Turn Key. Why all the hate?

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Turn Key. Why all the hate?

Bukka LevyPro Member
Real Estate Agent · Petaluma, CA · Member since 2017 · 63 posts · 35 votes

 Not my first post about buying out of state but I am perplexed. Why all the hate towards “turn key”? To be more direct, if it meets the bigger pockets guidelines/numbers, what’s the problem?

And if you can resist, this is not really pointed toward the turn key industry so try to restrain yourselves and enjoy the comments :)

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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
7y

Not sure what you mean by 'not pointed toward the turnkey industry'... if I'm supposed to or not supposed to answer a certain way.

Jay hit the main reasons people knock turnkeys. Another factor to consider is that most turnkey buyers I know that like their turnkeys and like the strategy aren't on BP once they start buying. Once you buy a turnkey once, it's really straightforward and if you're happy with the strategy as being your primary strategy, no real need to be on BP anymore. Which primarily just leaves the haters to talk about turnkeys. So the 'pro turnkey' folks aren't here to stick up for them.

I think the biggest issue people have with them is the inability to force appreciation. Which, yes, that's a thing. Other people argue you should never invest outside your own backyard. Well props to those people who have a backyard that it makes sense investing in (vs. us LA or NYC or CA folks). 

I will say that I think it's strange how rowdy people get against turnkeys. I've never heard a turnkey investor knock anyone else's strategy. Who cares what other people do? 

And like Jay said too, Morris Invest didn't help anything. But I started buying turnkeys in 2011 and I totally dig them. Wouldn't do an out-of-state any other way.

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  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Jay Hinrichs and as a result I try to 'bulletproof' my SFR's from the next GFC.

    My 'limitus' test is can I withstand a 20% cut to my 'top line'.  If the answer is yes, I'm ok.  Rents in PHX fell 12% in the last GFC.

    I'm not sure what the next GFC is gonna look like.  There is huge pension crisis brewing, both private and public.  The govt has told us, indirectly, that QE is here to stay.  We are gonna print money forever to stave off deflation.

    The next 10 years will be interesting for sure.  

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Alan Grobmeier:

    @Jay Hinrichs and as a result I try to 'bulletproof' my SFR's from the next GFC.

    My 'limitus' test is can I withstand a 20% cut to my 'top line'.  If the answer is yes, I'm ok.  Rents in PHX fell 12% in the last GFC.

    I'm not sure what the next GFC is gonna look like.  There is huge pension crisis brewing, both private and public.  The govt has told us, indirectly, that QE is here to stay.  We are gonna print money forever to stave off deflation.

    The next 10 years will be interesting for sure.  

    you were lucky in PHX to only see that much dip..  

    back in 05 there was an agent I think she is still active in your market named LInda Gercheck.. she did a fly buy program and we were on the same radio show and doing the same marketing events.. I was selling Portland she was selling older 4 plexs in PHX market.

    she sold a bunch of them.. well many of the clients bought there and bought from me in PDX.. during the GFC their 4 plexs went 100% vacant and stay that way for a year or more.. they ended up losing them to the bank.. and these were a combination of partners two were lawyers one worked in tech in SF.. so it happens..  the issue for those type of units was the renter pool was pretty much all working class a lot in construction and as you know construction stopped dead in its tracks in many markets.. so they moved  left the state went back to mexico or where ever..  I am no way predicting a replay of those events but it did happen.. and for those to think that rentals are immune well they just don't know what they don't know.. in some markets sure but in many NOPE> 

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  • James O.
    Real Estate Agent · Chicago, IL · Member since 2016 · 18 posts · 11 votes
    7y

    @Jay Hinrichs

    Had a couple questions for you since you have tremendous experience with turnkeys:

    1 - You foreclosed on hundreds of investors who couldn't refi with you HML at bank rates. What happened there? Were appraisals not coming in high enough? And were your HML long-term fixed financing like a 30 year mortgage?

    2 - Do you have any insights into how turnkey investors did during the GFC? These would be investors who didn't need to worry about refinancing, only holding on and weathering out the storm. I've heard many investors in B-class areas taking initial hits, but being able to recoup shortly after.

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  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y
    Originally posted by @Jay Hinrichs:

    WEll part of it is that you have local investors who get deals usually below market and do some fix up and get larger returns..  

    on turnkey folks admittedly pay full retail.. and some claim higher than retail.. 

    So that's were you get folks talking negative about them.

    then of course not all turn key companies are equal in customer service quality the deal etc.. 

