Out of state Turnkeys??

25 Replies

My whole goal is to have a small group of rentals that can give me passive income for the rest of my life. I live and work a little north of Seattle where essentially homes start at $350k and the 1% rule doesn't really exist, in most cases rents would be less than what my mortgage would be. If I wanted to do any sort of BRRRR, House Hack or Live-In-Flip (which I was planning on doing) I would have to move 2 counties away which would make my commute 2+ hours. In no way am I saying investing in Seattle is impossible, but with my current situation it doesn't seem to make sense. So my question is, are turnkey rentals from a reputable company something that would be a good idea? I understand this is an extremely passive way to invest, but with my main goal being steady cash flow the numbers seem to be much more attractive than anything I can find in Seattle. Any thoughts??

buying rentals out in the mid west north east deep south are pretty much interchangeable given price and rents.

but don't kid yourself  its not like investing in mutual funds or a reit.. it takes work to buy and to manage long term.

if you buy at the top end of the market in most of these areas you will do just fine over time.. just don't get sucked into buying on the bottom end of the price points.. those will have the toughest tenants lots of turn over and damage etc.

so just be cautious but yes it can be done..   Although you don't have to go any farther than rural WA to find deals that will cash flow you may have to put a little more down but they may be a little easier to manage.

No doubt @Jay Hinrichs is right. Talented people can make this work. Be very cautious though. I've bought several properties from out of state investors in NC that thought they could turn a nice, easy ROI from a 1,000 miles away. After a few years of paying a PM, turnover, poor tenant selection, damages, etc. they were only too happy to get out. I'm not the smartest guy in the room but I can make these profitable with self management and local relationships E.g. plumber, electrician, painter, GC, handyman, roofer... you get the picture.

@Jay Hinrichs thanks for the reply! My first instinct was to try look over in Eastern Washington but I still feel like the price points and rental rates are better in more of the midwestern cities. In a states like Missouri, Nebraska and South Dakota I found much higher supply of SFR right around $100k in what seemed to be B neighborhoods, obviously I need to do a little more research but this definitely got my mind rolling!

@Tyler Smith I did the same thing after buying my first rental in 2009 in maple leaf. And then south seattle in 2010. In 2012 I started buying for cashflow via turnkeys because my time was better spent at my day job. Let me know if you have specific questions.

@Tyler Smith There are opportunities to do well out of state...just depends on how you do it, and who you do it with.  We do very well in Indy...happy to answer any questions about this market, if you'd like to PM me.

Turnkey can certainly work well for an out of state investor looking for something passive that they expect to hold for at least 5-10 years, really closer to 10 in the current market. I started investing turnkey in 2012. There are also other options to explore if you are going the passive route in REI as I write about in my article Three Key Routes for Passive Real Estate Investing

Originally posted by @Tyler Smith :

My whole goal is to have a small group of rentals that can give me passive income for the rest of my life. I live and work a little north of Seattle where essentially homes start at $350k and the 1% rule doesn't really exist, in most cases rents would be less than what my mortgage would be. If I wanted to do any sort of BRRRR, House Hack or Live-In-Flip (which I was planning on doing) I would have to move 2 counties away which would make my commute 2+ hours. In no way am I saying investing in Seattle is impossible, but with my current situation it doesn't seem to make sense. So my question is, are turnkey rentals from a reputable company something that would be a good idea? I understand this is an extremely passive way to invest, but with my main goal being steady cash flow the numbers seem to be much more attractive than anything I can find in Seattle. Any thoughts??

 Investing in Turnkeys OOS can be a great way to earn passive income. It is a good way to invest when you work a 9-5 or want to invest in another market where you do not have any contacts. Ideally, the Turnkey provider will make it 100% passive for you. Everything should be done by them. They should own, renovate, and manage the property all in-house for you.

Try looking at:

How to Find the Right Turnkey Real Estate Investment Company for You

and

The Best Types of Markets for Profitable Turnkey Properties

@Tyler Smith , I think there can really be a spectrum of passivity when it comes to how one defines TurnKey investing.  Some companies will manage everything from a rehab, sale, and in-house management, while others will sell you a completed property with vetted tenants already in it, and hand-off the local management / contracting relationships for you.  Either way, while you don't manage the tenants, you should be prepared to manage the manager.  The first step is to decide how passive you need to be, and go from there.  The more value the TK company adds, the more of a premium one should expect to pay [which is certainly appropriate], but that doesn't mean there aren't good cap rates to be had.

