The One Piece of Advice You NEED to Read Before Buying a Turnkey Property
Turnkey rental properties seem to be talked about more and more these days, and I hear the question all the time:
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“Turnkeys seem too good to be true. What’s the catch?”
The answer is — no, they aren’t too good to be true.
So then, what is the catch? Why isn’t everyone buying these things?
I wouldn’t say necessarily that there is a catch, but there are plenty of reasons why not everybody wants to buy turnkeys. There is also a caveat about turnkeys that everyone thinking about buying one should know.
Let’s get right into it.
Why Not Everybody Wants a Turnkey
The fact is, turnkeys just aren’t for everyone. Those they are good for though, they are great for!
The first two lists are just basic ideas of who may and may not be interested in buying turnkeys. Then the last list will go into more detail specifically about why some people may not want a turnkey.
Turnkeys are great for people who:
- Have full-time jobs and/or other things (family, traveling, etc.) that occupy most of their time, leaving them little time to get heavy into real estate investing
- Have no interest in investing a lot of time and effort into their rental properties
- Are just beginning with investing and want a way to learn the fundamentals without being bombarded with more advanced skills (rehabbing, landlording, etc.)
- Lack expertise in any related area (market fundamentals, rehabbing, managing, etc.), therefore increasing risk
- Live in cities not conducive to good cash flow or profit and need to invest long-distance in order for the numbers to work
Turnkeys are not always as great for:
- Those who have investing and/or rehabbing skills (and interest) — there’s really no reason to pay more for a property if you can just as easily do the work yourself (and want to)
- Those who live in markets that are great for cash flow and don’t need to invest outside of their local area
- Control freaks (it’s not worth losing sleep knowing your property is being 100% managed by other people)
3 Reasons to NOT Want a Turnkey
These reasons may or may not pertain to you, and you may or may not be flexible on some of them. These are all legit reasons to not want a turnkey, but remember that none of them are bad either, and there are situations or reasons why you would still want to buy a turnkey despite these things. Everything is a trade-off, so you have to weigh what is more important to you in purchasing an investment property. On that note, I encourage you to make sure you know what is important to you before diving into any investment property! That way, you can know for sure if what you are buying actually serves you in the way you really want it to.
Loss of Control
The fact is that just not everyone is comfortable leaving things in the hands of other people. Turnkeys are primarily managed by other people — rehabbing the property, placing tenants, making any repairs to the property, and managing it along the way. I’m serious. If you are going to lose sleep because you aren’t comfortable trusting other people, then don’t buy one. No investment is worth losing sleep, no matter how good the returns might be. Do know that despite other people doing all of the work, you are still the boss and the final decision-maker. So in that sense, you are still in control. But you aren’t going to be the one doing the day-to-day tasks.
Yes, turnkeys are more expensive than buying a property on your own. Well, at least initially. There are plenty of arguments that can be made about why this isn’t necessarily true — having to later do work on the property can be expensive, while turnkeys come fully rehabbed; and if you have to put in a lot of work on the property, then a lot of that “savings” can be considered payment for labor (i.e. not really savings). But typically, the initial price to buy the property will likely be more than if you were to find a property on your own. Fact is, people just don’t always like this. Paying “market value” for an “investment” property is not something we are trained to be OK with.
Limited forced appreciation.
Because you are likely buying a turnkey closer to market value, and because the property comes fully rehabbed — meaning there’s not really room for improvements to be made — you are going to have a hard (or impossible) time forcing appreciation right away. A lot of people buy properties with forced appreciation as one of their top priorities, and turnkeys just won’t get that for you.
There are some methods of turnkey that do allow for it, but they are riskier and I’d make real sure you know and trust the company doing it for you because there are fewer ways to verify what is initially advertised to you than with traditional turnkeys. I know of a company who offers it, and it’s turned out great for a lot of people, but I’ve heard of a lot of other companies who offer it that I would be pretty leery about.
Related: 4 Steps to Ensure You’re NOT Getting Duped by a Turnkey Provider
Now, is there any way to force or get appreciation on a turnkey? Yes. Buy a turnkey in a market that is in the infancy stage of their expansion cycle. What does that mean? It means it’s just at the beginning of a boom cycle. Now, don’t confuse that with a market that is in the dumps, but people are swearing it’s going to come up any day now. I’m talking about markets with very solid evidence that notable growth is about to happen.
As of today, in summer of 2016, it is harder to get in on any market that is on the brink of any huge boom cycle. In the last couple years, the booms around the nation have pretty much happened. I know a guy who bought a turnkey in Dallas in early 2014, and he just emailed me all sorts of excited because the value of his property has gone up 14%. That is because Dallas boomed and he bought at the perfect time — right at the brink of the impending boom.
