Real Estate Investing Basics

Turnkey Investing 101: What to Avoid & How to Know if It’s Right for You

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Turnkey investing is a very hot topic in real estate circles and seems to only be getting hotter. On a daily basis in the BiggerPockets Forums there could be from half a dozen to two dozen conversations involving turnkey real estate. Those conversations may involve questions from new investors to advertisements of opportunities, but almost all of them get comments from investors who hate the concept. Some are uninformed opinions, and others are comments from experience, but all seem to point to two clear conclusions:

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  1. There is no definition of what turnkey real estate really means.
  2. The worst investment you can make is a cheap $40,000 turnkey property!

Read this article carefully, and pay close attention to the end. If you are thinking about buying turnkey investments, there are many great opportunities all around the country, but there are probably more out there that are not. Investors are often their own worst impediment to making turnkey portfolios work, and I give a few ideas at the end regarding which investors this concept works for best!

What is Turnkey Real Estate?

To be very brief, turnkey real estate involves a model where an investor purchases a property — usually for long-term buy & hold — that another investor or company has purchased, renovated and put under in-house management with a tenant. That is my definition of a turnkey real estate investment. However, and unfortunately for investors everywhere, every week there are new turnkey companies popping up and creating their own spin on what it means to be “turnkey.”

Some companies own all of the services, while some do not. Some offer a completed property with tenant, some do not. Some companies are fully capitalized, while others need to use an investor’s money. Still other companies act as a real estate broker working off the MLS and then broker all of the after-purchase renovation and management services as well.

I am not here to tell you as an investor which one of these definitions is correct. I have been in this business for a number of years now and have seen all of the good (and most of the bad) and can honestly say that the word “turnkey” no longer has any true meaning. It is defined by the seller and marketed and sold to the buyer. As an investor, this is a major issue when you begin to investigate buying turnkey investments because different companies will have a different definition of the word “turnkey” to fit their model.


Related: What Are The Different Kinds of Turnkey Properties?

What I will tell you is that no matter the definition, there is one type of investment that I have seen fail every time when it comes to turnkey properties. In my opinion, the real blame for this failure falls on the constant marketing of turnkey investments and the lack of experience on the part of turnkey companies. Everyone markets the same thing and attaches the same emphasis on return and service without thought about how those two things are going to be delivered.

If you are looking to invest in real estate through a turnkey provider, exercise extreme caution when it comes to the marketing and pricing of properties. There are two absolutes when it comes to this business: turnkey investments sold at super cheap prices with super high returns are the riskiest investment you can make today. No matter how sincere a company or turnkey provider may be, it is impossible to maintain long-term relationships and high-level management and service without building in the revenue.

High quality renovations, high quality customer service and high quality long-term investments are not words that can be used by super cheap, low-end property turnkey sellers. They do not go hand in hand.

The Worst Turnkey Investment

I started as an active real estate investor and had many opportunities to invest all over the country. My business was extremely successful, which gave me all the capital I needed to make lots of mistakes! I didn’t know it at the time, but my biggest mistakes were the properties I was investing in for passive income. I was buying a lot of properties in Memphis, where I had spent part of my time growing up and where my family was still investing. The properties were turnkey for all intents and purposes even though that term wasn’t really out there at the time. What attracted me most (looking back it is easy to see why I, like many new investors, was attracted) were the low prices and low barrier of entry into real estate. I was buying cheap properties with little work being done to them — and what on paper were fantastic double-digit returns.

Before long, I had other investors around me asking what I was doing and what projects I was working on… so I told them. These same investors were some of the first investors to push my family to start our turnkey company. Unfortunately, like I said, when we first started, we fell into the mindset that super cheap properties with super high returns were great investments. We also believed that the best way to compete for investors was to offer cheap pricing. Keep the pricing low, and allow investors a low hurdle to their plans to build portfolios.

I speak from experience when I tell you that cheap properties — defined by me as anything priced $50,000 and under — make the worst turnkey investments. I have had them in my portfolio, and I have managed them in the past for other investors, and they are not profitable for anyone. We are currently managing over 2,700 turnkey investment properties, and here are our conclusions from reviewing factual data from managing those properties:

  1. Two percent rent ratios are unicorns in the turnkey industry. They may pencil out as 2% properties, but you will pay in deferred maintenance what you should have paid for proper renovation and see your rent ratio cut to 1.5% or less.
  2. Turnkey providers who operate with these low price properties have two major issues to overcome and one, if not both, eventually force a change in model.

It is impossible to staff a turnkey company correctly with a focus on high-touch customer and tenant relations when selling low-cost properties. There is not enough room to build in the needed revenue to build and train a team properly. In the end the client and the tenant lose out, which both lead to problems for the company.

