Turnkey companies. What's the motive?

12 Replies

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@Account Closed , I honestly would like to know the answer to that question myself. My best guess is that they would rather not have thousands of properties on their books and would rather make a few dollars upfront on the sale and then make consistent money off of the property with little to no risk. 

I think it comes down to strategy.  Some people like making money upfront with flips (basically TK companies) and some people like making money long terms, with buy and hold.  It all depends on the strategy

Think of a turn-key company as being a middle man between a "flippable" property and the rental market.  It is true that either buying and holding or selling to owner occupant buyers would be alternative strategies.  However those do not scale as easily as being a turnkey provider.  Also capital is not tied up as much with the turn-key model.

Turnkey is just another form of flipping.  You might ask the same question on any flip.  Why don't they just rent it out and keep it?

The turnkey model started when flippers realized that they could provide full service and market properties to non-owner occupants--typically to buyers from markets where the barriers to investment properties are high or provide low returns.  This broadened their potential customer base.

In fact, according to @Jay Hinrichs , many turnkey operators do keep some properties for their own portfolios, both because they can and to put their money where their mouth is.

Finally, many (if not most) flippers finance their deals much differently than they would buy-and-holds.  Usually all cash or some sort of short-term financing.  These underlying financing arrangements are not conducive to long-term holds and institutional lending has many restrictions like the number of loans a borrower can have.

Hope this helps.

@William Hochstedler

@Brie Schmidt

Exactly Turn key is just another name for fix and flip.. instead of owner occ its to a investor. and to take it another step they arrange property management and have well defined marketing strategies that include marketing to CA residences. The fact is CA investors represent 50% of all turn key purchases.. there is a reason they all hammer on CA... LOL.

As opposed to the locals in a town buying all their rentals..the locals know the ins and outs the risk reward of certain neighborhoods and won't touch them for buy and hold. its the unaware naïve investor that gets sucked into those.. the foreign investors especially.

the UT most care must be taken with buying out of state properties.... Remember those that are sitting on the west coast and marketing properties in the mid west or east are just brokers.. no different than a RE broker.. And I would ask if those folks even have licenses to sell properties they don't own.. but that's another matter.

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It's a business. It's no different than fixing up a house and selling it to an owner occupant. With a retail flip, no one asks why they don't just keep it and live in it. The only difference between a turn key rental and a retail flip is the turn key company is selling to an investor.

@Account Closed  basically, would you rather get 25k today or get it slowly over the next 5 years

Hey Peter! I asked the same question when I got started with turnkeys. If they are so good, why are the sellers selling them? What I've since learned is that turnkey companies are essentially flippers. They are bigger scale than individual flippers, but they are strictly flippers with a focus on selling to investors. I do know, tho, that a lot of the sellers do keep occasional properties for themselves. They just don't keep all of them because that isn't their business model.

@Account Closed

I am not sure I can add anything to what has already been said, except that turnkey companies exist because there is a demand for them. There are many different kinds of players that make the whole thing run, including the turnkey flippers, the lenders like Jay Hinrich (who only do short term lending), and the many investors who want to buy and hold turnkey properties that are managed as passive investments. I started in REI as a small time private lender, then started buying turnkey properties, and now am doing my first turnkey flip - although it is retail (to be sold to owner occupant), all as passive, at a distance investments. Many ways to play the REI game.

Here is the system;

Name: Turn-key

Meaning: fix and flip business with a secondary business of property management, construction/rehab, and retail sales.

Game: get financing from several sources, get property in C+ or better neighborhoods, fix for rental, price home to fit needed ROI of target investor-type buyers.

Secondary Game: offer property management until growth of property management business is profitable.

Extra profit center: Some end buyers will be disillusioned. Provide sales of failed properties to other investors or sale homes to retail buyers. Provide ongoing service to fix and maintain properties to investors. Provide others in the community fix/rehab type services.

Take the profit and invest in other projects. (keep an attorney handy for lawsuits)

@Peter Jun  As a fellow Californian who has invested in three different US markets, I have found significant differences with turn-key companies.  Some (obvisously fewer) are more like wholesalers, where they rehab and take out just enough to make it worthwhile, but leave the price enough below market to give the buyer a little equity going into the deal.  Others sell at market.  And yet others are significantly above market and trying to appeal to the "cash-flow only" crowd.  They are just like flippers but they make money in multiple ways -- the two key ways being on the sale of the home and, for the long term, property management. But they also have construction businesses that make money on the rehab and if you want anything fixed/upgraded on your property. Some have brokerages and will get transaction fees. Some have finance companies.  But the KEY factor for a good turn-key company is property management.  Poor property management kills everything.

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