Mastering Turnkey Real Estate: How to Build a Passive Portfolio
If you want to start a quick debate on real estate forums today, post a question about how investors feel about turnkey real estate and then pop a bag of popcorn. The answers will come out, and the fierce opinions are sure to follow.
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Turnkey real estate investing has garnered a lot of attention because it flies in the face of what many real estate investors think “true” investors should be. Over and over again, you read that if you are not physically investing yourself, doing the work with your own hands and feet, then somehow you are not a real investor.
Whether it is house hacking, wholesaling, rehabbing for rental, or rehabbing for retail sale, there is a strong bias that you have to be personally involved or you are not really investing.
I personally think that argument is silly. As a very experienced real estate investor, I have invested both passively and actively for almost 15 years. If I am risking my money (or my credit) in a real estate deal with the opportunity to make a return, then I am an investor!
Now, the real debate about turnkey real estate should actually surround what the heck turnkey really means. I often tell investors that there is no real meaning, at least not when you see it used online. The term has been hijacked into a marketing term meant only to capture eyeballs.
Perhaps that is what has so many people in an uproar. It is nearly impossible to compare two turnkey companies, or two turnkey properties, because there is rarely consistency in what is being offered. With that said, I am going to define exactly what turnkey is supposed to mean for investors. After being involved with nearly 5,000 turnkey transactions (and working with dozens of entrepreneurs wanting to offer Turnkey properties), this should be a pretty good start.
Is Turnkey A Good Option For You?
To be fair, unless you are prepared to have a third-party company find a property, renovate that property, and professionally manage it, turnkey may not be the right fit for you. To that end, here’s a quick checklist to help you determine if turnkey may work for you. Ask yourself these five questions:
- Do you desire a source of passive income?
- Do you want to invest in real estate as a side project?
- Do you define successful investing in terms of the value of your time?
- Do you want to build a portfolio of homes?
- Are you comfortable not seeing your properties on a regular basis?
You must be comfortable answering those questions affirmatively if you truly want to build a passive turnkey portfolio. So exactly how do you do that? Read on.
What Exactly Is Turnkey Real Estate?
At the most basic level, turnkey real estate typically refers to investment properties that are already rehabbed, tenant occupied, have management in place, and are producing positive cash flow. The term comes from the idea that you can “turn the key” in the door and walk right on in. Unfortunately, many companies, and even individuals selling real estate, hijack the word to use in their marketing because they know it attracts eyeballs.
The word itself is like a shiny object because it implies simplicity, which is what many investors are after. The absolute safest route when buying a turnkey property is to make sure that the property is owned by a company, has been fully renovated before going under contract, and the management company is the same company selling you the property.
There are plenty of companies today that will try to convince you that the safer way to invest turnkey is by not buying a property that has been renovated or has in-house management. I will explain why it is always safer to buy a property already purchased, renovated, and under management.
For now though, just know that turnkey is meant to define a property that is ready to produce a revenue stream on day one.
With a traditional residential rental property, the investor would purchase it, fund renovations, find a tenant, hire a property management company, and then hopefully see profit. Turnkey real estate cuts out a lot of steps, making the on ramp to positive cash flow shorter.
But There’s a Catch…
One problem with turnkey real estate is that there’s simply no set meaning for the term turnkey real estate. Turnkey real estate companies can look very, very different (and we’ll dive into those differences and red flags later).
Make no mistake: we think turnkey real estate investments are great. But they also have to be the right investments with the right people. Remember: no investment is a sure thing. They each require careful research, attention to detail, and putting value in the right places.
Still, a strong case can be made for the benefits of turnkey real estate. When you know what pitfalls to watch out for, you can rest easy equipped with the knowledge to find success as a turnkey real estate investor.
Why Turnkey? Let’s Do a Rundown of the Benefits.
1. Ideal for Truly Passive Investors
Not everyone wants to invest in their own properties that they can see and touch or drive by on a regular basis. Whether they are local properties or not, many investors simply desire a more passive investment.
Your local market may not afford the price point you desire or offer exactly what you’re looking for. Maybe you want to get in on hot markets that are showing promise. For other investors, it may not matter what their local market looks like, they may simply have no desire to be active. They may not have a good, local option to invest easily in a near-by turnkey property, and therefore have to look at other markets. I have learned that each investor has his or her own reasons for looking outside of their local markets.
Out-of-state investing, however, can be pretty scary. After all, would you want to buy a property sight unseen in an area you aren’t familiar with? How do you know you’re not getting cheated? There’s a lot of uncertainty to investing out of state. You’d be right to be apprehensive.
At the same time, that’s one of the reasons turnkey real estate investment is such a great option! Yes, you’ll have to identify a market that you are comfortable owning long-term real estate in and find a reputable company before you buy. But suddenly you aren’t in it alone. You aren’t navigating a market sight unseen. You’re putting your investments in the hands of people you know you can trust because you’ve done your homework. Suddenly, new markets open up all around you!