    Then of course you have Morris invest who sold I don't know what 500 to 700 houses that were all never deals no matter what in what of the biggest frauds of this decade..  so that does not help

    Scummy property sellers are definitely a bad thing... but on the other side of that coin it's not that hard for a buyer to get:

    -leases and rent roll

    -3rd party inspection

    -3rd party appraisal

    That + using a 3rd party property management company outside of the providers is a pretty simple recipe. Using the providers management company is fine too, if you can verify that they've got integrity.. but that adds a bigger judgement factor in there for the buyer which doesn't always work out.

    Investors need to learn how to run their own numbers too. All the 1% deal talk floating around BP for OOS properties is a losing recipe, and people take it at face value without actually calculating their own NOI and throwing in some conservative reserves.

    Can't tell you how many investors come to me going "i want a 10% cash on cash return with financing" on an 80k SFR out of state. Which is basically a guaranteed break even deal if not a loser when those "incidentals" start happening.

    TK providers should take it upon themselves to operate ethically, but by no means should a buyer feel entitled to assume any of that. 

    1Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Jay Hinrichs, do you think that came down to 'greed'?  If I can't rent it for X, I'm not going to rent it at all?  Econ 101, price is determined by scarcity and demand.  If demand is low, price has to follow.  Right?  

    Could those guys taken a slight hit to keep it all?

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Alan Grobmeier:

    @Jay Hinrichs, do you think that came down to 'greed'?  If I can't rent it for X, I'm not going to rent it at all?  Econ 101, price is determined by scarcity and demand.  If demand is low, price has to follow.  Right?  

    Could those guys taken a slight hit to keep it all?

     in there cases with those units. there were hundreds of them all vacant there were not renters.. did not matter if you took 50 bucks.. 

    vacancy factor happens.. many MF failed in vegas when vacancy hit 30 to 40%.. did not matter no renters no income.. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @James O.:

    @Jay Hinrichs

    Had a couple questions for you since you have tremendous experience with turnkeys:

    1 - You foreclosed on hundreds of investors who couldn't refi with you HML at bank rates. What happened there? Were appraisals not coming in high enough? And were your HML long-term fixed financing like a 30 year mortgage?

    2 - Do you have any insights into how turnkey investors did during the GFC? These would be investors who didn't need to worry about refinancing, only holding on and weathering out the storm. I've heard many investors in B-class areas taking initial hits, but being able to recoup shortly after.

    if you were not in business during the GFC it would be hard to fathom.. but what happened was

    Country wide and Wells were the two biggest investment lenders.. country wide went out of business and wells fargo stopped doing investors loans.. for about 2 years there NO one was doing investor loans.. did not matter .. Unless it was your local banker with Class A borrower and Class A property .

    I mean look at huge REITS went under because they could not refi.. Opus out of Mn huge multi billion dollar REIT went under.. could not refi projects they had in AZ and other markets.. it happened.. credit froze that's why prices in many areas dropped like a rock.

    I mean what would the price of a Cadillac escalade be if you had to pay cash and how many would get sold ?

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    7y

    Over priced turn keys worked for me. I made more at a day job than to spend searching for good deals especially when starting out.

    2Reply
  • Kanwar Sodhi
    Real Estate Agent · Chantilly, VA · Member since 2016 · 245 posts · 61 votes
    7y

    @Bukka Levy

    The hate because some feel you NEED to be the one flipping it and getting that equity. Won’t matter as much in 30 years. Do you 👍🏻

    0Reply
  • Patrick Fermo
    Member since 2019 · 34 posts · 9 votes
    7y

    @Jay Hinrichs How should someone analyze a turnkey company? How do you know you'd be avoiding the next Morris Invest situation?

    0Reply
  • George Munoz
    Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 360 posts · 213 votes
    7y

    @Bukka Levy I think it has a specific niche. ( must investors that like turnkey are passive investors)  and are pretty happy with 5 or 8% return, as long as they are not doing anything (just receiving a paycheck every month) 

    And also foreign investors love these. ( I have a client (investor) that his strategy is basically to buy houses ( Distressed) on a 10 to 15% return as is. and then flip, put tenant in place  (guaranteeing 8% return) and then Pitch opportunities to high-end investors throughout the world ( 3 world countries mainly) and believe me 8% return comes along way in a 3 world country.

    So I guess it depends of the niche and find it.  There is always an investor for something 

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    7y

    @Jacob Sampson

    What are you using in your calculations?

