Real Estate Investing Basics

5 Reasons to Think Twice BEFORE Purchasing Turnkey Real Estate

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There has been a recent soar in the popularity of turnkey rental properties over the last few years, especially among those people who want to tap into the world of real estate investing but don’t have the necessary amount of time to dedicate to flipping, renovate to rent out or even simply try and scour for a great deal on a distressed home. The great thing about investing in turnkey rental properties is that it doesn’t matter whether the Real Estate market that you’re currently living in is worth investing in. After all, with such a diverse range of markets all around the country (or even the globe), Real Estate investors have the luxury of being provided with so many choices when it comes down to choosing where they want to invest.

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However, unfortunately, like most things in life, there is always a con to every pro that you find. So while not all of these disadvantages will apply to every single turnkey property out there, these do have some truth to them and are certainly things that you should not take lightly. If you are seriously thinking about purchasing a turnkey rental property, be sure that you keep these factors in the back of your mind and are convinced that having these cons following around you is OK before you stride on forward.


5 Reasons to Think Twice BEFORE Purchasing Turnkey Real Estate

There is Very Little Appreciation

The thing is, most turnkey rentals are located in cities/areas where very little appreciation occurs. Nevertheless, the real estate market of these locations are highly stable, so it is also very unlikely that you will see a decline in appreciation.

Related: 6 Key Items to Seek When Investing in Turnkey Real Estate

However, if you are in it for gaining equity via appreciation, i.e. selling the property for profit in the future, this is not the real estate investing path for you. This is simply because, if you want to purchase a turnkey rental property, it is best if you go into it without expectations of high appreciation.

You Can’t Always Find Good Property Management

First of all, if you think that turnkey properties are an easy way to earn some passive income, you may have to re-evaluate your thoughts. Due to your investment properties being miles and miles away from you (sometimes in a different state or even in a different country altogether!), there is no way that you can manage the property on your own.

More often than not, you will have to hire a management company to lend you a helping hand. Unfortunately, just because you purchase a turnkey property doesn’t mean that it will automatically come with a good property manager. So this may be a hassle that you’ll face, which will take more of your precious time to oversee.

No Diversification Comes With Risks

If you are dealing with turnkey investing for single family properties, if you find that the property is vacant, you are in now at a 100 percent completely empty vacancy rate. This isn’t a good thing for you if you are using leverage (which you most probably are), so the sad truth is that despite having no tenant occupying your property, you still have to pay that mortgage.

You’ll Be Tapping into Unfamiliar Territories

Chances are, if you are seeking to be a turnkey property investor, you will be purchasing properties that aren’t in your area or even your city. This can be a rather frightening thing and is certainly one of the bigger risks involved when buying a turnkey property.

After all, how can you be sure that you are making a good investment decision if you don’t know the neighborhood like the ones surrounding you? Pro tip: It’s best to take a trip to the market you plan on investing in to get a feel for the neighborhoods. 


Related: Turnkey Real Estate Investing: Can You Really Have Your Cake and Eat It Too?

You’re Purchasing at Retail Price

It probably goes without saying that if you manage to nab a deal on a property where it is selling for less than its retail price, you will be making good money. However, this is unfortunately not usually in the cards to those of you who wish to tap into the world of turnkey properties. The truth is, if you opt to buy a turnkey property, the likelihood of you paying retail value for the property is extremely high, as it is quite rare to buy off a turnkey provider at a price that is below retail. So for those of you who are in it for the appreciation or the equity, think twice.

From this article, it is probably quite obvious that there are a few things to keep at the back of your mind when it comes to buying a turnkey rental property. While these disadvantages won’t always be intrinsic to every turnkey property, it is important to remember that they do exist, so before going forward with anything due to a sudden passion, be sure that you make well-informed decisions so that you won’t live to regret your choices later.

Investors: What do you think? Are turnkey properties a part of your portfolio? Why or why not?

