Real Estate Agent · Baltimore, MD · Member since 2020 · 18 posts · 8 votes
I'm looking to start investing in properties this year. I find myself leaning towards properties that I can rehab on some level to ultimately gain more equity overall. However, I see a lot of experienced investors building their strategy around turn-key rental properties.
1.) Why is the strategy so popular?
2.) What are the benefits of purchasing Turn-key rentals vs. Properties that need a little bit more help?
Any advice and insight from experienced pros would be very helpful in helping me figure out my next step with investing
@Nicholas Pedrick we like properties that require either very light rehab or none at all. We are not interested in doing much more than cleaning, paint, fixtures, landscaping and flooring. We avoid anything that requires permits. There is several advantages:
1. Speed to rent. We can have tenants placed before closing, so we are collecting rent before our first payment is due.
2. Remove the time and budget risk of a full rehab. When you open walls you can find problems, waiting for subs or inspection issues... you name it, things can go wrong.
3. Very little time invested. We are full time W2 and don't have time to manage construction projects.
4. No risk, time or cost associated with refinance. We put financing in place when we acquire and leave it long term. Paying multiple closing costs has an expense.
5. Tax advantages, because property goes into service faster, so you can start claiming depreciation, rather than waiting until it is rent ready.
No doubt if you rehab, you can gain more equity. That is true of anything, the more you do yourself, the more money you save. It is your choice what is your best use of time and expertise.
I would call it easier in some ways, but harder because it requires more capital. For someone with more capital than time, it is the easier path. For someone with little capital, it is not easier.
I can't see how you would manage a rehab remotely. Its hard enough to manage contractor locally. You are going to be one small client thousands of miles away. How good service do you think you are going to get? Compared to the turnkey guy using the same contractor for hundreds of properties? Any 'savings" would probably be eaten up that way, not to mention the headaches and hassles along the way.
Having said that, some turnkey markups are not tenable. One option is to buy a property of an existing investor. You won't get to force too much appreciation but you can get it cheaper than turnkey but just like turnkey with tenant in place. Anyway, turnkey is just a marketing term. In the end the PM is the most important part of the equation for long term profitability.
I bought 4 last year sight unseen, it's easy with the right amount of due diligence. 2 are doing well (set it and forget it), 2 are doing so-so because of unexpected expensive repairs needed such a a large tree falling onto one and another needing foundation repairs of all things, one needing sewer main repair. Each repair being around 4k on a 115k and 130k house. Really disappointed on those ones because it's a turn key! But, oh well, they all should do ok in the long run.
@Ryan Landis are you suggesting that there could be people stashing away $2500 per month (you said $25k but I think you meant $2.5k per month)? You’re probably speaking to an infinitely small audience here on BP if they can buy a house per month. Am I missing something?
@Nicholas Pedrick I’m also in the process of investigating turnkey investments and what I’m coming across is that some of these providers are cash purchases only because they will never appraise for asking value to get lending because, as already mentioned here, their prices are inflated. It’s worth digging deeply into the overall process. Good luck.
I feel similarly, as a realtor here in Baltimore I have assisted some professionals who were selling turn key rentals on a smaller scale. investors are willing to pay a premium for a property that was already rented and ready to go. Felt to me financially irresponsible which is why I needed to start this conversation because I was clearly missing the full picture. so far it seems like it might be easier to do turn key if I was investing way out of state or across country
Thanks for your input I really appreciate your help
No need to apologise your input is extremely helpful. I definitely feel similarly which is why I need to start this conversation to understand the other perspectives on why this might be worth pursuing for some investors.
Thanks Ali! I feel similarly! I'm a realtor here in Baltimore I work with in a ton of neighborhoods that are transitioning and have amazing potential for cash flow that will also appreciate over time.
It seems the majority of people who have responded would use turn key properties as a way to either break into a market or have a more passive investment due to the lack of free time outside of their full-time work schedule.
What I said may not work for others, because I can do the work myself. But... buying the properties that I buy, even if I hired all the work out, I’d still be in a much better position than buying turnkey. Full rehabs aren’t for everyone. I just can’t fathom buying a property that basically has zero equity from the get go.
If you can find a good deal on a local rehabbed property it can make a great first investment, use a local broker who knows area and negotiates for you. I would never recommend the turnkey operator type properties. You end up overpaying for a property in an area where rents typically stagnate (or even drop as property ages) and these areas tend to not appreciate so you cant even easily exit. You are better off buying a REIT in terms of risk vs reward.
