Why Not Invest in Turnkey?

11 Replies

New investor dumb question - I am about to pull the trigger on my first SFH turnkey, but want to ask the question on the plank...other than liquidity and convincing traditional investing family and friends who don’t invest in real eatate - why not do it? Hope to hear your experiences.

@Zachary McGinnis When you invest turnkey you lose the opportunity to value add outside of catching market appreciation in an area. The majority of the money at that point is going to be made by the turnkey company finding you the property. Now if you don't mind smaller returns in exchange for eliminating the majority of work to get into the game then turnkey is a great way to do it especially with low cost to entry, but then again you could also invest in an REIT, syndication, NNN lease type asset. Now I may be misunderstanding your question because you may just be buying turnkey and not through a turnkey company. If that is the case, there is nothing wrong buying turnkey as long as you get a deal, because you also eliminating holding costs to get the next renter in but you also generally have more competition because now you are competing with homeowners. We buy turnkey all the time on properties but we will not buy unless numbers make sense and it is under 20% under market which generally results in us making a lot of offers, but the model is unbeatable with volume. You may have one deal go bad over time, but if you continue to the model, the numbers will always be in your favor as you increase its utilization.

@Zachary McGinnis 99 times out of 100 TKSFR is a bad model. Given enough time most deals will go flat on cash flow or negative. The hidden problem is turnover expenses. NOTE: turnover is NOT maintenance and repairs. It's a different expense and often hidden by TK providers when dealing with rookies.

Keep digging!

Originally posted by @Zachary McGinnis :
New investor dumb question - I am about to pull the trigger on my first SFH turnkey, but want to ask the question on the plank...other than liquidity and convincing traditional investing family and friends who don’t invest in real eatate - why not do it? Hope to hear your experiences.

 It just depends. If you are looking to invest outside your market or you work a 9-5 than Turnkey is just fine. Some people do not like it because of the up front costs, but if you are not ready nor able to become a full time landlord or flipper, then going Turnkey is fine. You are essentially paying for a product and a service. Ideally, the turnkey company will own, renovation and manage the property all in house and not use any third parties. They should not only be in it for the sale but the relationship. Some investors think they will do better and make more if they go it alone, and that may be true. It just depends on what kind of time and resources you have. 

Now if you are dealing with some company that just calls a nice property off of the MLS a "turnkey" and they are going to ship you off to some other management company, that is a different story. Those are just agents trying to earn commission and I would have some second thoughts.

Good luck!

Tom Ott, Real Estate Agent in OH (#2016003865)
440-749-4043
Originally posted by @Zachary McGinnis :
New investor dumb question - I am about to pull the trigger on my first SFH turnkey, but want to ask the question on the plank...other than liquidity and convincing traditional investing family and friends who don’t invest in real eatate - why not do it? Hope to hear your experiences.

 Welcome to the site Zachary. Many people are apprehensive to invest in Real Estate. Myself I love the business. It has dramatically changed my station in life for the better but that's not to say it's without risk or it's downfalls.

Take a look at this thread I started the other day. TENANTS FROM HELL #1 Deplorable living conditions. It's important to note that these things can, do & will happen to you. Even if your property was "turnkey" when you purchased it. Just be prepared to roll with the punches & take the good with the bad.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

@Zachary McGinnis , I agree with @Ivan Barratt on turnover expense is costly. I’ve bought one turnkey property in Memphis and I’m about to buy another. An average turnover will cost 1500 dollars in just repairs and getting it rent ready.

Now the way to combat this is to do the same thing as multifamily, have more properties. If you own 6 or 7 SFR, you probably will be fine if one is vacant at a time. I work a day job and I’m about to start grad school, I don’t have time to be a full time investor myself and my local market isn’t very conducive for buy and hold, hence why I went turnkey. It’s worked for me so far, but you have to do your research and really vet the provider

turnover is an expense and will not really change regarding if the home was purchased form a turnkey provider or not. It’s part of owning real estate. For most ppl investing long distance buying turnkey is the most logical way to buy with the exception of a few who have the ability, knowledge and experience to do it on their own. 

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

@Zachary McGinnis

As usual @Lane Kawaoka is spot on.

Turnkey is a way to get in the game and/or build up your portfolio with less hands on time and experience.

Multi family to me is the ultimate end game but unless you have loads of money to start out most people build up using single family.

Also as others have said you miss out on value-add opportunities when you buy turnkey, but it takes a lot of time, experience and risk to go after value add (I.e. forced appreciation) opportunities.

Originally posted by @Kyle M. :

Zachary McGinnis

As usual Lane Kawaoka is spot on.

Turnkey is a way to get in the game and/or build up your portfolio with less hands on time and experience.

Multi family to me is the ultimate end game but unless you have loads of money to start out most people build up using single family.

Also as others have said you miss out on value-add opportunities when you buy turnkey, but it takes a lot of time, experience and risk to go after value add (I.e. forced appreciation) opportunities.

 I very much agree with these statements!

Tom Ott, Real Estate Agent in OH (#2016003865)
440-749-4043

@Zachary McGinnis

Hi Zachary,

If you can buy a turkey at wholesale prices, then it makes sense.  4-5 years ago, it made a lot of sense. Prices have escalated to where there is no appreciation left.  The other problem is scalability.  You need to own several to limit your risk from vacancies and repairs.  There are some reputable turn key providers out there. I think Chris Clothier from Memphis Invest has a very good operation and has been doing it for years.

COC looks good until the one tenant stops paying or it goes vacant. Research the market and the turn key provider

Gino

@Zachary McGinnis I think the biggest issue (by far) is that many TK investors use a TK provider as a replacement for their own diligence. They use the provider to build a pro-forma, give them an ARV, have a management company, etc. It’s akin to have a sellers realtor tell you that their asking price is right. Sure, it could be right, but would you trust them? If a sellers agent told you the roof was new, would you forgo a home inspection? If a sellers agent told you a property would rent for $____ would you believe them? There are plenty of people that buy a TK (their first investment) without visiting pre (or post) rehab. It’s lunacy to me, but that’s just me.

I do, 100%, agree that the time, effort, etc. to find your own “value add” isn’t “free”. Especially since most people buying TK do it out of state. It’s incredibly risky and challenging to go into your first investment that will be 1.) out of state, 2.) a major rehab, and 3.) something that needs an ARV of “____” to refinance.

Bottom line, no matter what, you’re not de-risking the deal by inherently going with (or not going with) a TK solution. Do you own diligence and if a TK property is the best option, go for it.

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