One Secret Advantage to Turnkey Real Estate You Don’t Know About

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Turnkey? What in the world is that? It’s a method of buying an investment property. Most people who buy turnkeys buy them because they live in an area where it doesn’t make sense to invest, so they have to be long-distance owners. Or, they have full-time jobs and/or families and are limited on how much time they can spend on an investment property. Turnkey means (usually) that a property has been fully rehabbed, tenants are living there and paying rent, and property management is already set up to handle the property once you own it. The name “turnkey” refers to the theoretical idea that all you have to do for the property to be putting cash in your pocket is turn the key in the door. I think that name is misleading though, because I’ve never so much as owned a key to any of my turnkey properties, much less turned one in a door.

Turnkeys (a.k.a. turn keys or turn-keys, but that extra space or hyphen is just an extra character I don’t care to type so I leave it out) are highly debated, mostly because the price tags on them are higher than do-it-yourself rental properties and there have been turnkey providers in the past who were less than ethical and they gave turnkeys a bad name. The latter isn’t as big of an issue now because most of the really bad ones are out of business, but the price tags are still higher than other rental properties you can buy. If you wonder or worry about why they are more expensive, check out this article: Do the Markups on Turnkeys Kill the Deal?

As that article mentions, and as a lot of turnkey advocates will stress, turnkeys do have their perks. They allow you to buy an investment property with a lot less effort, no rehabbing work, stress or risk, and you don’t have to spend your time and brain landlording the property yourself. Some of those perks are exactly why some people don’t want to buy a turnkey though- they want more control over their property and are willing to do more work in order to achieve higher returns. To each their own and there is no right or wrong route to go when it comes to buying rental properties.

If you are toying with the idea of going the turnkey route versus doing everything yourself though, I want to point out one much less obvious perk to turnkeys that most people don’t realize. We already established the obvious benefits to paying more for a turnkey property. So what is left? It seems like that covers all of them, no? Nope, there is one more. This one isn’t advertised, nobody has mentioned it that I’ve seen anywhere, and I bet you couldn’t guess it if you tried. Oh! And one more thing, this benefit could be the reason you become a big rig, hugely successful real estate investor later on!

The Secret Advantage to Turnkeys…

Learning the fundamentals.

Whoa, hang on. Yes, I know that sounds boring, but hear me out.

You’ve heard a million times that you can’t become a successful real estate investor, or anything for that matter, overnight. You can’t because you have to find your niche, which isn’t always as easy as it seems like it should be, you have to learn basic skills, you have to expound on those skills, and you have to do all of that step-by-step. Doing it any faster than step-by-step will cause you to miss out on critical information and skills, do something you don’t end up liking, get yourself in too deep, or who knows what else.

Think about a rental property. You want to own one. What are the two critical things you have to know about a rental property in order to own one, and profit from one, successfully?

  1. Knowing what makes a good rental property
  2. How maintain a rental property

If you buy a good rental property and you do a good job at maintaining a rental property, you should end up profiting successfully. If either of those two things are lacking, it is likely that your investment in said rental property will tank, potentially costing you tens of thousands of dollars (no pressure).

So what comprises those two issues? What do you have to know (or learn, if you’ve never done it)?

Knowing What Makes a Good Rental Property

  1. Running numbers. You absolutely have to understand how to calculate returns and you have to know how to do that not based on phony-baloney theories or equations. You have to understand how to include estimates for uncertain expenses (which does not include expenses you can easily find actual numbers for) and what are those uncertain expenses and how do you estimate for them? How do you know what a good return is?
  2. Markets. How do you know if the market you are buying in is a good one or not? What even makes a market good or bad? How do you know where within a larger market to buy?
  3. Condition of the property. How do you know the true condition of the property? You know one of the biggest horror stories of real estate investing is you buy a property not realizing it needs a mega-major repair that you weren’t expecting and that repair costs so much that it blows any profit potential out of the water. Whoops! How do you ensure you know what you are getting and how do you know what you even need?
  4. Back to running numbers. Did I mention it’s important? It’s critical! If the numbers don’t work, you’re hosed. So, while we revisit numbers again, let’s add in financing. Are you approved for financing? Do you know what your monthly financing costs will be? Will that negatively impact the property? Have you gone through the mortgage process in the last few years?! It’s repulsively long and tedious. You will definitely be asked to send them your left arm and first-born child. And then they will you ask you for both of those again because they’ll have forgotten you sent them in once already.

