What Does a Turn-Key Real Estate Business Entail?
I started my business in 2005, but didn’t really put the turn-key model in place until 2008. At that time, I had honestly never heard the term or knew of any other companies that offered a turn-key investing opportunity. However, since that time there have been a number of different companies that have either formed or come to prominence in different markets around the country that would fall into the “turn-key” business model.
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So what exactly is a turn-key provider? I would define a turn-key real estate investment company as a team of individuals in a particular market that provide all of the necessary components that would enable an investor to make a successful buy and hold purchase.
I would define these necessary components as follows:
A turn-key provider must have the ability to purchase properties with excellent rental potential at a tremendous discount. While some properties can be purchased on the local MLS, this acquisition strategy is becoming increasingly difficult in many markets across the country. Turn-key companies must find other acquisition sources such as:
- Deals from other wholesalers
- Off Market Deals (ie. postcard advertising, probate, vacancy, bandit signs, Craigslist, FSBO, etc.)
- Relationships with local agents, attorneys, lenders, etc.
In addition to this, the turn-key company must have the capital necessary to acquire and renovate the properties that are purchased. Whether this is through a local bank, private lenders or even hard money lenders, it’s crucial that a provider have a source of capital lined up in order to purchase and hold property until sold.
Once a deal has been purchased, the turn-key company needs to have the means to renovate the property. Some companies choose to employ in-house staff to do this, but most companies outsource the renovation to trusted general contractors. Having an accurate knowledge of renovation costs is critical to the success of a turn-key company. Additionally, the quality of the renovation plays a big role in the reputation of a turn-key provider. It’s my opinion that doing quality work can set a turn-key company apart from the competition.
Once a property has been renovated, it's imperative that the turn-key provider have the ability to place a tenant. It doesn't necessarily matter whether the tenant is placed in-house or by a property manager …. However, it does matter that the tenant be thoroughly and properly screened. One of the worst things a turn-key provider can do is gain a reputation for putting under-qualified tenants in place that end up burning future investors. While owning real estate does carry inherent tenant risk, the more the provider can manage that risk for the investor, the better.
Also, it's important that the lease amount provide attractive cash flows for investors. These days, there is an expectation that an investor can obtain financing and still have good cash flow above and beyond the principle, interest, tax and interest payments.
Many people have the ability to find, renovate and even lease a property, but not everyone knows how to go about selling the turn-key investment property. A turn-key company must have appropriate staff in place or strategic relationships to help sell the properties. The person (or people) responsible for selling typically have a very good working knowledge of the market, the properties, the financing process, contracts and escrow arrangements.
I've found that most investors still prefer to use financing to purchase investment properties. This is understandable as the cash on cash returns are typically much higher when leverage is used (especially at today's interest rates). I think it's critical for turn-key providers to partner with one or two proven lenders who really know and have experience closing non-owner occupied loans in that specific market. I've found over the years that most lenders do not have the ability to close these types of transactions. Having a lender that can consistently close deals is a tremendous asset to the business.
I think this may actually be the lynchpin of the turn-key business model. Once a property has been purchased by an investor, there is an expectation that the property will continue to perform over the long term. Some turn-key companies have their own in-house property management companies and some outsource this. Either way, I think it is crucial that the turn-key company have a very close working relationship with the property manager to ensure investors are being taken care of and that properties are performing at their peak potential.
Turn-key investing can be a phenomenal acquisition strategy for those investors who live outside of desired investment markets or for investors who simply don’t have the time or know-how to put it all together. As such, there is an opportunity for real estate professionals to build a business around this model. While it is definitely not the easiest business to undertake, when done properly, it can be a very rewarding business.