The Downside to Turnkey Rental Properties No One Tells You
I imagine if you are reading this article that you have probably been trolling BiggerPockets for a little while now, and you have probably seen the mention of "turnkey rental properties" quite a bit. They have become more and more popular over the last few years, and I'm definitely noticing a lot more talk about them.
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If you’ve followed me at all on here, you know that I primarily deal with turnkey rental properties for my own investments. The reason I deal mostly with the turnkeys is because I prefer being as hands-off as possible with my investments. The “out of sight, out of mind” theory doesn’t intrigue me for many things in my life, but it does for my investments. I prefer to just get my checks every month and not have to do any work or exert any stress over my properties!
Despite my promotion of turnkeys, however, I have recently come to realize a downside to them that I don't think everyone is aware of. This is not a downside to deter anyone from buying a turnkey, but rather it is one that just encourages a little extra due diligence on the part of the buyer before diving in.
Before we get to that though, I want to clarify what I mean by turnkeys in this particular case.
Defining a Turnkey Rental Property
Most generally, a turnkey rental property just means that a property is ready to go as an investment property. It’s “rent-ready,” and in most cases would already have tenants in it. So no rehab required and tenants are in or coming in.
If you read about turnkey rental properties on this website or wherever else, most often “turnkey” refers to properties that are being sold specifically from a turnkey provider. Someone can certainly advertise a random property as being turnkey, so keep an eye out for that, but the place most people go to buy turnkey properties are from the turnkey providers.
These turnkey providers find the distressed inventory, rehab the property, place tenants, and set up property management to be ready to take it over as soon as you buy it. So, in theory, all you have to do is buy the property, and it is up and running to put cash in your pocket from day one. An entire business model has been built around this, and these turnkey providers sell these properties in mass quantity. They are essentially glorified flippers, if you will. They buy a ton of properties, rehab all of them in bulk supply, and sell them off to investors.
The properties I am referring for this article specifically are those properties from the turnkey providers.
The Downside to Working with the Turnkey Companies
If you decide to buy a turnkey property from these guys, what is advertised to you is that the process is about as hands-off as you can get — the property is already rehabbed for you, tenants are already placed, and they have property management set up and ready to take over as soon as you close on the property.
In terms of doing due diligence on the property and potentially on the provider themselves, you are likely to be guided towards doing the following checks (all recommended, none required, and this list is not inclusive of everything you can do):
- Hiring a property inspector to verify the condition of the property. This is to make sure you are getting what you paid for. Not just to confirm the true condition of the property, but also to verify the quality of the rehab job.
- Checking up on the location/neighborhood. If you work with a good turnkey provider, this part should be OK, but it can’t hurt to add it in as part of your due diligence. Checking on things like safety, rentability, and stability.
- Ask any questions you feel necessary of the provider and the property managers. This is to make sure you know the terms of working with everyone, you like the feel of how things will be conducted, and you can verify rental income and tenant quality, etc.
Now, downside time. It in part has to do with that third bullet up there — interviewing all of the parties involved with your property. In this case, it is specifically with the property management.
With turnkey properties, and in working with turnkey providers, there is an inherent sense of trust instilled in the buyer that usually causes the buyer to forego doing the same level of due diligence that they would do if the property were not turnkey.
Why this is a downside is that it can get buyers in a pickle should the property management turn out to not be all that dandy. It can happen with any property management company, not just turnkey property managers, but when it happens, it can be quite costly (and frustrating).
Let’s break this down. Let’s pretend you are buying a non-turnkey property — just some random property in some random town (but one you plan to use property management on).
- You would certainly do some shopping around and get a detailed analysis of things just in buying the property. You'd shop several properties, likely with an agent, and eventually you would interview contractors and get quotes for the rehab. Boom. Cool.
- As you approached closing on the property, you would begin thinking about property management. You would research several property management companies and likely interview each one of them.
- Based on how the property management companies responded to your interview questions, and then assessing how you felt about them just by talking to them, you would choose a property management company to take over your property once you close.
Now, with the turnkey process, the first step of those isn’t required more than just choosing which property you want because all of the hard stuff is already done. But it’s the next two steps — researching and interviewing property management companies and selecting the one you like the best — that get missed with turnkey properties (I think).