2. As Passive as Passive Income Gets
For many real estate investors, investments aren’t their full-time job or focus. And that’s totally fine! In so many ways, that’s what these kinds of investments are good for: passively building up income over time to contribute to future financial goals and security. But traditional real estate investments can so easily turn into a full time job, even when investors aren’t bearing the burden of landlord responsibilities.
Turnkey, as a model, is just about as passive as can be. There’s legwork involved with finding the market and the right turnkey real estate company, of course. There’s also a responsibility to keep up with your investments and the market. But you won’t have to deal with day-to-day issues: your investments (ideally) are in the hands of a highly professional management team who takes care of all the time-consuming ins and outs of real estate management.
Your job as an investor is now front-end loaded and requires monthly check-ins to make sure you are being treated fairly and that there are no mistakes with your management. If an investor is willing to put in a little bit of time on the front end researching markets and interviewing turnkey partners, then they have done a majority of their work.
I want to point out that there are companies that promote themselves as turnkey, but they are not providers. They are actually promoters who connect investors with turnkey companies. Their pitch is often that they research to find the best turnkey companies for you, but in actuality they are paid by turnkey companies to bring in buyers. There is nothing wrong with working with a provider, but you simply cannot give away your responsibility to research the cities and companies where you invest. You have to assume that because there is a trade-off of money between a promoter and provider, that you are still responsible for your own best interest.
3. Easier Learning Curve
There’s still a learning curve, don’t get me wrong. But it’s definitely an easier one than if you were going at it alone as a real estate investor. Because the turnkey company has largely taken care of the heavy lifting—rehabbing, finding a tenant, taking care of property management—you can start investing right off the bat—and learn more as you go along without fear of making the same costly mistakes another investor might make.
You’re able to leverage the expertise of others in your journey in a way that is intrinsically tied to your own investments. That leaves you more grace to learn along the way—and that’s a big relief. Many turnkey investors who want to be both active and passive have used turnkey as a great entry into investing in real estate before moving into more active deals.
4. Portfolio Growth Potential
While turnkey real estate investment is about as passive as you can get, these types of investments also offer the most room to grow your portfolio—simply because they take less of your personal capacity to manage. It takes the same amount of time to purchase and own one property as it does to purchase and own five turnkey properties.
If you have the funds to back it up, why not add another investment property to your portfolio? When investments are passive, that means you have more room to capitalize on new opportunities.
5. Market Access & Insight
A big benefit for out-of-state investors in particular is that turnkey real estate offers market access and insight that you can’t really get effectively through traditional means. A good and reputable turnkey company will know and love the market(s) they’re in and can identify promising areas and real estate opportunities while bringing a more nuanced understanding of the area to their investors.
Not only that, but if a company is already established in a hot real estate market (Dallas, for instance), that means that investors who want in but find frustration in bidding wars can access the market through other means. Turnkey real estate companies offer that access in conjunction with expertise in the area, and that’s a big deal.
Of course, all of this is contingent upon whether or not you find the right company to meet your needs.
How Do I Find a Reputable Turnkey Real Estate Company?
The first step to getting involved in turnkey real estate is to find someone selling it. Still, not all turnkey real estate companies are created equal. A lot of the suspicion and naysaying you’ll see online surrounding turnkey real estate has to do with less-than-upstanding companies that aren’t interested in partnering with investors; their eyes are only on making money. With the wrong company, investors can lose a lot in turnkey real estate.
I want to be clear right here. There are a lot off investors who are going to be hurt because they are buying turnkey and not paying attention to who and where they are buying. That’s why it’s important to carefully research and vet companies that you’re considering working with.
As basic as it sounds, Google is the best place to start. Search the city you are interested in investing and use the words “turnkey real estate” in your search of that city. Take a look at what comes up. Ideally, you are looking for an actual company with offices in that city and people on the ground there.
In some cities, you will find multiple companies. The best companies will have a heavy presence: active blog articles, white papers, educational videos, and even podcasts. When you research specific companies, pay attention to how much you can learn about them online. A red flag you may come across will be the fact that you find a company, and yet have no idea who owns the company. Who are they? What do they stand for? Where is the information about their history?
Read, research, and then turn to forums such as BiggerPockets. This is just the beginning phase of learning, and you want to create a full picture. Is the company well known? Do they have a positive history? Are they putting themselves out there for transparency sake? Do they have a good reputation? These are the questions you want to answer first before digging deeper to see if they are worth your time.
So, what makes a turnkey company worth investing in? First, let’s look at the common variables between companies.
Common Variations in Turnkey Companies
1. In-House Property Management Team verse Outsourced
Many turnkey companies offer some sort of property management services to real estate investors. If they don’t offer any sort of property management (and some do not) forget about it. That is not even close to being a turnkey property. It is a red flag. If you’re having to bring in an outside property manager into the mix, that is not passive and that is not turnkey.
