Why would someone not buy a turnkey property?

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Why would someone not buy a turnkey property?

Nam NguyenPro Member
Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes

Signed up less than a week ago, listened to several podcasts and have read enough to make my head hurt.  One thing that stands out to me are turnkey properties.  

I've listened to a podcast that had @Nathan Brooks as a guest, read blogs from @Engelo Rumora, and seen posts from people like @Ali Boone who seem to be on the positive end of the turnkey spectrum.  I've done more than that trying to educate myself, but those are the three I think stand out when it came to understanding turnkey properties.

I think I'm pretty risk-adverse.  I'm an enlisted active duty Air Force guy with no car payments (I drive a 2001 Toyota Sienna with 284,000 miles that was handed down to me), no school loans (I worked in college and only took the classes that I could pay off.  Finished getting a BA in Liberal Studies, but that hasn't netted me much).  The only real debt I have is the rental in Fort Walton Beach that is being rented out (and I'm trying to re-evaluate how well/bad it is doing in this thread) and my current residence in South Riding, VA.

Why would someone not want to invest in a turnkey property?  It seems to be a very hands-off investment, and smarter people than me are managing it.  It may not be the most profitable real estate venture, but isn't it better than doing nothing?  Would it be smart/dumb to buy one with cash, and refinance it after 6 months and use that cash on another turnkey property?  Those answers and negative experiences are just as valuable to me as the positive ones because I'm confused on why someone wouldn't want to do it.  

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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Nam Nguyen You'll get 100 "it's great!" responses with 100 "this turnkey company screwed me!" Then it will settle into "it really depends on the vendor". You'll get a smattering of "you'll slightly overpay" and "you'll make more if you buy and rehab yourself". It's all true. Using a turnkey company won't magically de-risk your investment. Using/picking a turnkey company doesn't guarantee property management. Using a turnkey company does guarantee a quality rehab. And you will probably pay a little premium for the property. The latter makes sense as they did the work to improve the property. The only caution I'd think through is a turnkey company talking about cap rates (rather than comps) to justify a purchase price. And most of these companies have a great track record (and many were started) after the crash. It's really easy to be successful with a rising tide. Not meant to encourage or discourage using turnkey. Just for general awareness.
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  • Jared Cuyler
    Investor · Fort Walton Beach , FL · Member since 2016 · 16 posts · 18 votes
    9y

    From my perspective it is much more difficult to find a turnkey property where the numbers actually work. They're still out there, but are much more difficult to find in today's market. I personally am all about value add investing and am willing to put in the work in order for the numbers to work out more favorably in the long run. I'd rather buy a place for $50k and put in $20k on a rehab than buy a similar place turnkey for around $100k.

    3Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Nam Nguyen You'll get 100 "it's great!" responses with 100 "this turnkey company screwed me!" Then it will settle into "it really depends on the vendor". You'll get a smattering of "you'll slightly overpay" and "you'll make more if you buy and rehab yourself". It's all true. Using a turnkey company won't magically de-risk your investment. Using/picking a turnkey company doesn't guarantee property management. Using a turnkey company does guarantee a quality rehab. And you will probably pay a little premium for the property. The latter makes sense as they did the work to improve the property. The only caution I'd think through is a turnkey company talking about cap rates (rather than comps) to justify a purchase price. And most of these companies have a great track record (and many were started) after the crash. It's really easy to be successful with a rising tide. Not meant to encourage or discourage using turnkey. Just for general awareness.
    11Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    9y
    Why not? Delusional values proclaimed Delusional cash flow and appreciation projections The people you mentioned make their money selling/promoting turnkey.
    1Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    9y

    I have never bought a turnkey property and don't expect that I ever will.  That does not mean that they are not a good option for those investors the what to be hands off investors.  Here are a few of my reasons.

    Typically you are buying at or above market.

    Typically it is not in an appreciating market and you are buying for cashflow.

    You cash on cash return may be good, but so are other options.

    You are trusting you money to a PM that is not making very much money off of each property.