I did the same thing in Atlanta. All of the values of my properties went up $20-30k in just a couple years because I bought at the very beginning of the market boom. You aren’t going to see that kind of growth in any (turnkey) market again until the general real estate economy goes some degree of bust again and knocks the prices down. But the point is, buy at the beginning of a growth cycle and you can set yourself up for some appreciation on a turnkey. But if you want appreciation right away, turnkeys may not be for you.
The Biggest Caution About Turnkeys
I told you there was one. Can you guess what it is? I bet you can’t. I have started bringing it up more in recent articles because now that I’ve been working with people buying turnkeys for about five years and I can see what can cause a pickle for people, I realize people need to be warned ahead of time! It’s not that I didn’t want to tell it to people before, but I hadn’t been able to clarify exactly what it was in my head in a good enough way to relay it.
Now I have.
My ultimate caution about jumping into a turnkey is:
Don’t assume everything is perfect and/or taken care of!
I know, turnkeys are advertised as hands-off and everything is done for you — and isn’t the whole point of them that you don’t have to do anything? Well, here is the problem — people assume they don’t have to do anything and they assume they should be able to trust the company they are working with. Yes, that is the theory, but then there’s reality. The reality is that nothing — and no one — is perfect.
I’ve seen plenty of people have not one single issue or stress with their turnkey(s) over the course of however many years they’ve owned the property(ies). I’ve also seen some people have some stress. What I’ve noticed is that one of the biggest stresses for people, if not the biggest stress, is not necessarily with the logistics of the problem(s) they encounter. Instead, it is more so the idea that they thought the company and property should have been perfect, and when it’s not, they are really upset with the company. Their stress tends to lie either with the company directly, or they are stressed over thinking they got scammed.
No kidding, in my experience people stress more over thinking they got scammed than they do with the property’s problem itself!
Here’s what this comes down to, and this is where I think turnkeys can officially be considered not too good to be true.
Inevitably, because of the advertising of turnkeys and just the general idea of the whole point of turnkeys, people slack on doing due diligence. For completely justified reasons, they trust who they are working with and they just go with that.
Whereas, if you were shopping for a property on your own and having to do everything yourself, you would probably do way more researching and interviewing in order to decide who to work with and how you want things run.
The Advice You NEED Before Buying a Turnkey
You want my advice?
Perform turnkey due diligence as thoroughly and diligently as you would if you were doing everything yourself!
There are several components to the turnkey process — the property location, the condition of the property, and the management of the property. The location and condition of the property/rehab are easy to verify, and those don’t really require much more due diligence than people normally do on them. But the property management side? Woof. This is where the problems come in.
Of course, people are going to assume the property management that comes with the turnkey property is/should be excellent. Oftentimes it is, but even the good ones don’t always get along with everybody. You might just not jive with the company. This is when people get mad at everyone in the turnkey process — when they end up not liking the property management company for some reason. It’s not to say they are bad, but things just don’t always work out perfectly.
You don’t have to use the property managers that come with the property! Therefore, interview them and even interview outside property managers. Go with who you like best. That way if something happens, you aren’t going to waste your time blaming the turnkey folks.
Turnkey guys have never claimed to be perfect (if they do, beware), so don’t assume they are. No, you don’t have to do nearly the work on a turnkey as you do your own property, but don’t just automatically trust everyone either. Confirm everything for yourself.
For more information on doing due diligence on turnkey property management and knowing your options with those, check out “The Downside to Turnkey Rental Properties No One Tells You.”
An additional caution about turnkeys is to make sure you don’t assume a market is good to invest in just because there’s a turnkey provider in it. Not all turnkey companies out there are good, whether it be because they are in declining markets, they do poor or inconsistent rehab jobs, or they inflate their numbers, which can severely affect the returns you actually end up getting. I’ll save turnkey due diligence at these levels for another article, but make sure your eyes are open.
For help in choosing a market to buy a turnkey, check out “The Turnkey Investor’s Guide to Finding a Real Estate Market.”
There you have it! The reasons why turnkeys aren’t too good to be true — they aren’t for everyone and they aren’t perfect! But even with all of those things I listed, they are all I will buy for myself. Why? I have absolutely no interest whatsoever in dealing with anything day-to-day on my properties, I have less interest in becoming an expert on the knowledge sets and skill sets required to do everything for a good rental property on my own, and I live in Los Angeles, where the only thing I can do is invest for appreciation (I like cash flow better).
If you have been thinking about buying a turnkey rental property but you’ve been hesitating, what is your primary reason for holding off?
Let me know with a comment!