Leave your comments below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
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    Mike McKinzie Investor from Westminster, CO
    Replied over 4 years ago
    Sterling, your bio says you started investing in 2009. I started investing in 1979. So my first question to you is, “How many ‘Turnkey’ properties have you actually bought and held, lets say, for at least 3 years? While I agree that your warnings are VALID, personally, I find people that have had personal experience are more reliable than those that give theoretical ideas. I have turnkey properties in six states, CA, CO, OK, TX, AZ and TN. And I am currently under contract to add more turnkeys, this time in MO. When people ask me about buying Turnkey, I tell them to treat it like buying Stock in the marketplace. Do you listen to Uncle Charlie or do you analyze the company, the financials, the marketing plan, the balance sheet, etc… before buying the stock? While I do not have a solid number, I would guess that 80% to 90% of turnkey property companies are some degree of ‘shady.’ Even a few here on BP! I would guess so are about 80% to 90% of Property Management Companies. Therefore, there is a huge RISK in buying from a Turnkey company, most of them are just “Carnival Barkers” trying to get you to ride the carousel. That is why I get an appraisal, a Home Inspection, and check out the Demographics of every Turnkey I buy. I stick to A or occasionally a B+ neighborhood. I am also now asking for a complete video, not just of the house, but of the street and neighborhood. So there are some very inexpensive ways to increase your chance of buying a quality deal, just don’t listen to your “Uncle Charlie” and do your research!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 4 years ago
    Valid question Mike. I have been in the involvement of buying & selling hundreds of turn-keys properties. Great points you have stated above
    Glenn Tracy Investor from Orange County, California
    Replied over 4 years ago
    Sterling, thanks for this blog! This is just one of the MANY reasons I’m loving BP! As a newbie REI like myself, I’m reading as much as I can on topics I plan on investing in, which happen to be flips and buy n hold rental properties. Up until this point, I’ve really only seen posts in the market place with realtors or companies advertising their turnkey properties for sale, all of which look very promising. However. I have a hard time believing it’s that easy to make $200-$300 (for example) in monthly cashflow on a $50k property, but I see it quite a bit. At the same time, I’m not saying it isn’t possible or that these realtors and companies are advertising false numbers, I’m just saying it’s always nice to see someone point out the ‘possible’ downside to this particular topic as well, so thanks for that! And Mike, thank you as well! You’ve obviously been in the RE game for a long time and have a ton of experience, which is priceless, and you mentioned a few good things to take into consideeration when investing in these turnkey properties, specifically out of state, (which is where I plan on investing for buy n holds). For my first buy n hold out of state and before making a purchase, I actually plan on traveling to the state and research the neighborhood in person, as well as meet all parties involved, realtor, PM company, etc, and then if everything looks good and I’m comfortable with the team, I’ll move forward. This way, if I’m happy with the results, I can continue to invest with that same team. Is this something you’ve done in the past with your out of state investments or have you been happy with the communication you’ve had with all parties involved via email, video, phone, etc? And again, a big thanks to both you and Sterling for your input, it’s much appreciated.
    Haim Mamane Palman Investor from San Francisco, California
    Replied over 4 years ago
    Good points Sterling. I personally bought from turnkey companies in the past and overall had a positive experience. What would you suggest as a turnkey alternatives?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 4 years ago
    Great question Haim. Here is an article on bp that addresses that Other alternatives can be syndication type deals, real estate crowdfunding, REIT’s those of that nature, which you may already be aware of those options.
    Solomon Oh New to Real Estate from Shoreline
    Replied over 4 years ago
    Hi Sterling- This is a well written article and gives the newbie investor like myself, pause to what could happen. I guess my next question is how do you “best screen” these Turnkey operations. As an out of state investor I would surely look at the financials of the property, but I would also like to know if you have recommendations to prevent future headaches due to the seller/management issues. Thanks! Solomon D. Oh
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 4 years ago
    Flying out to meet the operator can help tremendously. Have them drive you through the areas, in which they purchase their properties. If you are unable to fly out due to time(which you should make the time) ask for references. Hope that helps
    Mayank S. Investor from Herndon, Virginia
    Replied over 4 years ago
    I agree with your points of view regarding Turnkeys. However there are few points mentioned about appreciation and diversification that I don’t fully concur with. Appreciation is not in the primary focus of TK investors, it is cashflow and they fully understand that. Midwest market where most of the TK providers opearte from is a stable cash flow market with little to no appreciation. If appreciation happens that is icing on the cake but not the primary objective. On diversification side, multifamily does mitigate some risk of property being 100% vacant so mix of SFR and multifamily in the portfolio is a good strategy. Its the overall return of the portfoilo that matters and that should be well diversified and not all eggs in one basket. Paying retail is definitely one biggest issue with TK model and limits exit strategies.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 4 years ago
    Glad you found value in the content Mayank. Sadly from my experience some investors are not as realistic & do rely on property appreciating over X number of years. Often times not realizing their purchase price will make it difficult to see profit in event of exit.
    Herb Mitchell
    Replied over 4 years ago
    Another thing that is just as bad about paying retail for TK are the people that purchase a good rental and do a cash out to live off of. They never get out of debt. The $200-$300 cash flow each month goes up in smoke when one has to replace carpet and paint ever year as tenants move out. I have a friend that does inspections in Alabama for a TK company. He said that most are dumps so they can buy them cheap. Their rehab is questionable/cheap before they pass them on to an end buyer. They make their money up front.