    SFH PM's typically take the first months rent on new leases. This has nothing to do with turnkey, but my dislike for SFH

    You are trusting the turnkey company even though you still need to do your own DD.

    I like Syndications or note investments as a better passive investment vehicle.

    Everyone has their opinion and this is mine.

    2Reply
  • Daren H.
    Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes
    9y

    Any investment that encourages me to be hands off, is the higher priced alternative, encourages me not to be knowledgeable, and is the least profitable alternative, makes me very concerned. That my friend is why I do not buy turnkey rental property :)

    4Reply
  • Vivek Khoche
    Investor · San Jose, CA · Member since 2017 · 343 posts · 102 votes
    9y

    @Nam Nguyen - You say you are pretty risk adverse therefore considering TK. There is enough on the thread about TK pros and cons and layers of marketing companies leading you to heaven or hell. Most important for you is what are you buying? Run your numbers, evaluate you financial situation and ability to take risk. Once you know the answers to what , how ,who and where would be nobrainer. Please read every page of this thread for real REI education and connect to OP to get next level as there is a limit on how much could be posted on public forum.

    https://www.biggerpockets.com/forums/311/topics/227602-difficulty-selling-rental-properties-at-loan-amount

    Good Luck Investing

    Vivek 

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Nam Nguyen, you asked "Would it be smart/dumb to buy one with cash, and refinance it after 6 months and use that cash on another turnkey property?" My answer leans towards suggesting it would be the latter.

    If a deal won't cash flow positively at 75% leverage from the outset (thereby allowing your cash to let you buy 3-4 of those properties), then I reckon your all-cash idea for buying just 1 property, followed by getting just 70% back on refi, won't work out too well either. (Remember, if you get your financing in place FIRST, you should still be able to get good "cash-only" discounts from motivated Sellers, because they actually DON'T care that your funds are largely borrowed!)

    The MAIN reason Turnkey (ie. non-bargain) is often not highly recommended here on BP, is because they give you no quick exit strategy for PROFIT, whereas buying non-Turnkey ones should (so long as they're bargains). Good luck...

    2Reply
  • Jesse Kindra
    Rental Property Investor · Newcastle, WA · Member since 2016 · 86 posts · 39 votes
    9y

    Great comments here. I also think that you should think about the cycle of the real estate market. If this were several years ago, you might have a better argument for buying turnkey. However, if we are near the top and many people with years of experience think so, do you really want to pay top dollar? This seems risky as then you limit exit strategies should some sort of economic change occur.

    With that said, I'm still looking to buy and in fact closed on a single family house earlier this month. However, this was a short sale and requires some work to fix up prior to being rent ready - so, while no one can time the market, trying to buy right (i.e. BRRRR), makes me feel more comfortable and provides a cushion should the market drop.

    1Reply
  • Dave Ramirez
    Rental Property Investor · Ashburn, VA · Member since 2016 · 239 posts · 119 votes
    9y
    Why not hire a project manager for your flips? You can sell flips if you have a good project manager running your rehab. I'm in Ashburn. I've tried Baltimore turnkeys and they generate good passive income. I bought a duplex for $65k and sold it for $65k 2 years later. The 2 section 8 tenants went from a 100% subsidized to a lower rate for both. I didn't want my rent a risk. Great property manager. Great tenants. If a HML will fund a flip, then adding a project manager makes it a great passive income tool.
    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    By far the most important thing with turnkey investments is the quality of the operator and manager. I've seen turnkey scams before where the buyer got completely screwed over. So you want to vet the operator and manager very closely.

    Regardless, you're not going to be getting much, if any equity in the property up front. You'll usually be buying around market or so with turnkey from what I've seen. Not with all operators, but that's my general impression. If you're OK with that, then that's no problem. But the importance of vetting can't be overstated.