    0Reply
  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Mark S.

    Gross rent - 30% (vac, maint, capex) - PITI = true average cash flow. I want that true cash flow to provide at least 15% COC return. Ideally, on a 15 year note.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Jacob Sampson:

    @Mark S.

    Gross rent - 30% (vac, maint, capex) - PITI = true average cash flow. I want that true cash flow to provide at least 15% COC return. Ideally, on a 15 year note.

     its nice if you have a market that will allow those numbers not even a pipe dream in the higher value markets.. 

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  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Jay Hinrichs - the trade off is that you absolutely HAVE to have cash flow because you are going to get near 0 appreciation.  E.g. we purchased a 3 bed 1 bath home for $40k last year.  The last time it sold was 20 years previous for 40k.

    This town fits my fearful nature.  I need easy math, low numbers, and standard bank loans.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Jacob Sampson:

    @Jay Hinrichs - the trade off is that you absolutely HAVE to have cash flow because you are going to get near 0 appreciation.  E.g. we purchased a 3 bed 1 bath home for $40k last year.  The last time it sold was 20 years previous for 40k.

    This town fits my fearful nature.  I need easy math, low numbers, and standard bank loans.

     YUP I get it .. if you don't have cash flow in non appreciating markets then no reason to even buy real estate many other investments that would be better..  Heck a coffee cart for instance  :)

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  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Account Closed:
    Originally posted by @Jay Hinrichs:

    WEll part of it is that you have local investors who get deals usually below market and do some fix up and get larger returns..  

    on turnkey folks admittedly pay full retail.. and some claim higher than retail.. 

    So that's were you get folks talking negative about them.

    then of course not all turn key companies are equal in customer service quality the deal etc.. 

    Then of course you have Morris invest who sold I don't know what 500 to 700 houses that were all never deals no matter what in what of the biggest frauds of this decade..  so that does not help

    Scummy property sellers are definitely a bad thing... but on the other side of that coin it's not that hard for a buyer to get:

    -leases and rent roll

    -3rd party inspection

    -3rd party appraisal

    That + using a 3rd party property management company outside of the providers is a pretty simple recipe. Using the providers management company is fine too, if you can verify that they've got integrity.. but that adds a bigger judgement factor in there for the buyer which doesn't always work out.

    Investors need to learn how to run their own numbers too. All the 1% deal talk floating around BP for OOS properties is a losing recipe, and people take it at face value without actually calculating their own NOI and throwing in some conservative reserves.

    Can't tell you how many investors come to me going "i want a 10% cash on cash return with financing" on an 80k SFR out of state. Which is basically a guaranteed break even deal if not a loser when those "incidentals" start happening.

    TK providers should take it upon themselves to operate ethically, but by no means should a buyer feel entitled to assume any of that. 

    That's strange to me because finding a 10% CoC, even on retal MLS properties, is simple. And in good areas. I don't normally buy SFH or from MLS but I have search notices setup for some small submarkets. I just pulled the trigger on a ~$500k property that'll rent for ~$4,300 and I'll make about 15% CoC. House is in Houston. Cody (me) is in San Diego.


    If someone just wanted to find some SFH that returned 10% with 80% financing I'd think you could find those all day long.

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  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    7y
    Originally posted by @Jacob Sampson:

    @Mark S.

    Gross rent - 30% (vac, maint, capex) - PITI = true average cash flow. I want that true cash flow to provide at least 15% COC return. Ideally, on a 15 year note.

    😳

    0Reply
  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Cody L. - I'd have to see specific numbers. In my opinion a home purchased for 500k that rents for ~$4300 is not generating a long term 15% COC. Now obviously that depends on how much cash you are putting into the acquisition of the property. A silly example in order to make a point - If you can purchase it with only having to put $1000 into it then your 15% COC return is not very difficult, but you are taking on a lot of debt/risk for very slim margins relative to the debt. If you are putting 20% down and some misc other transaction fees then you are closer to $110k invested and I think it becomes much more difficult to get a long term average 15% COC return.

    1Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Cody L., Not trying to be 'negative', but I am sure that a 500k property in Houston is NOT an 'everyman' type of place.  

    What I have observed is the higher priced properties CAN stay on the market much longer than 'everyman' places.  

    Does this concern you at all?  What about fast turnovers?  PPL paying 4k a month are going to be buying their own place, probably as soon as their lease is up.

