What's the deal with Turnkey Companies?
Baltimore, MD · Member since 2014 · 145 posts · 65 votes
What's the deal with Turnkey Companies?
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Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes
11y@Rodney Kuhl I have found that investors that come from BP have a pretty good understanding of what it takes to get 2% per month. Essentially you have to give something up... the area, the quality of tenant, the age of mechanicals.. you can't have it all and get 2% (for the most part..) With investing in general there is a tradeoff between risk and reward. Buy and hold real estate is no different.
With the Out of state crowd from BP you have (in general) a very low tolerance for risk. If you read through some of the Turnkey disaster stories here its not hard to tell why. Here is what I have found to be very popular with BP investors:
- Coming to visit Indianapolis to see the properties / areas
- Newer big ticket items
- Inspections with repairs
- Area that they feel comfortable with - would I move my sister in this house? my mom?
- Finding an "overly qualified" tenant - not just meeting but exceeding qualifications
The first 4 can add costs and the 5th item calls for a rent reduction to offer a great deal to a great tenant. Your return will go down but your risk is also decreased.
Me on the other hand... I love 2% deals. Being local and having full trust in our property management team, I can put up with lower end areas, tenants that are qualified but not overly qualified, and doing maintenance on our properties on a regular basis. For us this is just part of everyday life. Not stressful. We are not passive investors though, we are active in property management every day. NOT the goal of an out of state BP investor.
I love BP (Very thankful) because it serves as a risk mitigation tool for its users. It makes life on me and my wife much, much easier as a turnkey provider. I would much rather sell 1.5% deals to informed investors rather than 2% deals (to someone that just goes after the higher return with no knowledge of why) all day long. Its way easier on the property management side, and in the end our clients get a better experience. BP is like Advil. It reduces headaches!
Hope that made sense!
Happy Thanksgiving! Happy Investing!
21 Replies
- Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes11y
Where do you see turnkey 2%? If you do, how many common expenses are they leaving out?
Yes - its the capital - they add value by rehabbing, placing the tenant and offering property management, they make money on the deal flow.
- Baltimore, MD · Member since 2014 · 145 posts · 65 votes11y
I'm seeing deals approaching 2% in the Baltimore area, although if you did it all yourself, I imagine the more experienced investors are getting closer to 3%. Turnkey seems to be hanging out in the 1.5% area, which isn't bad. These rules don't really take into account expenses, and I've have to see a pro-forma first, and for all I know, the property could need a new water heater, stove, dishwasher and roof within 6 months of purchase.
- Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes11y
@Andy Gross if it needs all of that - its not 'turn key' if you ask me. But defining 'turn-key' is the subject of many posts.
My local turn key company advertises an 80,000 property with $865 to $895 rent. And that's their 'B' property.
- Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes11y
Originally posted by @Andy Gross:
for all I know, the property could need a new water heater, stove, dishwasher and roof within 6 months of purchase.
Ya think? I wouldn't trust this at all. Wholesalers here are constantly picking up properties being dumped by out of state investors that wish they never bought the house.
- 11yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
"If it's such a good deal, why is the Turnkey company selling it? Is it just to raise capital? Are Turnkey companies just another type of flipper, buying distressed assets, cleaning them up, placing a tenant and selling for a profit? What's the motivation?"
This is their business. They are not simply selling off their portfolio. I think it's very hard to get 2% gross though on a turn-key, at least not in a decent are. I don't mean a market, I mean the neighborhood. To get 2% you really have to buy something that needs work. Let's take a very typical $60-$70K turn-key in Midwest markets like Indianapolis or Kansas City which are both known for good returns, you'd have to be getting $1200-$1400 rent for 2%. That's not going to happen. You'll be getting $800-$900 rent. We do turn keys in both those markets and the more typical ratio is around 1.2-1.4
At the end of the day, rent ratio isn't that important. It's the bottom line cash flow and ROI that matters.
