shari Posey April 22, 2013 at 9:22 pm

In our market, good MLS properties get all-cash-7-day-close-as-is offers plus a bunch with loans. Maybe it will happen in other markets, too. Times are a changin’!

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AJ May 19, 2013 at 1:49 pm

Hi Ali,

Love your blogs, I sent you a couple of messages on SKYPE–please advise on turnkey referrals, thanks!

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Ali Boone May 19, 2013 at 2:32 pm

Hey AJ. I emailed you. Haven’t seen any Skype messages tho.

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Tom Wingert June 5, 2013 at 11:18 pm

Hey Ali,

Got a question for you and it’s from the combination of two different articles of yours so I’m not sure if it’s better asked here or there. Guess I chose here.

This article got me really excited about turnkey investing and continues to do so with each reread. It seems like, if you find the right company, you’re in for some smooth sailing (I do realize it doesn’t always work out seamlessly but all the points you wrote above are great things to have taken care of by a company that knows what they’re doing).

The other article is:
http://www.biggerpockets.com/renewsblog/2013/04/20/due-diligence-turnkey-property/

You wrote there that “You are buying a property. You are not buying into a seller.” And you went on to describe that their trustworthiness and customer service really doesn’t matter if the property is the right one.

So, I was hoping you could help me bring these two posts together. When you refer to a seller, is that synonymous with a turnkey provider? If so, then wouldn’t it matter greatly whether the turnkey provider was an upstanding one? Otherwise, it seems like you would lose out on several big benefits including them connecting you with a good PM in the area, honoring their guarantees, etc.

I doubt this is a contradiction but, more likely, I’m missing the bigger picture so I was hoping you could clue me in.

Great articles, as usual!

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Ali Boone June 8, 2013 at 8:50 pm

Ohhhhhhh nice catch Tom. I even had to put some thought into this one! I definitely agree the two sound contradictory, absolutely. I think I wrote these two ‘points’ in completely different contexts, and as far as I wrote them they need to be kept in two separate contexts.

If you can find a really good upstanding turnkey provider (or seller as I refer to them often), then definitely go with that. I promote Chicago and Houston to a lot of people mostly because, aside from being good markets in general, the turnkey providers I know there are out of this world awesome. That’s a rare thing to find in real estate investing in general- a company or seller (of any kind of property) who is just that outstanding. So I promote those heavily because of the quality of their product, their customer service, and their property management.

I’ve met a couple turnkey providers, the individuals themselves who run the companies, who have less than perfect pasts. They have either had lawsuits or charges filed against them, for random various things, or maybe it’s as simple as their customer service absolutely blows. My point in talking about those was more to emphasize that a seller’s personality or past should have no bearing whatsoever on your purchase. All that matters is the property you are buying (the quality of it physically and the quality of the return potential) and with turnkeys, the property management that will come with the property. As long as the property is good and the management is good, and the legal side is clear, it doesn’t matter who sells it to you. That’s where that Due Diligence on a Turnkey comes in- checking those things.

Where I think the conflict between my two statements comes in, and rightfully so, is that it would be natural to assume if someone super shady is running a company, the quality of that company and therefore their product, is going to be shady. And vice versa, if someone running a company is super outstanding, their company and therefore their product is likely to be outstanding. However, this isn’t always true. Some of the best turnkey properties I’ve ever seen in one particular market came from two providers who had equally arguable pasts. But their products were amazing. So take those products and make sure the property management rocks, and you have an insane deal. Who cares what those guys did in the past.

So after talking this out in my head, my conclusion is this- if a property is good and you have good property management set up, who is behind it or the quality of the company doesn’t matter. However, if you can find a turnkey company who really does provide outstanding service, and over the top property quality and management (above just ‘good’ management), those are the guys you want to buy from. It will be worth it.

Hope that helps?

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Tom Wingert June 15, 2013 at 8:19 pm

Yep, that helps bigtime, Ali – thanks!

I knew it would make sense once you added more detail so I could put all the pieces together. If I understood, it seems like the main point is that you can approach each aspect individually because there are a lot of moving parts and the seller isn’t the whole picture. Ideally everything will be stellar but the seller is probably of the least consequence in the whole equation (due diligence is king).

My settings must not be right because I didn’t get any notification about your reply here.
Btw, I’m sending you a PM.
Thanks again, Ali!

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Jerry W. July 9, 2013 at 1:04 am

Ali, I have been considering out of state investing for some time due to the very low cap rate (4-8%)on my local rentals. My main concern has been getting ripped off conman style, ie no real house ponzi scheme, etc. After overcoming that fear my concern has shifted to money pit of getting a plumbing bill or electrician bill, or roof replacement claim 2 or 3 months after purchase. Last but not least is the fear of owning a ghetto house that most people are afraid to walk past after sunset. I really like your blog and have started reading your posts as you seem to focus on turn key properties. I am amazed at how many people give of their time to help educate others. Thank you. I may send you a PM to ask if you have knowlege of the company I have contacted about buying turn key properties.

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Ali July 11, 2013 at 11:14 pm

Sounds good, Jerry!

Remember, everything with a property can be checked on. There is no reason why you should not know any of things/fears you mention above. Due diligence is key.

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Frank March 5, 2014 at 5:19 am

Thanks for putting this together Ali…I’m leaning towards turnkey because i’m currently out of country but I only want to do it if it makes sense.

Thanks,

Frank

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Ali Boone March 5, 2014 at 12:37 pm

Hi Frank, yes turnkey would be perfect for you if you are out of the country. Just ensure you are working with the right people and you’ll be good to go.

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Frank March 5, 2014 at 7:44 pm

Thanks Ali….I choose one company to start off with but I will do my best to keep my ears and eyes open and take advice from the seasoned pros. I understand they’re in business to make money and I don’t mind paying a little more as long as it’s a win win for both of us. The trick is figuring out if it’s a win win. Any help or advice along the way would be much appreciated it. …I’ll make sure to follow you on BP.

Take care,

Frank

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Ali Boone March 5, 2014 at 8:23 pm

Sure, feel free to reach out anytime Frank if you have specific questions or concerns you want a second opinion on. How are you currently deciding if an opportunity is a win-win?

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Frank March 5, 2014 at 9:32 pm

Thanks Ali…I will take you up on your offer…Your site looks great by the way.

My goal is ultimately to build a system….I don’t have a good answer for your question. I’m starting out with a company that I trust but at the same time I’ll shop around a little.

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