It is not realistic for an owner to plan to spend a vast majority of revenue on team and systems, in turn keeping their own income low. In my experience, many choose a different concept altogether called “stay small, keep it all.” They choose to remain a small company while still marketing like a big company and simply keep the profit all to themselves. You can guess who loses out in this scenario!


Because renovations are often done at the lowest prices possible and some maintenance issues are deferred, those issues eventually have to be dealt with while a tenant is in place. At the same time, permits are a sticking point since permits can drive up pricing in some cases by 2% ($1000 in permits for electric, water and gas on a $50,000 property). So often work is done without permits, which can lead to more issues in the future when deferred maintenance has to be addressed and no issues have ever been pulled for any work. At some point, the major work on a property is going to have to be permitted, and often that falls on the owner when they are dealing with deferred maintenance.

Tenants do not hang around properties with ongoing maintenance issues, and management companies do not survive when poorly renovated low-price properties eat up their time and resources. There simply is not enough money in the deal to operate on a high level and deliver on marketing promises to owners.

It is a vicious cycle, where the company does not make enough money to cover permits or to hire and train team members. At the same time, because of efforts to keep prices low, more work has to be done on an ongoing basis. Eventually a turnkey company owner realizes their time is worth more than they are earning, and they have to change their model.

Which Investor Should Buy Turnkey Properties?

The answer is: Any investor who values service and quality over hyped returns and wants a steady yield in return for a passive investment. Unfortunately, that does exclude a lot of investors who end up being sold turnkey investments anyway!

Related: The Lessons of ‘Rent Ready’ And Turnkey Investment Properties

Brand new investors who are struggling to come up with down payments on investment properties should avoid turnkey investing at all costs. These are the investors who are most likely going to get caught up in a cheap property offering. Remember that turnkey investments are categorized as passive for the most part. There are literally dozens of ways to get started investing in real estate in a passive manner without running the risk of buying cheap turnkey properties that cannot perform at a level you should expect.

What level of performance should you expect? Well, for starters, there should be no deferred maintenance. On an average 1,500 sq. ft. property, the renovation costs could easily reach $25,000 when all systems, roof, flooring, paint, locks, doors, hardware, lighting, permits, fence, aesthetics and trees planted near water and sewage lines are addressed.

On the management side, an investor should expect a property management company to be owned and operated by the turnkey company and to be 100% responsible for the performance of that property. The property management company should be staffed at a level where the tenants and investors both can get quick service and fast replies. In my opinion, customer service fits right under the property management column since most of the communication for an investor occurs after they purchase a property is going to involve property management.

Customer service, in my opinion, does not involve having an answering service take in coming calls so you can return them. Customer service means going above and beyond so an investor buying from 1,500 miles away feels they have competent, safe and secure investments. It means reaching out when there are issues and being proactive on move-outs, as well as maintenance and rental issues. Whether a company is any good at providing service is another story! They have to at least have the personnel and systems in place before they can do it!

Passive investing, especially in a turnkey investment, should be all about the highest level of service, consistent returns and a no-hassle experience as much as possible. None of those things occurred when I was buying the super cheap properties from far away. None of those things were important when we first stated buying and offering cheap properties. And none of those things are present today when investors turn to super-cheap turnkey investments. Turnkey should be held to a very high standard by investors if they want to have a good and profitable experience.

[Editor’s Note: We are republishing this article to help out our newer readers.]

 Are you a turnkey investor? What would you add to my assessment?

Leave a comment below, and let’s talk!