If investing in Eastern Washington is still on your radar, let's chat further. I can share what I've learned in the area here, as well as give good local contacts one may need to accomplish their goals.

@Tyler Smith buying turkey rentals is great way to invest and cash flow instantly. The Midwest provides an excellent opportunIty because when the property values decline, rents stayed stable.

I've always gone the turnkey route for the exact reason you mention- my local market doesn't work for what I want to do/buy. I think if you work with a good turnkey company, they can definitely be a good fit.

Reach out anytime if you have any questions on the turnkey front!

I don't think you should invest out of state.  I think you should do your best to make it work in Seattle.  Do all of these things together.  House hack, buy a fixer-upper to force equity, live in flip, and do what it takes to make it work.

My reasoning is that in the long run, this line has a much better chance of increasing your total net worth.  It is much easier to convert a high net worth into passive income and cashflow than it is to convert cashflow into a high net worth.  The beauty of buying into a market like Seattle is that you get tremendous benefit from the power of leverage.

If you buy 5 OOS turnkeys for $75K each with 20% down and manage to make 15% return on them after leverage, you only make $11k net per year, not to mention the headache you'll have trying to find reliable help from 500 miles away.  Take that same $75K, invest it in a live in flip at 5% down owner occupied and you can own a million dollar property, force equity and make $11K look like chump change.

This approach is much riskier, but also provides higher potential.

Hey @Tyler Smith - there are many ways to go about this, and benefits and detriments to many markets and companies. In the Midwest, you can get great cashflow, but typically you see little to no appreciation and higher turnover. I have a turnkey company here in Boise, just a day's drive or an hour flight from you. Here, we see decent cash flow and strong appreciation, as Boise is the fastest growing metro area in the country. We have a unique concept, as we do not hold stock of tenanted properties, we work with each individual investor to develop a strategy and we acquire and manage those assets at our client's direction. 

Feel free to PM me if you'd like to learn more. If you have any desire to visit, I'll be happy to give you a tour of the valley and show you some properties, run numbers, etc. 

In any occasion, best of luck in your investing career!

@Vic Hartounian We rarely buy off of MLS. We run our own TK...full service. Have our own PM. 9% is very doable...that would be low end for us (after all expenses). You can PM me if you want more info

@Tyler Smith I help clients in similar situations to you find and set up turnkey rentals in North Texas. Many investors are priced out of their home markets, particularly in our area (we are based in Vancouver which has seen a similar price increase to Seattle). Like @Jay Hinrichs said, going for the low-end of the market comes with huge management problems that are difficult to deal with as a remote landlord. At Better Coast we find properties that are new constructions in new developments. While that does mean the investment takes more cash up front, we find there are many benefits. For example, in the construction phase the floor plan and finishes can be tailored to a rental use: durable finishes with broad appeal. Or inexpensive upgrades can be added to make the units stand out in the rental market. The result is top of market rental rates and higher quality tenants, which can make all the difference in the long term success of your investment.

Feel free to reach out if you have any questions and good luck!

Rod Zahavi

Better Coast Capital

@Tyler Smith out of state turnkey is certainly a viable option, but of course the people you work with are the linchpin. I'm sure you've seen some horror stories here on BP - due diligence and thorough vetting are the name of the game when it comes to turnkey.

That being said, many people are in your same situation - expensive home market, looking to put their capital to better use further afield. As @Jay Hinrichs said, many markets in the south and midwest are pretty interchangeable numbers-wise (though of course I'm biased toward Birmingham ;)  so the people you work with really are the crucial aspect of those types of turnkey investment. A good investment with a solid PM is always going to be better than an amazing property managed by someone who drops the ball. 