1. Like the others have said, easy. Very easy. 2. You get systems other people created. 3. Less time.
I saw some mentions to turnkeys being "overpriced." I purchased mine from @Nathan Brooks. It was appraised by a large regional bank for $2k over asking price. So I did not "pay a premium", I paid market value and the home still cash flows. Will this happen with every property? No way. Just have to vet the seller, market, and PM before paying market rate for something.
The way I see it, you can either build your own systems or buy into one that someone else made. Each have their own rewards.
@Jeff Piscioniere no I meant $25K a month. The reality is I would not go buy 1 turnkey property a year, I don't think that is the right approach (at least that is my take on it). The question was around the benefits of turnkey properties. I think they CAN be good for high-income earners. Figure your doctor/lawyer/pilot/business owner/etc. Good income earners that want to be able to go do well in their business are the ones this makes sense for. I personally don't do turnkey properties, but most prices are somewhere around $80-$150K I imagine in most of the markets. If that was the case I would only do it if I could buy 1 every month or every other month. After a year or two of doing that (what do people make - $150 to $200 a door a month) you would get some momentum and you would have a portfolio that is starting to become meaningful enough for the turnkey provider/vendors/etc. to value the business you are doing out there.
Forgot to include, from my experience most turnkey buyers are coastal buyers where they are looking for cash flow and thus invest in markets where it is a bit better. In the Bay Area for context, dual income $300K+ is pretty darn common. Not saying they take home $25K before all expenses, but that is who should be looking at this stuff (think of it almost like investing in a syndication/etc.)
@Nicholas Pedrick It all depends on your skill set, location and available time and available time. The advantage of buying a turn key property is ease of entry and lower risk if you're working with a reputable turn key company. There is no guarantee that rehabbing yourself will leave you any equity. Generally, to force equity, you need to be working with a fairly distressed property. You can't add much equity with a simple cosmetic update. That being the case, you are taking on far more complexity and risk. There are several reasons that you may not save any equity doing it yourself over a turn key.
1. Turn key companies are buying further upstream at much better prices. They are not buying on the MLS. 2. They have economies of scale for materials and things like HVAC systems and roofing. A turn key company can get these for about 1/2 of what an individual can. 3. Better control over labor. They employ the same crews on a constant basis. You'll never get that kind of control over contractors and trades people that don't know you and is doing a one off deal.
If you are considering going the turn key route, here are the things to look out for and avoid in a turn key company.
Don't allow financing or a finance contingency (it can be a good indication they are selling above market value)
Don't allow for your own independent property inspection
Are not realistic with their pro forma's (i.e. they don't include vacancy or maintenance projections or use unrealistically low vacancy factors)
Require you to pay for any renovation upfront
Sell only in cheap. low end neighborhoods
Don't accurately represent the neighborhood/property classification
Don't have consistent rehab standards for all properties
Pro's Already Rented, easy to acquire. Great for new investors.
Con's. Dont know if the work has been done correctly to renovate the property up to your personal standards. Do not get to purchase equity by buying a great deal. If you choose to manage then you wont get to pick the tenets in many cases as they will already have a tenet in place.
There are some great and not so great turnkey companies out there just do your due diligence on them and you will be just fine.
Well, it depends - what are your goals? I did my first one, and here are the reasons:
1. I work 9 - 5 or more like a 7 am to 10 pm, so little time to do the necessary oversite. 2. I purchase mainly out of state 3. I am looking for long term rentals. CoC must be at least 10%. But I am also looking for appreciation. 4. The company that I work with also is the PM. 5. Yes, it is more expensive than if I went out and got a property and did the repairs. But the way I look at it is: a. I don't pay commission to REA (So I get back a percentage). b. I would purchase fewer properties per year. c. Less stress! (Don't have to deal with contractors)
@Ryan Landis understood. So turnkey is basically for the wealthy to fool around with. That’s definitely a viable argument. The more research I’ve done, it just doesn’t seem to be a model that could be scaled all that quickly. To me not enough cashflow.
Be very careful if you haven't done this before, going and finding a property that needs work is a very risky business. Even as an experienced investor and builder myself, I have been in situations where I have lost money in some deals due to unforeseen damage/expenses. It's not worth the risk when you can buy a turnkey property that can give you income from day 1.