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

    Gary O
    Replied almost 5 years ago
    I am so totally and so unavoidably the description of inexperienced newbie. That taken into account and speaking from the standpoint of always having time to do things right the second time. Anyone who has actually come to a point where that wasn’t an option but an unavoidable reality knows that you get the problem solved but it isn’t the same RIGHT as it would have been the first time. Great heads-up article and of particular interest to me as that is the direction I feel the groups capable of buying everything that hits the market are pushing. Thanks Again Gary O
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Gary O – I think I know where you were coming from with your comment. It is always better to be safe than sorry because sorry costs a lot more to fix! I appreciate your taking the time to read the article and to leave a comment. All the best – Chris
    Jeff Chi from Little Neck, New York
    Replied almost 5 years ago
    Very informative article, Chris! especially on the deferred maintenance issues.
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Hey Jeff – Deferred maintenance is a serious issue with Turnkey investments. It can happen across all price points, but when you compare homes from different companies in similar areas, when you see one property priced well below another, deferred maintenance will almost always be present. That doesn’t mean you can just look at pricing. There is a lot more to it and just because something is priced high does not mean it is the better investment or that there will not be issues. But, from my experience, when you see companies stay small in terms of personnel and sell cheap properties or promote cheap pricing and always double digit returns, you can bet that their will be deferred maintenance. Feel free to reach out with any questions. All the best – Chris
    Megan Samuels
    Replied almost 5 years ago
    I completely agree, it is always best for novice investors to be cautious about their initial investments, especially those that seem to be “too good to be true”. This is not only true for turnkey properties, however, any investment that is priced significantly lower than other similar properties in the same area isn’t all its cracked up to be in most cases. Unless you are looking to fix and flip, these extreme bargain “turnkey” properties are hard to come by, especially if you are looking to include a reputable property management company in the deal. A much wiser investment would be to spend a little more initially to get a house that’s in move-in-ready condition to get those consistent returns immediately with reliable management already in place. That is a true turnkey investment and it is no surprise that you may be paying a little more for such a package deal, but trust me it is well worth it in the long run! I highly recommend the passive approach even for newbie investors but It is very important to do your research on the geographic area and the property management company before diving in head first to any real estate investment.
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Megan – Thank you for your response and for reading the article. All of the points you made were valid. I too am a big fan of passive investments but only because I have plenty going on that takes the rest of my time! But everything you said is correct about due diligence, geographic areas and property management. Thanks again for the comments. Chris
    Timothy Trewin from Clarksville, Tennessee
    Replied almost 5 years ago
    Chris, Thank you for that article as I have been heavily considering turnkeys. I have been looking into them more due to time considerations as I get so busy with other things, especially my job that a turnkey seemed like a better option. I never considered the deferred maintenance aspect of a cheap property, but I always wondered about potential hidden costs. This article definitely gives me a lot more to think about as I look to make my first purchase.
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Hey Timothy, There is definitley a lot to think about with any passive investment, but a turnkey property far from home is a big, big decision. It is the right investment for a lot of investors, but just understand – deferred maintenance can be present at any price point. The lower priced properties and the companies promoting super low prices with high returns, get to those dollar figures by cutting back. They are either cutting back on their own teams which means no service or cutting back on renovation which means deferred maintenance. Thanks for reading the article and for your comments!
    Jerry W. Investor from Thermopolis, Wyoming
    Replied almost 5 years ago
    Chris, thank you for your article. I experimented in buying rentals out of state earlier this year. One was very cheap with a tenant in place for under $20K renting at $550 per month, the other was bought at just under $40K and was renovated for another $25K and is renting for $950 per month. The lower priced property clearly provides the highest return percentage, but the most worry. If I have to replace a roof or dig up a sewer line one will cost all of its income for one to two years, the other only 6 months to a year. The more expensive one will probably be able to be sold for a profit as it is in a nice school district and prices are increasing there. I do rentals ranging from $400 to $800 in my hometown so I am not concerned that it is just lower rent. My concern is offering a rental that will not be able to attract good family renters in a decent neighborhood. I obviously have too little experience to give any advice on turnkey, so having someone post with your known expertise is appreciated. Thank you.
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Hey Jerry – Thanks for the comments! Investing out of state can be done and there are a ton of investors like yourself who show that you can do it. I am not sure if you bought those properties as Turnkey or not, but you do help me make two points that I couldn’t make in the article – it was long enough as it was! 1. active investors, investing locally, can buy lower priced properties that rent for lower rents all day long. They take on that risk and manage it themselves. 2. Turnkey properties are meant to reduce the amount of worrying an investor should do. The Turnkey company is supposed to provide a level of comfort. Those cheap properties have to have profit built in for a Turnkey company. There is not enough room to do low price properties properly, provide safe and secure comfort to the investor and profit for the Turnkey company at a level where they can continue to provide those services. I really appreciate your article and wish you the best of luck with your local and out of state properties. I also really appreciate all of your comments on the forums. I read a lot of them on different posts and appreciate your taking the time to share. All the best – Chris
