Im closing on my first property next Friday (housing hack / using the basement for a STR). I'm looking to get my second property at the end of Q2 2021, and have been exploring turnkey properties.
I’ve done the general research on the pros and cons, but was curious if any one has any experiences, stories, insights and/or lessons learned?
@Michael Cox That's great you are about to close on your first property!
In general, some of the advantages of turnkey properties include they can be more passive, require less rehab, and can immediately begin cash flowing.
The general cons are they generally have lower returns and you may have less control over the investment.
Have a great day!
@AJ H. , thank you! I’m definitely looking for more passive as I start out and learn.
I’ve read that returns could be lower, but don’t really know what to expect. Would you have a lose range/estimate on what I could expect?
@Michael Cox Every property will have different returns. You're probably seeing average turnkeys in the single digits, maybe some in the low double digits if you are lucky. I don't invest in turnkey, but that is what I have seen as far as returns.
However, if you do things yourself, you can double or even triple the turnkey returns. But you have to find the right properties, buy right, rehab right, get the right tenants in, and hopefully refinance out what you were expecting or more. There is more work involved than in turnkey with the potential higher returns.
Have a great day!
Pros of turnkey:
- - up to date with current design trends (comparable to apartment new builds)
- - easier to rent out and attracts more potential tenants
- - no work necessary AKA less time lost with rehab work
Cons of turnkey
- - may require some "breaking in". you might need to bring in contractors to fix things here & there
- - you don't know what's under the beautiful face of the property. flips can sometimes have terrible bones
- - quality of craftsmanship is subpar
My first house hack needed a ton of work. Tenants had been living there for the past 10 years, but I bought the place seeing the bare bones of the property. Knowing the problems from day 1, I was able to fix it up to my standards. The tenants have rarely had complaints of something not working since updating the place.
My second house hack was turn key, and as I've broken it in, I've discovered how shady the flip was. Ha! I've spent $15K so far on fixing the flip and i'm expecting more issues to come up as tenants move in, and as we get through all seasons of the year. I bought this place in a rush, partially because location, but also the Denver market has been crazy competitive so I didn't want to lose out on my ability to get under contract by a certain date... rushing is not recommended. This isn't to say ALL turnkey properties are like this -- just do better due diligence than me and you'll be fine.
Lessons learned: You'll spend money on the property no matter what condition you bought it in, but hey! that's the real estate game. I like to keep remembering that I'm in it for the long-haul; purchasing real estate will be very forgiving, and you're usually able to come out on top even if you slip up at times.
Typically zero to very little equity
Bad/sub par work
Buying the house from the management company, then paying them to manage. They are the only ones making money
Turnkey, if it all works out ok.
Just my opinion, but it seems to work fine for some investors.
@AJ H. Thanks AJ, I really appreciate the insight!
@Grace Wang Thank you sharing your experiences. This was really insightful. The market I live in is pretty expensive, so I've been exploring out-of-state investing and I thought a partnership with a turnkey company would be my best bet (positive, cash flow, seamless process, learning experience, a pre-existing team, etc...). But I'm nervous about getting burnt with additional rehab/maintenance costs as you explained/experienced. Hopefully with some due diligence, I can minimize the downsides and risks.
Thank you again for your perspective!
@Matt M. Thanks for your comments! Yeah, the cons you listed seem to be recurring in everything that I'm reading. I've had seen a few success stories, but they don't pop up often.
I'm curious, how you advise a new investor to get started. I'm in Philadelphia, and the market down here is super expensive. The SFH I'm closing on will give me some experience with STR, but won't really be a great learning experience. I've read the books, listened to the podcasts, and have the capital. I'm not exploring my best route to gain experience (and not lose a lot of money in the process-haha).
Thanks again and looking forward to hearing your reply.
@Michael Cox , l bought a few turnkey properties out of state and have had some success, but maybe 70-80% of the time. Most of the pros and cons have already been listed above, so l’m going to focus on how to address the cons.
1. Make sure you spend significant amount of time interviewing the turnkey provider. How long have they been in business? What is their business model? Do they manage properties in-house or do they outsource the PM work? Do they give warranty (1 year warranty is common) on expensive items (HVAC, roof, plumbing, foundation, etc)? Do they arrange inspection of the property or they will let you look for your own property inspector?
2. If you are financing the property through a bank, make sure you spend some time with the appraiser after receiving the appraisal report from your lender. Review each comment with the appraiser and get his or her opinion on the general conditions of the property. Note that the bank is not going to fund the property if there are major maintenance issues with it. The bank is spending 75 or 80% on the property and you are putting down only 25 or 20 %, so the bank would not like to lose its money on the purchase.
3. Spending time with the property inspector is critical. Don’t just review the report without asking questions. Note that you are an out-of -state investor and the property inspector (as well as the appraiser) is your agent on the ground. The inspection report is supposed to provide information on all issues that need to be fixed by the turnkey provider.
I suggest you buy David Green’s book on long distance investing because he provides some good comments and recommendations on out-of-state investing. I wish you good luck on your rental property investment.