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What Are The Different Kinds of Turnkey Properties?

Ali Boone
7 min read
What Are The Different Kinds of Turnkey Properties?

Thinking about buying a turnkey rental property? Great! I love turnkeys, they are all I’ve ever bought for myself (and plan to buy for myself). I know a lot of folks out there are interested in turnkeys because they are extremely convenient for anyone who either doesn’t want to put in a lot of work for a rental property investment or doesn’t have a lot of time to dedicate such a project.

For anyone interested in the turnkey concept, I want to make sure you understand that there are two different models of turnkeys out there (although more accurately, “turnkey advertising”). These two methods are advertised very similarly but they are in fact drastically different from each other, mostly in terms of the risk associated with each (hello, risk = important).

Before I explain the two different methods of buying turnkeys, let’s first make sure you understand what a turnkey property is:

What is a Turnkey Rental Property?

The most general definition of turnkey, irrespective to real estate and according to Wikipedia, is:

“… something that is ready for immediate use, generally used in the sale or supply of goods or services.”

For real estate investing specifically, according to

“A turnkey property is fully occupied, little or no maintenance required, with management in place.”

You can probably see how those two definitions correlate. Essentially it means you are buying a rental property that is already up and functioning and ready to go (i.e. performing). Now, from here it can get a little hairy as far as what people consider to be turnkey properties. Some might consider a property to be turnkey while others don’t, etc. Either way, not a big deal. Just know that the general idea is that the property is ready to go as an investment property, in terms of there is no work needed for the property to perform. Perform, in this case, means provides cash flow to the investor.

Any property, hopefully assuming it meets the definition of turnkey, can be sold as turn-key. If I own a property somewhere and it’s in great shape, ready to go, producing cash flow, with tenants and management in place, I can sell that property to someone and tell them it’s turnkey and they will have bought a turnkey property. If you are an investor and looking to buy a turnkey property though, finding individuals who sell them or individual turnkey properties can be difficult. The easiest way to find a turnkey property is usually to find a company who specifically sells turnkeys. Assuming you go this route, make sure you are very clear upfront when you talk to the turnkey companies about how exactly they work.

Related: What Does a Turn-Key Real Estate Business Entail?

The Two Different Methods of Buying Turnkeys

I feel a bit strange even explaining one of these two methods to you, because in my opinion it by no means fits the definition of “turnkey”, but for some reason companies who utilize this method still advertise the properties as turnkeys. Because of that, I’m considering it a method of buying a turnkey {rolls eyes}.

If you call up someone (a company) who sells turnkeys, they are likely to tell you that if you buy a property from them, it will work in one of two ways:

  • Option 1. You purchase a property that is fully rehabbed, tenants are in the property already paying rent, and property managers are standing by to manage the property the minute you own it.
  • Option 2. You buy a distressed property, you provide the funds to the company to do the full rehab to the property, and they then find the tenants for the property and then hook you up with property management as well.

The main difference you will see with the two options is: equity. In Option #1, you are buying a fully-done property so you can’t necessarily add forced value to it by making improvements, so you are likely buying at 100% ARV (after repair value, meaning the value of the property in pristine condition). In Option #2, and this can vary between the companies advertising it, your purchase price is likely to only be say 75% of the ARV because you are paying that company strictly on the rehab. As you know, or don’t know, it’s just how flipping properties works- you buy a property for $X, you add $Y in repairs and improvements, and now the property is worth $Z, which is higher than $X+$Y. So in the two scenarios above, you either buy the turnkey property at $Z, or $X+$Y, which is less than $Z. See what I did there?

Well then you ask, ooh, well if $X+$Y is lower than $Z, why not go for Option #2? If you go with Option #2, great! I’ve known it to work in some cases. But if you choose Option #2, make sure you are extremely aware of what you are getting yourself into as far as the associated risk. If you’re wondering why the difference in prices between the two options, the difference is because of risk.

  • Higher price = less risk
  • Cheaper price = more risk

(Kind of the general trade-off in real estate in general, isn’t it?)