    Pawan J. Developer from Vancouver, British Columbia
    Replied almost 5 years ago
    Chris something that many people forget to do even when investing locally is warrant the quality and workmanship of the renovation itself and confirm with the local city if and what permits were taken. E.g. A permit for electrical could have been take but not for plumbing or structural. Also referrals are a must with any property management company and if out of town make a trip out there and assess a few different companies and their properties on the market to see what kind of properties they are renovating, managing or both. Thanks for the info.
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Pawan – Great comments! Thanks for taking the time to include some good tips for other investors. Chris
    Aaron Mercer Investor from Pokolbin, NSW
    Replied almost 5 years ago
    Chris, Thank you for the informative article. I have recently been looking into Turnkey investments for the ease of management as I’m based in California. The points you make around deferred maintenance and price are also very helpful. Thanks again, Aaron
    Chris Clothier Rental Property Investor from memphis, TN
    Replied almost 5 years ago
    Hey Aaron, I really appreciate your reading the article and am glad that your found it helpful. Turnkey investing is just one way to invest passively. If you are going to move forward, just make sure you pay close attention to deferred maintenance and the way a management company runs their business. A profitable Turnkey company is going to be around for the long-haul. They do not need to be greedy (that is subjective and for you to determine), but as an investor, you want them to be profitable so they can continue to provide quality service to you and your tenants. All the best to you and be sure to reach out if you have other questions as you move forward. Chris
    Rob Zoromski Real Estate Professional from West Bend, Wisconsin
    Replied over 4 years ago
    Great article , especially for a rookie like me. I’m in San Diego and things are so expensive out here that I was looking into turnkeys in Midwest. Problem is , new to the game I don’t want a “fly by night” turnkey company that isn’t genuine. Due diligence is an absolute must .
    Leslie Fludd from Lewisville, Texas
    Replied over 4 years ago
    Great information Chris! I’m definitely considering a turnkey as one investing strategy.
    Sandy S
    Replied over 4 years ago
    Great article and comments. I am considering Turnkey option. Being a first time, how do I make sure that PM is reliable. All the deals I have got so far guarantee that tenant is in place but I don’t actually talk to PM folks till the deal is completed. Till then it’s just the seller answering question. Another question about low cost properties, when I looked up the neighborhood, it wasn’t the most nicest one with great schools, so is it possible that companies have just figured in one year’s guaranteed rent to attract a newbie like myself and from next year onward, that property won’t rent easily or at at that rent to say the least. Sorry for being devils advocate but I am just making sure that I am not missing end to end picture.
    Pete Chan Investor from Redwood City, California
    Replied about 4 years ago
    I’m a newbie to turnkey investments. This article is very helpful and gave me a better realistic picture of turnkey investments. Any recommendation on which turnkey companies/sellers that are good, honest and reliable, the ones which don’t skim on renovation (renovate the right way right from the beginning) with a good management company behind them?
    Erik Hammagren Investor from Bend, Oregon
    Replied about 4 years ago
    Hi Chris, thank you for all of your great posts. They are all very informative. I was hoping to get some feedback since it seems you have a lot of experience. I am an ‘accredited investor’ and am looking to invest passively as I start out my real estate investments. There are many syndication companies that offer to be included on deals and then there are companies such as yours that are ‘turnkey’. What do you see as positives and negatives for going one route over the other? Or is doing a little of both a good option? Thanks for your help! Erik
    Brian Rule from Cerritos, California
    Replied about 4 years ago
    Hey @Chris Clothier I just listened to you on one of the BP podcasts, very informative. I’m new to BP and in the last few months I’ve been continuously learning all I can like a sponge about all the different niches, and seem to find myself leaning towards a turnkey property in the future, maybe in Texas, due to the high prices here in Los Angeles / Orange County. Your Memphis Invest is all over the place so maybe I will eventually talk to you or your employees soon. I do have one question though, do you think it is fine to invest in turnkey as my first investment property? Or maybe see that it is better that I invest in a house of my own first? Thanks! -Brian Rule
    Tim Butters Accountant from Philadelphia, Pennsylvania
    Replied about 2 years ago
    Thanks for the insightful article. I wish that turnkey companies would be transparent with their numbers and what kind of numbers they need to achieve to make the partnership work. I think that most people buying turnkey understand they are paying a premium and shedding some light on how the deal is working for everyone would go a long way to building trust.
    Chris Connor from Augusta, GA
    Replied about 2 years ago
    Hi nice article. I am also looking for turn key opportunities. I noticed the topic of deferred maintenance come up. So what as a potential turn key investor do I need to do to mitigate this. The proformas I see have 5% of monthly rent set aside as a maint reserve. Are you saying this isn’t enough? Or is your advice on deferred maintenace: its better to do maint now than defer the maintenance when the issue can become bigger. Thanks Chris
    Chris Clothier Rental Property Investor from memphis, TN
    Replied about 2 years ago
    Hey Chris, Thanks for your comments. I am saying that purposely deferring maintenance, while holding down the entry costs, will come back to haunt you as an investor. It will cost you $2 or more to fix a $1 problem if you defer the maintenance and choose to address it at some point in the future. Ads for what to put aside, a lot of that will depend on what you address on the front end. I have found that 5% of collected rent has covered me on may nicer properties. Some years my maintenance is $0 and others will be equal to 5%. Some capital expense items have pushed my maintenance higher on some properties on some years, but I am still averaging less than 5%. Great question. Thanks for asking!