{"id":97044,"date":"2018-02-25T14:30:52","date_gmt":"2018-02-25T21:30:52","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=97044"},"modified":"2023-11-06T14:16:16","modified_gmt":"2023-11-06T21:16:16","slug":"learn-successful-turnkey-investing","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/learn-successful-turnkey-investing","title":{"rendered":"Sorry, But Turnkeys Aren’t 100% Hands-Off. For Success, Know THIS."},"content":{"rendered":"

People think that when turnkeys are advertised as \u201chands-off,\u201d it means they have to do nothing. Then, inevitably, when something goes wrong, the investor is irritated because things are getting handled.<\/p>\n

Well, I hate to break your cookie jar and spill cookies everywhere, but turnkeys aren\u2019t fully hands-off!<\/p>\n

Turnkeys do, however, take care of a lot of the work for you. You don\u2019t have to spend time focusing on more advanced skill sets such as rehabbing, negotiating, or direct landlording. You also are likely working with experts so you are able to get a lot of built-in expertise with your property as well, which can be especially advantageous for newer investors.<\/p>\n

But then some questions arise\u2014how do you know if the turnkey folks you are working with are legit? How do you know if they really are experts? Can you buy a bad turnkey? Are you getting scammed? Is the property getting taken care of as it should?<\/p>\n

This is where your job as a turnkey investor starts\u2014with knowing how to answer these questions and then knowing what to do with the answers.<\/p>\n

I believe there are three stages of a turnkey investment purchase, and each of these stages requires a certain level of effort on your part to ensure they are leading you towards a successful investment.<\/p>\n

The three stages are:<\/p>\n

    \n
  1. Choosing your turnkey provider.<\/li>\n
  2. Conducting due diligence.<\/li>\n
  3. Owning the property.<\/li>\n<\/ol>\n

    For each stage, I\u2019m going to list out what I believe are the things you need to educate yourself on to be a successful turnkey investor. Some of the things are just education-based, but other things may require you to actually do certain things.
    \n
    \nRelated:<\/strong> Mastering Turnkey Real Estate: How to Build a Passive Portfolio<\/a><\/em><\/p>\n

    Choosing Your Turnkey Provider<\/h2>\n

    Before you ever select a property or sign a contract, there are some things you need to know. Prerequisites, if you will.<\/p>\n

    These two things are:<\/p>\n

    Numbers<\/h3>\n

    While most turnkey providers sell properties with cash flow, since cash flow is the primary focus of turnkeys, you still need to be familiar with what you are looking at in terms of the numbers as you start shopping. You\u2019ll want to be able to identify the accuracy of the numbers any turnkey provider is offering. For example, I think it\u2019s a red flag if anyone doesn\u2019t include maintenance and vacancy estimates in their projections because both of those things are unavoidable if you own any kind of rental property. Another red flag, to me, is when a turnkey provider offers appreciation projections. While this can give a decent idea as to potential income along the way and help paint a picture of the income benefits of a rental property, I think these numbers can be distracting from the numbers that really matter. Anyone can throw in some fancy appreciation (i.e. speculation) and make an otherwise bad cash flow look promising.<\/p>\n

    You need to understand numbers so you can know what you are looking for, what you want to see, and what you should and shouldn\u2019t consider in terms of the numbers.<\/p>\n

    Most often, turnkey providers will show you the net cash flow on a property (without financing) and the calculated Cap Rate based on that. If you are financing, then you would want to calculate the cash-on-cash return with that financing taken into account.<\/p>\n

    For detailed information on how to run these numbers and the general premises behind them, check out “Rental Property Numbers so Easy You Can Calculate Them on a Napkin<\/a>.”<\/p>\n

    \"turnkey-tips\"<\/p>\n

    Market Analysis<\/h3>\n

    Understanding the market in which you are buying is critical to sustain the numbers you so diligently calculated. It doesn\u2019t matter how fancy of equations you use in calculating the cash flow or how great the numbers look\u2014if the market you buy in can\u2019t support those numbers, you\u2019ll never actually see those returns.<\/p>\n

    With markets, as with most things, it\u2019s all about risk. You can buy an insanely profitable property in a tanked market, but your chances of doing well continue to decrease the worse the market gets. On the flip side, you can end up with horrible tenants that cost you a fortune in a fantastic market, but the better the market, the better your chances of not experiencing the bad tenant conundrum or other issues that can demolish your numbers. So nothing is guaranteed on other side, but your chances of sustaining your numbers get better the better the market is you are investing in.<\/p>\n

    Not sure of what can happen with a bad market? Check out “5 Risks of Buying Rental Properties in Declining Markets<\/a>.”<\/p>\n

    The reality is, in my experience with turnkeys, not all providers are in what I would consider to be solid growth markets. I\u2019ve known turnkey providers to sell hundreds of properties in what I consider to be declining markets. It\u2019s not to say they are trying to deceive you or that they don\u2019t run a good business, but it is up to you to understand the market in which you are choosing to buy and the market fundamentals that are associated with that market so that you understand any pertinent risks.<\/p>\n

    If you aren\u2019t feeling very confident about how to differentiate between different markets and their market fundamentals, check out “How to Know if a Real Estate Market is Wise to Invest In (with Real Life Examples!)<\/a>.”<\/p>\n