The Difference in Risk Between the Turnkey Options

There is no such thing as a real estate investment that has zero risk. I’m often surprised at how many people I talk to that seem to be really driving towards that zero-risk investment. Well, uh, sorry. If you want a zero-risk investment, keep your money in a bank that earns you 1% (on a good day). Even that risk level though could be argued. But! Good news, there are ways to control risk. Even with turnkeys! So let’s look at the differences between these two methods of buying turnkeys to help demonstrate one aspect of controlling risk factors in an investment property purchase.

Related: How to Perform Due Diligence on Turn Key Real Estate Providers

Option 1. Waiting to buy a property until it is already fully performing lessens your risk tremendously. Not just because it’s already performing, because performance can be misleading or falsified, but because if the property is performing there is literally nothing you can’t verify. Just to reemphasize, verifying doesn’t necessarily prevent 100% of any potential unexpected problems later, but it can certainly give you a safer starting point.

 Some general comments that reflect risk with a turnkey property that is purchased fully functioning:

  • The condition of the property, and quality of the rehab, can be fully known by hiring a property inspector (or 3 of them if you really want some assurance).
  • Because the rehab is completed and the condition of the property confirmed, there should be no unexpected rehab costs that could potentially wipe out your investment.
  • If you are waiting on your turnkey property to be finished, and any unexpected rehab costs come up, that cost falls on the seller and not you because you don’t own the property yet.
  • The qualifications of the tenants who are in the property can be verified, by you, so you don’t end up with tenants who were deemed qualified by who knows who.
  • The rent amount that the tenant is paying can be verified against current market rents for that area and type of property.
  • You can fully vet the property managers who plan to handle your property once you purchase it.
  • The only speculative variable is future appreciation but what you are buying isn’t dependent on those numbers so it is a non-factor.

Option 2. Definitely the better source to build yourself some equity upfront, but here are things associated with following the model of buying before the work is completed that you need to consider:

  • You are putting all of your money down upfront, the seller is putting in nothing (so, who do you think is going to lose should things go haywire?)
  • If the rehab costs are higher than expected, whoops for you.*
  • If the rehab takes longer than planned, you incur those holding costs.*
  • If the quality of the rehab that is done isn’t all that great, oh well.*
  • You incur the cost of vacancy while you wait for a tenant to be placed in the property after the rehab is completed.
  • Most variables are speculative, and therefore unproven.

Cost of rehab- discussed already.ARV- if you can’t take out financing until after the home is completed, how do you know the appraised value will come out at what you expect? That could drastically affect your loan. Rental income- what if you just can’t get what you planned for income?
Quality of tenants- do you know for sure you can land the quality of tenants you expect to? Vacancy period- discussed already.
Quality of finished product- discussed already.

  • A lot of these companies charge an upfront, sometimes undisclosed, fee.

* I’m not familiar with the contracts these companies have you sign. There may be some mitigations for these items in there. If there are, make sure you read them very carefully and they are air-tight. If there are no contractual mitigations for these types of instances, uhhh, be careful.

So yes, you will most likely pay for Option #1 than you will Option #2. The reason, risk, should be clear now as to why. Would I ever do an Option #2? I haven’t yet, but maybe. If I found a company who had a lot of great references from investors who had gone through the process, I might trust them. But for sure, I would require that the returns (both cash flow and equity) I’d stand to get out of the deal would be incredibly high. Why would I assume all of that risk to end up with returns only slightly better than I would get from a true turnkey purchase? No way. So if I had something crazy big to gain, maybe.

Neither option, even Option #2, is necessarily wrong. And like I said, I’ve known some investors to go the Option #2 route and be successful. But be very aware of the differences in buying model and what you stand to gain by going either direction with it. As with anything in real estate investing, knowledge is power! The more you know, the smarter you can be.

The best way to minimize risk is with knowledge. Choose any investment strategy you want, just make sure you know what you are getting yourself into!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.