On top of that, when the turnkey company is only a seller, it can be very easy for them to cut and run, taking advantage of you as the investor. What are the procedures after the sale? A good company will want to continue to journey with you after the sale.
A reputable property management company is integral to your success as a real estate investor and worth a premium cost by far. Your management can make or break an investment, no matter how good it was to begin with.
2. Resident Verse No Resident
Ideally, when you purchase the property there will already be a resident present, and thus, the property is already generating income. Be sure to clarify resident status before purchase.
What does the lease look like? When is it up? How does the property management team vet residents? What can you expect in terms of resident turnover? Too often, investors take the meaning of turnkey for granted and end up buying a property that is not occupied and often not renovated.
Again, this is not turnkey. If someone else in another city says they will handle everything for you, yet you have to purchase the property and then pay for the renovation, that’s a passive investment, but it’s not turnkey. To my earlier point, this raises your risk as an investor exponentially.
What Else Should I Look For?
1. Proof of Renovations
Every good turnkey company provides a full scope of work. This is a detailed breakdown of all the work preformed on a property inside and out.
There should be before and after pictures provided, pictures of new A/C units, heating units, water heaters, etc., along with pictures of the approved permits. Often, permitting is required to do major work such as plumbing, electrical, heating, and air, so make sure you receive proper copies of permits. Unfortunately, failing to pull permits is one bad rap that turnkey companies have earned for themselves. It is an easy way to hold down costs and raise profits. Make sure you hold the turnkey company accountable, and make sure they are pulling permits when the city requires them.
Knowing what was done in detail and how it will affect your investment is important, especially when the company is advertising a fully updated property. Ensure that they’re being honest.
If you are buying a turnkey property that has not been completely renovated, then that is not a turnkey property. It can still be a passive investment, but to be considered a truly turnkey property, it cannot have deferred maintenance. Why? As an investor, consider how you’d feel to find that you have major system replacements or even roof replacements within the first couple of years. That is not going to feel like a stress-free, headache-free property. You are going to feel like you were taken advantage of. Want to know why so many investors have bad turnkey experiences? This is a major reason why. The reality is that it is the investor’s responsibility to know on the front end if the property has been properly and fully renovated. If it has not been, it is not turnkey, and the investor should absolutely be prepared for major maintenance issues very quickly.
2. Solid Recommendations
Get outside references. Talk to other investors who have worked with the company. Don’t just settle for the list the company gives you: turn to Google. Search for reviews. Join forums. Ask your connections. The more information you can pull from, the better.
Also ask for the contact information of investors who have not had a perfect experience. If they cannot give you an investor to speak with who may have had maintenance issues or had to deal with an eviction or lost rents, then you need to find another company to work with. They either are not being honest or they have not been in business long enough.
These things happen in real estate. You want to find out how a company works with investors who are not having a perfect experience. What happens when an investor has an unexpected maintenance issue? How do they handle the unexpected? You should have a high level of comfort and confidence to invest in passive, turnkey properties, especially far from home. Knowing how a company handles the unexpected will go a long way.
3. Business History
How long a company has been in business is so important. I cannot stress this enough. As an investor, your risk goes down the longer a company has been in business, and obviously goes up if a company is only a few years old. Time is what helps a company reach scale on the management side, lower costs on the renovation side, and give an investor a confident answer on how it handles issues that arise.
Companies that were formed after the housing crisis have not experienced a downturn in the real estate market. They do not know how rents perform in the market during hard times. They have no idea what happens to labor availability and costs. They have no idea what happens to demand for housing.
4. Avoid Cheap Properties
Turnkey is supposed to be a passive investment. No matter what anyone thinks of low-priced properties (below median value) these are not good properties for passive, turnkey investors. A hands-on, active investor can do fantastic things with these cheap properties by putting in time, labor, and effort. These are time intensive properties.
Do not waste your money and time looking at cheap $40,000 to $60,000 turnkey properties. There simply is not enough money in the deal to purchase, do a proper renovation, make an income, and then properly manage a property at these price points. What usually gets cut from the equation is the renovation, and the passive, out-of-area investor doesn’t find out until well after they have purchased the property.
Do yourself a favor and keep your turnkey purchases to median price for a market and above. There is far less risk for you as a passive investor.
5. Are They Trying to Hide Something?
Beware of any company that doesn’t fully disclose details and involve you, the owner, in your properties. Any company that isn’t upfront and honest with you about performance should indicate a big red flag. If you’re being isolated from operations and financial doings, it’s likely not the sort of company you want to get involved with. Approach with caution. Ask questions. See what sort of support they offer after the deal closes. If it’s not to your satisfaction or if it makes you feel uneasy, move on.
Remember: not all turnkey real estate companies that disappoint are unscrupulous or underhanded. They may just lack the business experience they need, or don’t have a sustainable business model. Even the best of intentions can go awry. That’s why it’s so important to be aware of promises that seem too good to be true.
Have your built a turnkey portfolio?
Do you have any turnkey buying tips of you can share with readers?