    Podcast Guest on Show #121
    4Reply
  • Account Closed
    Rental Property Investor · Miami, FL · Member since 2016 · 72 posts · 26 votes
    9y

    Hi @Nam Nguyen, I completely understand your question. I'm also getting started from abroad and had always thought I'd start with TK rentals. I figured it's the easiest way to get in and it would minimize risk (after doing your due diligence) since I'd have my own counselor guiding me through the entire process. After picking the right provider and the right property, you'd be cash-flowing with very little effort from your part. It's definitely a sound strategy for OOS investors and hands-off investing.

    You ask if it'd make sense to buy with cash then refi and use the cash to purchase another, assuming 70-80% LTV the problem with this is that you're not forcing appreciation through added value and therefore, don't have the equity to be able to take all your cash out. So, in essence you could do that, but you'd still leave 20-30% of your cash in the property, which would be the same as paying 20-30% for the downpayment. If it's even possible to do 100% financing, the issue would then be if with 100% financing it can cash flow.

    However, what if you can buy the property from the turnkey provider at the distressed stage? Using the same turnkey provider to rehab and manage your property, you would have the same hands-off expereince with one major difference. This time you (or the turnkey provider) would have forced appreciation on the property and in turn, now have the equity to refinance and pull nearly all of your cash with a 70-80% LTV. This is currently the route I'm investigating and hope to find reputable turnkey providers that do this sort of operation.

    1Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Nam Nguyen I haven't bought any turn key but two different people who have approached me to do "Subject Tos" have 5 properties between them, in Memphis, Dallas, Phoenix and Casa Grande and all of the properties are now negative cash flowing and have problems with the renters. I suspect that since they were newbies at the time, they didn't understand the investments, but now they want out. Both told me in separate meetings that they heard the market was hot and wanted something they didn't have to worry about. They wanted "in". Well, they are "in". Just be sure you understand the turn key investment and make sure that it is positive cash flow and that if it is out of state, it is problematic. By the way, both people said the companies they dealt with were honest and easy to work with. They just didn't understand what they were getting into.

    0Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y
    Originally posted by @Dave Ramirez:

    Why not hire a project manager for your flips? You can sell flips if you have a good project manager running your rehab. I'm in Ashburn. I've tried Baltimore turnkeys and they generate good passive income. I bought a duplex for $65k and sold it for $65k 2 years later. The 2 section 8 tenants went from a 100% subsidized to a lower rate for both. I didn't want my rent a risk. Great property manager. Great tenants.
    If a HML will fund a flip, then adding a project manager makes it a great passive income tool.

     Just curious, how do you buy a property for $65k and two years later sell it for $65k and stay happy? Aren't there real estate agent costs, closing costs, and time value of money considerations? What am I missing?

    1Reply
  • Dave Ramirez
    Rental Property Investor · Ashburn, VA · Member since 2016 · 239 posts · 119 votes
    9y

    $1620 of rent after paying property manager.

    No financing or closing costs 

    No agents

    No fixes on property

    $35000 of cash in rents and $63125 back at the second closing.

    About 25% ROI

    0Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    9y
    Originally posted by @Nam Nguyen:

    Signed up less than a week ago, listened to several podcasts and have read enough to make my head hurt.  One thing that stands out to me are turnkey properties.  

    I've listened to a podcast that had @Nathan Brooks as a guest, read blogs from @Engelo Rumora, and seen posts from people like @Ali Boone who seem to be on the positive end of the turnkey spectrum.  I've done more than that trying to educate myself, but those are the three I think stand out when it came to understanding turnkey properties.

    I think I'm pretty risk-adverse.  I'm an enlisted active duty Air Force guy with no car payments (I drive a 2001 Toyota Sienna with 284,000 miles that was handed down to me), no school loans (I worked in college and only took the classes that I could pay off.  Finished getting a BA in Liberal Studies, but that hasn't netted me much).  The only real debt I have is the rental in Fort Walton Beach that is being rented out (and I'm trying to re-evaluate how well/bad it is doing in this thread) and my current residence in South Riding, VA.