How to maintain a rental property

  1. Finding tenants. You do know that tenants are your most crucial element of owning a rental property, correct? If you have bad ones, or if you have no tenants, you lose. You lose big. How do you know how and where to find good tenants?
  2. Maintaining the property. Another horror story- constant repair expenses, the repairs never end. That’s just if the house isn’t in good condition. What about if tenants constantly destroy the house? Told you tenants are critical. How do you minimize repair expenses while still maintaining the property properly? How do you afford a big expense, do you have a savings account built up for that situation? How do you keep an eye on your beloved tenants and make sure they are behaving and not destroying things?
  3. Evicting tenants, if necessary. Where do you even start for that? Courthouse, police, I don’t know?

Every one of these are things you have to know even to buy a turnkey rental property, and turnkey rental properties are theoretically the easiest way to buy a rental property. Wait! I thought you said turnkeys were hands-off. Well all of this, compared to other methods of buying properties, is hands-off! Muahaha. Scary, isn’t it? Just think, knowing all of the things above and being able to function within that space with ease of knowledge is what we in the real estate investing world do consider hands-off. Meaning, that is the minimum amount of stuff you need to know in order to succeed with a rental property. And rental properties are usually considered one of the easier forms of real estate investing!

You have to know and understand each thing I mention above in order to be successful at profiting from rental properties. These are the fundamentals. If you go out and buy a turnkey rental property (the easiest of the rental properties), you will still be forced to learn all of these things. The only chance of escape you have from learning any of that is when it comes to the maintaining the property part. If you have a good enough property manager who functions properly and takes care of everything for you, you don’t need to learn the detailed ins and outs of finding good tenants and maintaining the property efficiently. The manager will do that for you. But don’t you need to know how to find a good manager, and therefore you need to know the questions to ask? So let’s keep all of those things in the list of fundamentals you have to learn.

Versus what?

Buying a turnkey rental property will teach you the fundamentals I list as being critical pieces of knowledge you must have in order to succeed with a rental property. As opposed to what though? Well, if you don’t buy turnkey, you are likely buying a property that needs work- a rehab. And because so few people who want to do that work themselves want to do all of that long-distance, chances are the property you buy is local to where you live, which odds tell me means you are planning to landlord the thing yourself.

So, on top of learning everything I already mentioned, you now have to learn in addition to those:

  1. Finding a property
  2. Rehabbing
  3. Landlording

Do you even know how much is involved in both of those? Oh man!

Finding a property

  • Do you use a real estate agent? You do know only, like, 1% of Realtors have any lick of experience with investment properties, don’t you? Meaning most of them will not be able to help you find a good property, simply because they don’t know what constitutes one.
  • What about auctions? Uh, have you tried one of those before? All I can say there is: good luck.
  • Foreclosures and short sales? Maybe. They can be really good deals, assuming the bank ever lets you actually have the property. They usually will, assuming you are willing to wait 6 months to a year while they fight you on it.
  • Are you looking in a market where a lot of big boy investors and hedge funds are buying? How will you, as a little guy, compete against them?

Rehabbing

  • Knowing what all needs to be done. And I’m not even just talking about the big things that need fixing… I bet you haven’t thought of things as small as making sure you replace all the locks and other methods for protecting from vandals, have you?
  • Managing contractors, potentially multiple contractors at that. Which doesn’t sound hard, but have you dealt with bad contractors before? Oh, it’s horrible. Have fun with that.
  • Doing the work yourself saves a lot of money, but then you are looking at needing to know how to do things like checking on and working on the mechanicals (plumbing, electrical, etc.), prepping walls and ceilings for painting, painting, possibly replacing windows, lighting, flooring (including laying tile!), and yard work.