Why does this matter? Isn’t the point of the turnkey process so that you don’t have to do any of this work and your property should just come neatly packaged with a pretty bow on it — which includes property managers? Yes, that is the point. However, there’s this small thing called “reality.”
The reality is this. First of all, nobody is perfect. And very often, one of the least perfect types of companies out there are property management companies. Second of all, for every one person I’ve seen despise a turnkey property management company, there are about 10 who love the same company. I’ve yet find rhyme or reason for this, but some people just really jive with their managers, and some completely butt heads — and all hell breaks loose.
Every turnkey property management company has a different level and style of communication, so it’s all a matter of who gets along with each other. Yes, every manager should get along with every owner, but life just doesn’t work that way. I have heard of way fewer bad experiences with the turnkey property management companies than good ones (yay), but that doesn’t matter for those who end up not liking their managers.
This is really no different than with any general property management company, regardless of whether it’s one specific to the turnkeys or not.
A Break in Trust
Now, where the downside of this really plays in is — if someone buys a turnkey and just trusts the process and everyone who comes along with it (which is what is advertised and what is completely within reason to think that you should do), and then when their property management experience is horrible, they blame (and have every reason to blame) everyone who was involved in the process. Yes, “trust” was indirectly advertised, and then that trust is broken, so the investor feels duped. Or more blatant than just feeling duped is feeling like they bought into a scam. Then they go from being mad at that turnkey provider and feeling duped and scammed to distrusting turnkeys.
A quick clarification on this — I don’t know of any turnkey property managers who have scammed anyone or have tricked them in any way. What I’ve primarily seen is poor communication by the managers. Even if the money is coming in swimmingly, a break in communication often triggers these negative thoughts by the owner. It even does for me! In the old days, “bad” property managers that came with turnkeys were really bad, far beyond just poor communication. But I haven’t seen that in a few years now.
Let’s go back real quick to the scenario of you buying a property on your own and choosing all of the people on your team, including the property managers. If you interviewed all of those property managers and picked a company you liked and then they suck later on, who do you blame? At most, just that property management company. But remember too, you chose that company so — not to say you are completely responsible, but it was your choosing. Of course, the company didn’t let you know ahead of time they were going to screw you, but it was only you who chose to work with that company. So the blame isn’t far spread — it’s really just the property management company themselves, which you chose.
If that happens, it's unlikely you suddenly distrust the entire rental property concept. You also, at that point, just fire that property manager and hire a new one.
But with the turnkeys, it was more or less advertised to you that the property management company that came with the property was going to be excellent. I will say that in my experience, all of the companies do seem to try for excellence, but they don’t all quite hit it. With all of the turnkeys I work with, the only part where sometimes things go wrong is with communication. Communication, or a lack thereof, can be extremely frustrating and disconcerting for an owner.
My point is, I encourage all turnkey buyers to keep this situation in mind and adjust accordingly.
Solution to the Problem
The good news is there is an easy way to get around this situation of potentially being disappointed with the property manager that comes with the turnkey property.
Vet and interview property managers for your turnkey property, just as you would if it weren’t turnkey.
Of course, one of the property managers you want to include in this is the one that comes with the property and through that turnkey provider, but talk to some others as well.
Note: You are not required to use the property manager that comes with the turnkey property! Once you buy the property, it’s yours to manage as you wish.
This way, you have a much better feel regarding the property management you will be dealing with on your property. There is still a chance things could go wrong with any manager, but at least you have more diligently vetted the options and gone with whoever you feel most comfortable with.
In no way am I saying that you should expect horrible property management with turnkey rental properties. Like I said, I hear more good stories than bad. But the rough stories have a level of frustration and disappointment that I hate seeing. Mostly because the disappointed investor was willing to trust someone to take great care of them and for whatever reason, it may not have worked out.
Being more thorough in your due diligence, despite the advertisement of trust and hands-free, is really the message I want to get across. Doing this can help lessen your chance of getting stuck in a frustrating situation. You might just sleep better at night knowing you chose your property manager, even if it is the one that comes with the turnkey property, yourself!
I will say, the only trouble I’ve ever had with turnkeys (and this was back in the day, not so much recently) has been with bad property managers! I could have easily mitigated every one of these problems had I known to vet more than one property manager and not necessarily trust the one who came with the property.
For everyone who has dealt with property managers, what interview questions do you recommend investors ask during interviews with the various companies (turnkey or not)?
Leave your suggestions below!