    Why would someone not want to invest in a turnkey property?  It seems to be a very hands-off investment, and smarter people than me are managing it.  It may not be the most profitable real estate venture, but isn't it better than doing nothing?  Would it be smart/dumb to buy one with cash, and refinance it after 6 months and use that cash on another turnkey property?  Those answers and negative experiences are just as valuable to me as the positive ones because I'm confused on why someone wouldn't want to do it.  

    It all depends on the investor! Some investors want to be very hands on and have the ability to put in work on their investments. Others know the contractors needed to do renovations. Others, do not have the time or want to be hands on. For people who work 9-5 or want to invest in outside markets, a Turnkey investment is best! It all just depends.

    Good luck!

    1Reply
  • Nathan Brooks
    Real Estate Investor · Kansas City, MO · Member since 2012 · 397 posts · 187 votes
    9y

    Everyone has to make the choice for themselves.  Real estate investing is not about the one size fits all (turn key is bad, wholesaling is good, flips are awesome, subject to doesn't work ... ). It's all about what works for YOU ... 

    With that said, we've grown our personal rental portfolio, as well as the turn key properties we sell because its been a great value and a great fit for clients.  Just remember, go with what you understand, with what you are comfortable with, and with what gives you the end result you are looking for.

    2Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    9y
    Originally posted by @Nam Nguyen:

    Signed up less than a week ago, listened to several podcasts and have read enough to make my head hurt.  One thing that stands out to me are turnkey properties.  

    I've listened to a podcast that had @Nathan Brooks as a guest, read blogs from @Engelo Rumora, and seen posts from people like @Ali Boone who seem to be on the positive end of the turnkey spectrum.  I've done more than that trying to educate myself, but those are the three I think stand out when it came to understanding turnkey properties.

    I think I'm pretty risk-adverse.  I'm an enlisted active duty Air Force guy with no car payments (I drive a 2001 Toyota Sienna with 284,000 miles that was handed down to me), no school loans (I worked in college and only took the classes that I could pay off.  Finished getting a BA in Liberal Studies, but that hasn't netted me much).  The only real debt I have is the rental in Fort Walton Beach that is being rented out (and I'm trying to re-evaluate how well/bad it is doing in this thread) and my current residence in South Riding, VA.

    Why would someone not want to invest in a turnkey property?  It seems to be a very hands-off investment, and smarter people than me are managing it.  It may not be the most profitable real estate venture, but isn't it better than doing nothing?  Would it be smart/dumb to buy one with cash, and refinance it after 6 months and use that cash on another turnkey property?  Those answers and negative experiences are just as valuable to me as the positive ones because I'm confused on why someone wouldn't want to do it.  

    Thanks for the mention mate,

    Below are some of the reasons why I wouldn't buy turnkey:

    1. I want equity in a deal
    2. I don't want to invest out of state
    3. I'm happy to manage/do the work myself and make a higher cap rate
    4. I trust myself the most
    5. I want more control
    6. Most property managers suck
    7. Most turnkey properties are in C-D class area

    I hope that paints the picture lol

    Much success

    Podcast Guest on Show #89
    Oz Realty4.5369 Reviews
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    2Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    9y
    Originally posted by @Account Closed:
    Originally posted by @Dave Ramirez:

    Why not hire a project manager for your flips? You can sell flips if you have a good project manager running your rehab. I'm in Ashburn. I've tried Baltimore turnkeys and they generate good passive income. I bought a duplex for $65k and sold it for $65k 2 years later. The 2 section 8 tenants went from a 100% subsidized to a lower rate for both. I didn't want my rent a risk. Great property manager. Great tenants.
    If a HML will fund a flip, then adding a project manager makes it a great passive income tool.

     Just curious, how do you buy a property for $65k and two years later sell it for $65k and stay happy? Aren't there real estate agent costs, closing costs, and time value of money considerations? What am I missing?

    Hi Ken,

    The saying goes "Best time to buy is NOW, best time to sell is NEVER" 

    Investing purely for cashflow should be a long term play

    In my opinion, you will loose money in the short term.