Landlording

  • How do you know how to find the good tenants? More importantly, how do you figure out if someone is going to be a bad tenant? How do you screen? How do you run background checks? How do you accept application fees, security deposits, and ensure the move-in goes okay?
  • Are you going to handle all repair requests yourself? If so, do you already know how to work on a house yourself? I supposed if you rehabbed it yourself, you are already miles ahead of the game. What if your tenant calls at 3am to tell you a pipe burst? Are you ready to go over there in your jammies to fix it? Do you know how to fix it? What can you do to make sure your tenants aren’t causing absurd damage to your property?
  • God forbid you have to evict tenants, do you know how to handle that process? What is the process? Do you know the state laws concerning the eviction process? What if your tenants fight you on it?

Okay. Finding a property, rehabbing a property, and landlording a property is hard work! There is a ton of stuff you need to know and skills you need to possess. In no way am I saying this to say it isn’t possible to learn it all or that I don’t support doing it that way. I think it is all great stuff to know but what I am saying though is that if you are a new investor, do you see how much you need to learn in order to do everything yourself? Trust me, you have plenty to learn without worrying about finding the property, rehabbing, and landlording.

So, what is the summary of my point as to what is the secret advantage of turnkey rental properties? Turnkeys give you a chance to learn the fundamentals of what goes into a successful rental property without bombarding you with complicated things like finding properties, rehabbing, and landlording. Those three things are what I would consider to be advanced skills. Some people have a natural knack for them so it’s no big deal if they start out by doing them, but most people, I would venture to say, will be biting off more than they can chew if they choose the do-it-yourself route. If you go the turnkey route, you are allowing experts to do all of the advanced things for you while you spend your time learning the basics. You have to conduct due diligence on the turnkey seller and on the property and in order to do that properly, you have to learn all of those fundamentals. If you learn the basics in the beginning, you will only be more prepared to have a ridiculous amount of success with the harder stuff later.

Turnkeys are far from the only way for new investors to start out with decreased risk and skills required. But if you are looking at turnkeys or toying with the idea of them, be sure you realize this advantage that they give you. It can be a big one for a newbie!

For more advanced investors, what are the critical things you think newbies have to know in order to succeed as they progress?

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About Author

Ali Boone(G+) recently left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor only two years ago but managed to buy 5 properties in just 18 months using only creative financing methods. Her focuses have been on rental properties and overseas investing in Nicaragua.

22 Comments

  1. Lots of good information here, thanks! I am most familiar with the market in Washington, D.C., and now I’m moving to San Diego, so I’ve been considering exploring some turnkey options in other areas of the country. I know as investors we’re not really supposed to account for the potential appreciation of our properties, but do you think that sometimes the lower cash returns could be worthwhile in a market that will probably be appreciating faster than the national average?

    • Elliot, I think that is the number one mistake investors make. The areas that appreciate faster are usually the areas that depreciate faster as well. It’s no fun to have negative cash flow and that is usually what happens when someone sacrifices cash flow for appreciation.

      • Thanks for the insight, Mark. I just keep trying to figure out how investors are successful in places like D.C. and southern California, then! Why would anyone choose to invest in those places given the option to start out with a much higher cash flow in other parts of the country?

        • It’s a speculation game Elliott. A lot of people have banked huge by playing the appreciation game, but even more have lost huge. Ask all the speculators how 2009 treated them.

          More than that though, I think if you think of how most of us grew up seeing money and investing, we weren’t taught how dangerous the appreciation game is. For a long time, it was a good game to play so a lot of people played it. It wasn’t until you know what hit the fan that people started wising up to reality. Then you have the people who just feel better about themselves when they can say they own property somewhere ‘cool’ like LA. And lastly, there are people who can’t get comfortable with the idea of investing outside of their own backyard so they are willing to trade profit for comfort.