    It seems to me that it's a tight fit @ 20% down, 5% interest loan investor rates.  

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Jacob Sampson:

    @Cody L. - I'd have to see specific numbers. In my opinion a home purchased for 500k that rents for ~$4300 is not generating a long term 15% COC. Now obviously that depends on how much cash you are putting into the acquisition of the property. A silly example in order to make a point - If you can purchase it with only having to put $1000 into it then your 15% COC return is not very difficult, but you are taking on a lot of debt/risk for very slim margins relative to the debt. If you are putting 20% down and some misc other transaction fees then you are closer to $110k invested and I think it becomes much more difficult to get a long term average 15% COC return.

     I don’t want to break it down again but yes, this is with a traditional 20% loan. When I moved back to San Diego about 4 years ago I kept my almost identical (across the street actually) property. I’ve kept it leased for that amount the whole time. I know what to expect in terms of the #s. 

    But it doesn’t matter. I wasn’t even buying it for the #. I like the area and like acquiring more property in that subdivision. The fact it’ll make about 15% on my ~$100k is a bonus 

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  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Alan Grobmeier:

    @Cody L., Not trying to be 'negative', but I am sure that a 500k property in Houston is NOT an 'everyman' type of place.  

    What I have observed is the higher priced properties CAN stay on the market much longer than 'everyman' places.  

    Does this concern you at all?  What about fast turnovers?  PPL paying 4k a month are going to be buying their own place, probably as soon as their lease is up.

    It seems to me that it's a tight fit @ 20% down, 5% interest loan investor rates.  

     Doesn’t consern me. No. As if push comes to shove I can lower my rent. If it broke even I’d be fine. 

    I have old tiny (450sf) studios right down the street that stay 100% occupied with a wait. And I have a townhome a street over that has leased for ~$2400 for the last 6 years. So a large single family rents easily. Tons of people with $ want to live in that area. 

    0Reply
  • Jimmy O'Connor
    Real Estate Agent · Philadelphia, PA · Member since 2018 · 428 posts · 484 votes
    7y

    @Bukka Levy I have no beef with turn keys, it's all about whatever fits your goals. The reason why there may be some "hate" in the bigger pockets community is because the majority of the users are looking for the "best possible deal" which usually means they want the sweat equity to trade off for the profit. You can 100% go for a turn key and make a profit, just significantly less. It's very unlikely you refinance out of the property since you will probably be close to 100% LTV and most banks will provide 70-80% LTV. This is probably another reason why the BP community may not be keen on Turn Key since many follow the "Bible of BRRR(rrrrr....)" and turn key really hurts your ability to satisfy the "Refinance Repeat" portion

     Real Estate Investment is a game of risk and reward. Turn Key= Little risk, little reward. If you are looking to just pick up properties, not worry about dealing with contractors and permits for repairs (which, honestly, IS a head ache in its own), hold onto them long enough to cash flow, and truly benefit come 30 years of payments at ~5% of a fixed rate then turn key would be a way to go.

    1Reply
  • Greg Carrier
    Investor · Granger, IN · Member since 2015 · 195 posts · 129 votes
    7y

    @Bukka Levy Because why buy a turn key rental when you can buy a REIT or an index fund and get better return, less risk, and higher liquidity. It's like buying a diet plan on late night TV. You're not going to get the results you think you are.

    0Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y

    @Cody L. you can definitely find 10% COC all day, I'm trying to say that that is way too low. Especially on a small deal. A lot of buyers have very low standards for qualifying property, and it's a problem. It's how people get burned. I recommend investors seek out a 10 cap using a REALISTIC pro forma. That usually comes out to a 18%-20% cash on cash return with good financing terms. Lower could work, like with your houston house, but I would only recommend that if someone feels very confident that incidental expenses with the property (vacancy, maintenance, etc...) are going to fall in line with your pro-forma estimates.

    Another thing that scares me about lower yields, esp in major markets, is that we're at a peak. Major markets tend to see depreciation and weaker rental demand during low economic cycles. It's nice to have a buffer for that built into your cash flow.


    The point I'm really trying to drive home is it's on the buyer to make sure they're making a good investment, and not to assume or trust that a provider or seller of any sort adheres to high ethical standards (they should, but it shouldn't be assumed).

    Now if you're saying MLS vs TK... That's just a matter of do you want the additional service a provider offers or do you want to do it yourself, which is more of a preference thing than a performance thing so I don't think it speaks to the

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