    I would look at the investment from a 5+ year type horizon.

    Thanks

    Podcast Guest on Show #89
    Oz Realty4.5369 Reviews
    WebsiteView Page
    2Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    9y
    Originally posted by @Andrew Syrios:

    By far the most important thing with turnkey investments is the quality of the operator and manager. I've seen turnkey scams before where the buyer got completely screwed over. So you want to vet the operator and manager very closely.

    Regardless, you're not going to be getting much, if any equity in the property up front. You'll usually be buying around market or so with turnkey from what I've seen. Not with all operators, but that's my general impression. If you're OK with that, then that's no problem. But the importance of vetting can't be overstated.

    100% agreed here

    Podcast Guest on Show #89
    Oz Realty4.5369 Reviews
    WebsiteView Page
    0Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    9y
    Originally posted by @Wayne Brooks:

    Why not?
    Delusional values proclaimed
    Delusional cash flow and appreciation projections
    The people you mentioned make their money selling/promoting turnkey.

    Wayne,

    I actually talk 90% of investors out of buying turnkey.

    If they want to be more hands on and making a higher return with equity.

    They should just do it themselves.

    We help investors that are happy with decent returns for a complete hands off experience 

    Thanks

    ps. I actually make more money being an A$$ model on the weekend lol hehe

    Podcast Guest on Show #89
    Oz Realty4.5369 Reviews
    WebsiteView Page
    2Reply
  • Billie Miller
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y

    We are getting ready to buy a turn-key in the next couple months and I think everyone comes from a different perspective. 

    It's pretty easy for people in the midwest to say just go out and get your own deal, you'll have more equity in it. 

    For those of us who live in really tough markets, turn-key deals seem like a great and easier option. Yeah, I won't be getting as good of a deal with my turn-key as @Jared Cuyler's $50K purchase/$20K rehab, but that kind of a deal just doesn't exist in Denver. So turn-key is starting to look pretty good from my angle!

    1Reply
  • Ryan Jones
    Colorado Springs, CO · Member since 2017 · 32 posts · 17 votes
    9y

    Well performing markets like Denver, Nashville, San Francisco, etc. do not have many flip or BRRRR deals because the rent ratio comes no where near at least 1% i.e. $5k/month for a $500k home. On the other hand, in Colorado, you can find good deals in cheaper areas like Pueblo where rents can be high relative to the home price. In summary, I agree to stay away from turnkeys. Plus you won't have any equity gain up front.

    0Reply
  • Arianne L.
    Investor · Fort Walton Beach, FL · Member since 2015 · 568 posts · 966 votes
    9y

    @Nam Nguyen 

    You have a lot of good points here already of why and why not people buy turnkey properties

    Basically when you buy turnkey you usually buy at what the house is worth / fair market value. So if if you are okay with that and the cashflow return meets your desired % annual return on your cash and great.

    Some people like myself like to have instant equity and only buy for a discount. But obviously we have to be a lot more active to achieve that. And in some higher price point markets even at a steep discount, the cash on cash returns still aren't lucrative. 

    If I was considering turnkey rentals I'd probably also seriously consider lending money to the good flippers I know. 

    Turnkey will have depreciation going for it, while lending is a short term commitment (6-12 months) and then I can reconsider. The cash on cash returns are usually about the same % 

    0Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    9y

    I'd argue a lot of the people that seek out the information within this site are going to be inclined to trust the numbers they have created vs the numbers supplied to them via a biased 3rd party. Not that the numbers are wrong or even bad, but at the same time they probably aren't the best fit. 

    Or your an oddball like me and finding the deal is half the fun...

    1Reply
  • Nam NguyenPro Member
    OP
    Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes
    9y

    @Arianne L. how do i know who the good flippers are and how do i trust i'll get my money back?  I've considered loaning money, but I always assumed you had to have at least $500k or more just sitting around.  

    @Matt K. I'd love to  be that oddball.  It sounds more fun than what I currently do now...

    0Reply
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