    Once you understand the basics of running numbers on rental properties, then you can go ahead and move forward on interviewing or researching different turnkey providers and then ultimately select which one you want to go with. If you don\u2019t learn numbers and market fundamentals, though, you won\u2019t have much of a basis to differentiate between all of the turnkey providers who advertise their products to you.<\/p>\n

    One of the keys of being a real estate investor is to have enough knowledge so that you can decipher between everything being offered to you\u2014hence, this \u201cprerequisite\u201d knowledge that I believe every turnkey investor needs before diving into any properties.<\/p>\n

    Conducting Due Diligence<\/h2>\n

    You also need to have enough knowledge so that you can verify things about the property being sold to you. I often argue that it doesn\u2019t even matter which turnkey provider you work with, as long as everything about the property checks out. Now, typically a bad turnkey provider will offer you a bad property, but technically nothing about the provider themselves matters if the property checks out.<\/p>\n

    With that said, how do you check out a property?<\/p>\n

    This is where due diligence comes in. Due diligence on your prospective property isn\u2019t the first time you\u2019ll performed done due diligence\u2014remember that numbers and market analysis talk? Learning all of those things and comparing that knowledge to what is being offered is a really a version of doing due diligence as well.<\/p>\n

    But now it\u2019s time to do due diligence on your property, rather than the theories or bases for decisions.<\/p>\n

    The three most important things to do during your due diligence period before you close on the property are:<\/p>\n

      \n
    1. Get a property inspection. <\/strong><\/em>The actual condition of the property is critical. If you buy a property with some lingering large ticket maintenance item, your cash flow could tank in a heartbeat come time to fix that thing. A turnkey should be fully rehabbed or redeveloped, so you want to confirm that is really the case so you don\u2019t end up with any unexpected large out-of-pocket costs. Keep in mind, the inspection will come back with a fairly significant laundry list of things that need to still be fixed on it, but that\u2019s OK because that\u2019s what you use as the punch list to demand that the turnkey provider fix before you close.<\/li>\n
    2. Interview the property managers. <\/strong><\/em>People often assume that the property managers who come with a turnkey should be completely up to par. That\u2019s a great thought in theory, but the reality is property management is rarely a turnkey provider\u2019s strong suit. As the person who is going to own this property, you have the right to use any property manager you want on it, so interview managers accordingly. If you decide to use the one that comes with the property, that\u2019s great, but do it because you feel comfortable with them rather than just because you assume they should be good.<\/li>\n
    3. Verify the numbers. <\/strong><\/em>Do a little verifying here. Do you know for sure the advertised rental income number is accurate? Either confirm the tenant lease and how much they are paying and confirm that amount seems realistic for that neighborhood, or if tenants aren\u2019t in yet, contact a third\u00a0party who can run comps for you and give you an estimate of what you can expect for that property. You\u2019re basically just trying to ensure that the rental income being advertised is realistic and can be sustained. For sustaining it, what is the neighborhood like? What quality of tenants will be attracted to this property? Again, don\u2019t take the turnkey provider\u2019s word for it\u2014know these answers for yourself.<\/li>\n<\/ol>\n

      \"traits_reputable_turnkey_company\"
      \nRelated:<\/strong>       Turnkey Investing 101: What to Avoid & How to Know if It\u2019s Right for You<\/a><\/em><\/p>\n

      Owning the Property<\/h2>\n

      Over the years of watching people buy turnkeys, this one has baffled me the most. What tends to happen is that a turnkey is advertised as being a hands-off method of investing in real estate, so people take that to mean they can not only be hands-off, but they can also turn their brains off and solely rely on whoever is managing the property.<\/p>\n

      In theory, that\u2019s what should happen. But we also live on Earth, and we are also talking about the real estate investing industry here. If only life and our expectations always held true.<\/p>\n

      While someone else is<\/em> managing the property for you, so you don\u2019t have to worry about the day-to-day stuff, you do still need to be willing to jump in if anything starts going astray. I don\u2019t mean jump in necessarily like suddenly start fixing toilets or collecting rent checks, but you need to be willing to manage the manager if need be. If the property manager isn\u2019t performing up to par, be able to put your foot down about it. Or you may need to fire that manager and hire a new one. Identifying when a property manager goes bad isn\u2019t always easy, but as soon as you realize it, it\u2019s up to you to do something about it. I\u2019ve seen it time and time again when a property manager isn\u2019t performing, the owner\/investor just sits back like \u201cWell, I don\u2019t know what is happening. What do I do?\u201d Do something! This is when you should truly not be hands-off with your property.<\/p>\n

      Another tips is that if a big-ticket maintenance item comes up, before you just pull the cash out of your pocket to pay for it, call your insurance company! My rule of thumb is that if a repair is going to cost more than my deductible, I\u2019m going to first try and see if insurance can help. Maybe they can\u2019t, but at least I can say I tried (it\u2019s free to try). If it\u2019s early on in the ownership of your property, first contacting the turnkey provider about the issue is the best move because maybe the issue is covered by a scope-of-work warranty or maybe even just out of their good graces they offer to cover it because it should\u2019ve been included with the rehab (depending on what it is, of course). The point is\u2014try other avenues before you just fork over the cash!<\/p>\n

      So a summary of what I believe turnkey investors need to know and be involved with, when applicable:<\/p>\n