- Rental Property Investor · Fishers, IN · Member since 2013 · 381 posts · 69 votes11y
@Andy Gross Yes, exactly. This is their business. Why do some people flip whereas others buy and hold properties as rentals? That's the preference for their real estate business. A good turnkey company can be a great source of buy and hold properties, if that's what you are looking to invest in. They are a form of a flipper, only they don't rehab to retail grade and sell them on the market. Instead, they rehab them to rental grade and sell to other investors. They make a profit off the sale, the buyer gets a cash flowing property, and everyone is happy (at least in theory).
As far as 2%, that can be tough to find, especially with turnkey providers. With turnkey providers you will often pay a premium, which is justified because they are minimizing your risk by fixing up the properties and hopefully placing a good tenant in placing and managing the property as well. 2% deals are more likely to be found off market on your own or through a wholesaler. There are several turnkey providers that sell properties in Indianapolis. You won't find the 2% rule with most of them. - Flipper/Rehabber · St. Louis, MO · Member since 2008 · 489 posts · 300 votes11y
Basically turn-key business are set up for those real estate investors who either
A. Want to get into the buy and hold game, but don't want to deal with the grunt work that it entails and doesn't want to deal with renters or property management. They just want the cash flow.
B. For the out of state investor that can't invest in their own state. Building a relationship with a turn key company is a great way for them to be an investor long distance.
The mission of a good solid turnkey company is to find great deals to sell to investors, so they can make solid cash flow and not have to worry about their investment. But like all business there are good one and there are bad ones. Just make sure you do your research and educate yourself on the areas that you are looking into and the company you are working with.
- 11yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
Well said @Nicole Pettis
- 1. Unless you have a turn-key company that is putting huge mark ups on their properties (and some do, but not all), you don't always pay much more through a turn key company and your risk can be much lower. Why?
- 1.The turn key company usually has a lower cost basis than someone doing it on their own because they can buy cheaper. The average person would buy something off the MLS whereas the turn key company is often buying at auction for much less or working with wholesalers marketing directly to distressed owners.
- 2. Cheaper construction costs. Because the turn-key company puts a lot of volume through their construction crew, they are able to get better costs and discounts.
- 3. Turn key companies get better costs on mechanicals like AC, furnace etc.
- 4. The person doing it themselves takes on the risk of construction cost over runs
- 5. A turn key has a tenant in place and is cash flowing from the start. If you do it yourself, you can easily have 3 or 4 months of lost rent while you renovate and find a tenant.
- 6. A turn key already has a tenant in place so you don't have to pay the 1 month of rent in lease up fee's.
- 7. Since the turn -key already has a tenant, there is no risk of mis-estimating rent.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Yep, it's basically the latter. Turnkey companies are large-scale flippers, they just primarily flip to investors (and in bulk) rather than to primary homebuyers. That is why they don't keep the properties themselves- that isn't the business they are in. Although I do know a lot of turnkey sellers personally and they do keep some for themselves as they get them. But they are more for 'flipping' the property and using that capital to buy more. They continue that cycle to grow profits. Just like small-scale flippers.
Be leery about any turnkeys you are finding that are advertising the 2% rule these days. Those are likely in declining markets. The good markets won't have that.
- Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes11y
Our company provides turnkey rental properties for investors that want to be passive. Most investors don't want to deal with all the headaches of acquisitions, rehabbing, leasing and management. So that is what we do. If I had the capital I would just buy and hold every deal that I came across. and that is a goal that my wife and I have... But, until then I will continue on with my "day job".
I do advertise the 2% rule because we do have properties that meet that criteria but what I have found after talking with several dozen BP investors is no one wants 2% properties. All the BP investors that I have met with strongly prefer properties in the 1.5% range.
At first I was very hesitant to offer "turnkey" deals to the BP crowd because there are so many companies that have made turnkey into a bad word. Giving a bad name to the concept in general. What I have found though is there is a huge demand for turnkey deals from out of state investors. BP is awesome because the investors that I talk with are already educated on the subject and know how to do there due diligence - Mainly from this forum and the contacts they have made because of it.
If you want to understand the essence of a good turnkey company I would read stuff from Chris Clothier and Memphis Invest. I have been following there company for years and have learned quite a bit. Just like any business customer service is the corner stone of the turnkey model.