      • That’s true Mark but as long as you aren’t trying to sell the property, it doesn’t matter if your property loses value. As long as you have positive cash flow going every month, the value doesn’t matter. Unless you have an adjustable-rate mortgage or a higher interest thing where you do need to refinance or lose your current interest rate and it wipes out your cash flow. But for that, always use fixed-rates when you can to avoid that.

    • Elliott, as long as there is positive cash flow, you can definitely choose between markets with greater appreciation potential than others. There are a lot of very stable markets out there that are way less likely to appreciate than others, and you will likely see higher cash flow on those. Or you can buy in an area with more expected growth and sacrifice some of those returns, but never to the point of going negative. As long as you have positive cash flow, you are fine and can choose from there.

  2. Good article, as usual, Ali. When I bought my Indiana properties (while living in Calif), I used a realtor, who in the end, turned out to be pretty shady (went MIA on me in the final days leading up to close of escrow), but he did refer me to a great property manager, who handled the rehabs and placed tenants. He then promptly retired and I had to find a new PM, which took me two tries before I got it right. But I survived and my rentals are profitable – with my background in real estate, I’m definitely one of those whom you mention as “having a knack for” this REI thing.

    My advice to new investors is to treat this as a business, because at the end of the day, that’s what it is. Keep excellent records, have appropriate systems, surround yourself with experts who conduct themselves in a professional manner, and remember that ultimately, the buck always stops with you, so the blame game won’t get you very far in this venture.

    • I love that advice Sharon! And your wording is perfect. Made me smile :) And to piggyback off that too, it is a business and you are the boss, meaning you absolutely fire whoever is costing you money and look for someone new. My biggest mistake was letting bad PMs go for too long before I did something about it. Yes, treat it like a business all day long. Which includes don’t befriend your tenants because you will find yourself giving them passes and it will cost you money. Your relationship with them, if you even know them, has to be business-only. I won’t even hire friends as contractors anymore. That’s bit me big twice.

  3. Great article! You covered a lot of info. I think newbies need to investigate property managemt companies thouroughly as well. Even if they dont think they will need one, they may in the future. Calling a property manager pretending you want to rent a house is a great way to see how professional they are.

  4. Very informative article, Ali!

    I agree, turnkey properties sometimes get a bad wrap. Though, with anything there are pros and cons. And, yes it all boils down to personality — not everyone works the same way.

    Whether someone decides to go the turnkey route or more the “do-it-yourself” route, I think one thing we can all agree on is that one of the keys to success is knowing how to hire good, reliable and honest people. Like you said, “To each his own!”

    Lots of good information here. Thanks for sharing Ali! :)

    • You’re welcome Rachel and I’m so pumped you give your thoughts every week. I catch myself keeping an eye out for them now! :) I think you always have very good and sound advice. And yes I too think either route, turnkeys or DIY, are excellent. It’s all about personality, your personal goals, and your personal skills and more importantly your DNA. I wish like all get out that I had rehabbing in my DNA. I think it would be super fun, super profitable, and a great experience. But it’s not in my DNA so I stick with what is. Things go a lot smoother when you do it that way.

  5. We have turnkey properties and properties we did the work. Our best properties are the non-turnkey variety. Unfortunately with two full time jobs and two little ones, our purchase process was slow and limited. With the turnkey wholesaler we found, we have bought as many properties in the last 6 months as we have purchased in the last 6 years. Its far from management free on our end, but not even close to as intensive as running the full rehab. Plus we still have equity in the deals from him. When you buy one property at a discount, its hard to ever pay full price again.

    When we have a good turnkey wholesaler we will buy turnkey, when we don’t, we will manage the projects ourselves.

    Jason

  6. So I’m a little confused. You list “how to maintain a rental property” and finding/evicting tenants as one of the things you need to know/learn when getting a turnkey property, then you list landlording as one of the necessary skills if it’s not a turnkey. Am I missing something?