And, as @Larry F. mentioned, you need to be looking to hold a turnkey for at least 10 years, realistically. There's no point in buying a rental and selling right away, as your tenants haven't had any time to build up your equity. You'll also need to be ready for some sort of market correction in the next few years if you go into a big primary market. But, just like stocks, if you hold on through the ups and downs you're more likely to end up on top - turnkey is buy-and-hold, so be prepared for market fluctuations. Secondary and tertiary markets won't have the same volatility, so for more stable values you should consider looking outside major metros. 

As for returns, you can certainly get 9% or better. If you buy in cash, of course, your ROI will be lower (usually 7-10% for us) but you'll have greater cash flow per month. I generally advise investors to use leverage, put down 20-25% and let the tenants buy you the remaining75-80%. Our returns in the first year for leveraged properties are generally in the 17-22% range, which increases as the loan paydown accelerates over time. Some of that is equity, of course, but equity your tenants have paid for. If you don't need maximum cash flow right now, this is the best way to go, IMO.

You'll find many many people on BP who have made their REI careers on OOS Turnkey investments, but it takes a lot of work upfront - it's certainly not the 100% passive investment many people make it out to be. Before you ever cut a check, you should be doing plenty of homework, vetting providers and asking questions. It's after the investment is made that you should be able to be relatively hands-off.

Luckily you're in the best place to get the info you need, trusted referrals, and plenty of specific advice from those who have gone before you. Use it for all its worth!

Best of luck!

Clayton

One more thing worth noting (or not, you decide I guess):

@David Clinton III made a good point, which is a stumbling block for some people when getting into turnkey - the difference between what I call 'Capital T Turnkey' and 'lower-case t turnkey'. 

Capital T Turnkey is what we call full-service turnkey - one company finds the props, rehabs, markets, tenants, manages, all in-house. Lower-case t turnkey is more of an adjective meaning 'rent ready'. So a turnkey property can be sold to you by a Turnkey company, a marketer, or the guy down the block. Many marketers especially call themselves Turnkey Companies, but what they really mean is that they market rent-ready rehabbed properties owned by other companies or individuals. Some of them might be owned by an actual Turnkey provider, some might be for sale by owner - either way you have to make sure you're getting what you pay for. It can be a rude awakening if you think you're buying a full-service Turnkey product, complete with PM, only to be handed off to a third party manager you haven't had a chance to vet. Not to say marketers never sell solid properties, they often do, but you need to do the work to verify what you're buying, from whom, and what kind of post-sale services you can expect.

@Clayton Mobley I appreciate the input. I've heard a lot of different opinions on this topic, so would you recommend flying out to take a look at the property as well as meeting the PM maybe the seller/company the first time or two until you can create a solid relationship with them?

Here's the simple deal w/ Turnkeys....

If you lack the time/skillset to source a property, do the rehab, and find a tenant then they can work. Note you are paying for each one of these steps and while it's "easier" it's not always better. It's important that you at least be able to verify the numbers yourself, some companies are more accurate then others... and its on YOU to piece that together.

Now here's the thing... if you have the time/skill set to do this on your own, chances are you can do better yourself. Better not in terms of price, but in terms of value. 

As far as passive... let me tell you when things go bad they go bad. Just this month for me I've had one set of tenants break a lease (1 month into it), 1 water heater go out, 1 rodent/pest control call which has turned into I don't even know what at this point. Oh and I'll probably have another vacancy in 60 days or so. Now some of this burden could be shifted if I had a property manager vs self.... but not all of it. My challenges aren't unique nor are they uncommon, just part of the joys of landlording.

@Tyler Smith I recommend flying out to meet the team. If you can schedule that visit so that you're actually looking at the property, great, but most things move a little too quickly for that to be feasible. In most cases, you'll be flying out to meet the team, see the town/areas they invest in, tour some properties. Unless you have the cash to fly out last minute to see properties as they come available, it's unlikely you'll have time to go see a specific prop before it gets snapped up. That being said, you should be able to get a clear picture of the provider and their workmanship during a tour. You should be able to see and ask questions about different neighborhoods, see some of their rehab work, and shake hands with the people you'd be trusting with your investment. It really comes down to a gut check, and meeting people, looking them in the eye, still is the best way to suss out a true partner vs a scam artist in most cases.