- Rental Property Investor · Fishers, IN · Member since 2013 · 381 posts · 69 votes11y
@Ryan Mullin Interesting that you say most of the investors you've spoken to here on BP prefer the 1.5% props to the 2% props. Why do you think that is?
Just interesting because we always hear about the 2% rule. I tend to think if you find either you are probably doing ok. Just was curious why you think that is. - Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes11y
@Rodney Kuhl I have found that investors that come from BP have a pretty good understanding of what it takes to get 2% per month. Essentially you have to give something up... the area, the quality of tenant, the age of mechanicals.. you can't have it all and get 2% (for the most part..) With investing in general there is a tradeoff between risk and reward. Buy and hold real estate is no different.
With the Out of state crowd from BP you have (in general) a very low tolerance for risk. If you read through some of the Turnkey disaster stories here its not hard to tell why. Here is what I have found to be very popular with BP investors:
- Coming to visit Indianapolis to see the properties / areas
- Newer big ticket items
- Inspections with repairs
- Area that they feel comfortable with - would I move my sister in this house? my mom?
- Finding an "overly qualified" tenant - not just meeting but exceeding qualifications
The first 4 can add costs and the 5th item calls for a rent reduction to offer a great deal to a great tenant. Your return will go down but your risk is also decreased.
Me on the other hand... I love 2% deals. Being local and having full trust in our property management team, I can put up with lower end areas, tenants that are qualified but not overly qualified, and doing maintenance on our properties on a regular basis. For us this is just part of everyday life. Not stressful. We are not passive investors though, we are active in property management every day. NOT the goal of an out of state BP investor.
I love BP (Very thankful) because it serves as a risk mitigation tool for its users. It makes life on me and my wife much, much easier as a turnkey provider. I would much rather sell 1.5% deals to informed investors rather than 2% deals (to someone that just goes after the higher return with no knowledge of why) all day long. Its way easier on the property management side, and in the end our clients get a better experience. BP is like Advil. It reduces headaches!
Hope that made sense!
Happy Thanksgiving! Happy Investing!
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ryan Mullin for as long as I have been posting on BP which is 10 months now... I have my opinion and I follow exactly what your saying.
Low end rentals are not appropriate investments for out of state buy and hold.. Far to management intensive and too many ups and downs and too much risk for vandalism bad tenants etc. For one who lives and works it everyday and has years at it its simply a JOB its what you do...
For someone sitting in LA when these things happens to them its a freaking disaster .. So the investor can very much mitigate the down side by buying UP in the market place and getting those areas that are populated with the top end of the renter pool not the bottom end.
I know you don't like to have to call your out of state client and let them know their house just got hit.. everything has been stolen the copper ripped out etc... But that is reality in the lowest price points in every major metro area .
- Investor · Bayside, NY · Member since 2014 · 45 posts · 14 votes11y
I live in the outskirts of New York City and I've invested in Nevada and Indiana. Although I've seen some enticing turnkey investments, I've always decided against them because of the reasons stated by @Jay Hinrichs
Right now Indianapolis is a hot market for turnkey investments. The problem is that most of what I've seen have been 80-120 year old homes, located in low income areas, surrounded by the worst schools in the state. Even if the home is going to cash flow 2% a month, I feel like its a huge gamble. I'd rather take 1% a month and know that I bought a new home, in an excellent neighborhood, with the best schools, and high quality tenants.
In my opinion, as an out of state investor you have to be crazy to be investing in high risk properties. All of my investments are very low risk. My problem with turnkey companies is that the majority of them go into bad neighborhoods, buy old run-down homes for next to nothing, put a few thousand in them to get them "rent ready," and then flip them for a nice profit. Thats great for the turnkey company that makes the profit flipping the home, but more likely than not it turns out to be a bad investment. I did a little research the other day and I noticed that some of the turnkey properties being sold in Indianapolis for $50k-$100k were purchased for less than $5k at auction. I don't see how anybody could recover their money if they ever had to sell.
@Ryan Mullin Don't take what I'm saying personally. I've heard some good things about your company from others on this forum. I was just expressing some of the concerns that I'm sure most out of state investors have with investing turnkey.
- Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes11y
Originally posted by @Raj S.:
I live in the outskirts of New York City and I've invested in Nevada and Indiana. Although I've seen some enticing turnkey investments, I've always decided against them because of the reasons stated by @Jay Hinrichs
Right now Indianapolis is a hot market for turnkey investments. The problem is that most of what I've seen have been 80-120 year old homes, located in low income areas, surrounded by the worst schools in the state.
I personally prefer the older houses. Most of the newer homes are pop-up houses that were mass produced. IMO the phrase "they don't make them like they used to" is true. My model doesn't really rely on school systems per se as majority of our tenants are young professionals with out kids. The trick to Indy is knowing what parts of town you can still get good deals and attract tenants that aren't "low income" but are willing to live in a 650 - 800 / month rental to save money.
Even if the home is going to cash flow 2% a month, I feel like its a huge gamble. I'd rather take 1% a month and know that I bought a new home, in an excellent neighborhood, with the best schools, and high quality tenants.
There is a middle ground! Like I said 1.5% is a sweet spot for the BP investors that come to Indy and see what were doing.
In my opinion, as an out of state investor you have to be crazy to be investing in high risk properties. All of my investments are very low risk. My problem with turnkey companies is that the majority of them go into bad neighborhoods, buy old run-down homes for next to nothing, put a few thousand in them to get them "rent ready," and then flip them for a nice profit. Thats great for the turnkey company that makes the profit flipping the home, but more likely than not it turns out to be a bad investment.
Agreed. I have seen this over and over and I hate it. I once heard Jay call himself the "anti-guru, guru" and I want my company to be the "anti-turnkey, turnkey company" LOL...
I did a little research the other day and I noticed that some of the turnkey properties being sold in Indianapolis for $50k-$100k were purchased for less than $5k at auction. I don't see how anybody could recover their money if they ever had to sell.
More than likely these are Tax surplus auction properties. I buy them too... They have been sitting vacant for 5+ years and have all been completely stripped. The good news is that when these get rehabbed you are looking at new furnace, new roof, new plumbing, electrical, etc etc etc.. basically new everything. A rehab like that is 25k - 30k. So for us to buy something for 5k rehab for ~30k and sell for ~39k can be win / win for everyone. Depending on area of course... there are quite a few areas of Indy where I wouldn't take a house for free. And I would be happy to inform anyone on BP where those areas are via private message. And no I don't take anything like this personally. I love the discussion, it gives me an opportunity to explain how my company is making a huge effort to be different.
Ps... sorry to the original poster for taking this thread in a self promo direction... oops! :)
- Investor · Bayside, NY · Member since 2014 · 45 posts · 14 votes11y
@Ryan Mullin I appreciate the response. That clears up a lot about what you do. You guys are probably the only turnkey provider who I haven't heard any complaints about. A lot of the members on BP have good things to say about you
- Registered Nurse (ICU) · San Jose, CA · Member since 2014 · 496 posts · 332 votes11y
@Ryan Mullin I also enjoy reading your posts Ryan. Thanks
- Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes11y
@Raj S. @Account Closed Thanks guys! I appreciate it!
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ryan Mullin keep it real like your doing then its up to the investor to decide.
- Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes11y
@Jay Hinrichs That is what I will do Jay! Keep posting on here! I can already tell you have made a huge impact on the BP community in the last 10 months.
Ps. What do I have to do to get your E-book? I will pay retail for it! lol...
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Ryan my e book is for newbie's your anything but... however if you really need it I can send it along... It was written actually for Aussie's specifically as they were getting so totally abused in the US turn key environment and did not really understand that people in the US might not tell the truth or stretch the truth.. and they CERTAINLY had no clue as to what a war zone or Ghetto was.. .they just thought 30k houses were cheap they did not correlate that they were management intensive and that they were not going to sit over in Brisbane and just collect rent on the first of each month via electronic payments.
In OZ they don't have checks... They did not understand that the majority of tenants in lower end America do not have checking accounts and never will... that was a totally foreign concept...
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