    • Probably not Adrian, I probably didn’t write it out completely clear. If you go the turnkey route, you just need a basic understanding of what will make for good management of the property (maintaining a rental property) but you don’t need to know the nitty gritty details because a manager will do it all for you. But you need to know enough to be able to interview managers to know who to put in charge of it. You don’t need to know details of evictions either because the manager will do it, if it’s turnkey or if you use property managers. If you landlord yourself, you have to know all of that stuff.

  7. I completely agree with all your points around needing to understand fundamentals.
    Regardless of what type of investing you do not having a strong basic knowledge of what the process is going to hurt you at some point.

    Interestingly I feel this is one of the major points made by the anti turnkey crowd.
    You have the right mindset, but many people go into these investments thinking they are totally hands off and don’t really need to know any of that.
    I mean the provider showed them the returns and the management company knows all that tenant stuff, what can go wrong??? :)

    • Haha, right Shaun? What could posssssibly go wrong?!

      I think you make a very valid point and while I’ve known people don’t always have all the information, I didn’t connect that as being another reason why people knock turnkeys- the ability to be so easily duped by turnkey companies, or the companies suggesting they can be totally hands-off. So between past companies actually screwing people, and then people not being educated on how to check things out, I think those are the two reasons turnkeys can have a bad rep. Well that and some people knock them because they are over-priced, but that’s totally justified in my opinion because all the work is being done for the buyer and people don’t understand applying an amount to their time, so I don’t include that as why turnkeys can be ‘bad’.

      Great ‘aha’ moment for me thanks to your comment… it’s not just about convincing people that most turnkey providers out there now aren’t bad, and it’s not just about telling people what due diligence to do, it’s also about making sure people know they need to be doing due diligence as well! I hadn’t connected the simplicity of that last one yet. Thank you!

      • Unfortunately there will always be bad people and bad companies that are out to make a quick buck and screwing people over is just a means to that end.
        That is why it is important to vet out anyone you want to do business with.
        I’m sure that a good turnkey provider will deliver a quality product at a price that will allow the investor to make a good return and supply management companies that will make the process fairly simple for them.
        That is just smart business to get them to buy more and to get them to recommend them to their friends, family and colleagues.

        If someone happens upon a top notch provider they might do quite well without actually knowing any of the stuff you talked about. That is pretty risky though and I will guess more people will get burned at least a little rather than go their entire investing career in ignorant positive cash flow bliss.

        As far as them being overpriced, that is a personal value judgment. While not my cup of tea I see that cutting out those major components of the process (acquisition, rehab, vetting management, placing tenants…) bring a lot of value. So as long as the margin the provider is taking still allows for a solid return for the investor it is a judgment call if you would rather pay the premium for the hassle free acquisition or are you willing to put in the legwork to capture that margin by doing all the work that is being provided.

        • Great put Shaun and I totally agree. I’m one of the few who agree on the point that cutting out all of those parts of the process is worth a ton of money. If you really weigh out the time, effort, headache, stress, and knowledge set you need in order to accomplish those things, all of that is well worth the price difference in my opinion and you are actually getting off with a steal. For some people all of those things come naturally and they are good at them, in which case I say don’t buy turnkey at all, save the money and do what you are good at.

          I do know some people who have bought turnkeys who have not a single clue about anything I talk about, or have ever talked about as far as due diligence on turnkeys, and they are collecting cash flow fine. Looking back, I realize it’s because I did all the work for them as far as vetting everyone out and they just piggybacked. Heyyy, wait, now I see that! I just realized I did the work for them. Ha. Oh well. It’s worked out great for them so far but they are in a riskier position should anything start going wrong with their properties. Until now, nothing has gone wrong, which sounds great but it doesn’t teach them anything either. I guess they’ll just have to hope I answer my phone later on if there is a problem! :)

  8. For a newbie, turnkey might be OK. I fear there are many agents out there waiting for a newbie to show their cash, and then get sold hook, line and sinker to a over priced rental.

    Having found, rehabbed and rented all of my 24 units, learning the hard way at times, I would say start small, ‘digest’ the property, and then look for more.

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