Turnkey - Why Flip to Investors?

36 Replies

At a recent investor club meeting, a group of investors raised the question - why do Turnkey Companies "flip" their properties primarily to investors as opposed to owner occupants? One person responded, "because the majority of Turnkey companies operate in markets/neighborhoods with low job growth and limited capital appreciation... therefore little interest from owner occupant buyers." Another investor said, 'because some companies buy in neighborhoods/cities with incredible cash flow (2% rule of higher), but the problem is, very few prospective owner occupants want to live in those areas. Yet another investor thought that  many turnkey operators want to help investors realize higher returns.

Clearly, there are Turnkey companies that operate in excellent growth markets such as Austin, but I thought I will turn the discussion  into a forum to get a few different perspectives. Happy investing!

Another benefit of flipping to investors is that the turnkey company keeps the property in their management portfolio.  They are still making a money off the property once it's sold.  If they sold to owner-occupants, that stream of income would be cut off.

As a prospective turnkey buyer, this is a great thread topic. Understanding the economics of a turnkey operator's business model can definitely help you get a sense for the value you're getting and the sustainability of their operation. From what I can tell, the most successful operators have complementary revenue streams of fix & flip margin plus property management. The property management only starts to get attractive with scale, and it's tough to build scale without a large network of happy (and hopefully repeat) buyers.
Turnkey company gets to keep managing it, overcharging your for repairs and then after you discover the house is a lemon in the ghetto with constant vacancy and payment issues... they get to buy it back from you at a discount to sell it to the next sucker/"investor". If you can't tell, I am a wee bit skeptical about turn key companies. The whole set up doesn't smell right to me. I can't fathom why companies would do all of that work on the front end and then hand off a cash cow to a random out of state investor. Why would someone do that? I am sure there are great turnkey companies out there but I would be skeptical unless somebody has a long track record of success.

@Joe B.

A few reasons why turn key companies would sell to investors (assuming the ones that aren't in it to screw people over)

1. Fast sales, many turn key properties are sold before renovation is complete. Minimal holding costs if any compared to having holding costs when they try to sell to an owner occupant.

2. If they're doing it right, they'll have repeat business. Happy investors means repeat investments and also more investors = more work.

By belling able to sell fast at a decent profit and being able to put those funds back to work is a huge benefit than potentially have a house sit on the market for a couple months at a time, in areas where there aren't many owner occupants. The markets they target are typically high cash flow areas.

Drew Castleberry My feeling is why would they have a business model that has them on the hamster wheel doing the heavy lifting of constantly identifying, closing, rehabbing and selling when these properties are supposedly 2% cash cows. Why not buy, rehab, hold and manage these high performing assets for yourself? For me, that is the equivalent of running the first 26 miles of a marathon and then handing your Bib off to a stranger so they can sprint across the finish line and kiss your wife at the end. The steady monthly 2% cash flow is the reward, why give it away if it exists? If they truly do perform that well, your access to money would be easy.

@Joe B.

I can understand your skepticism.  Honestly, I wish that I could keep and hold about 80% of the homes that we sell off to end investors but the reality is we cant.  Also, if TK companies did not exist then there would not be much long distance investing and if investors are going to only buy in their own area, it might be impossible based on that market price range.  

To reply to the main question, one reason we sell more to investors as opposed to home owners there are usually less issues.  Not having to deal with buyers agents and pay a 3% commission.  Now this is great unless we are selling to an affiliate marketing company that charges $5-$6k.  

Curt Davis, Real Estate Agent in TN (#00321765)

I have been sent turn keys projections before from other investors wanting to get my take on it.

The numbers to me look way overstated.

If you were talking a "newly renovated" property where all expensive items were replaced that is different. Many resellers do the cheap stuff and say it is "turn key". Those situations are a farce.

Long term some turn key companies probably make their spread on the low income and low price point properties and then go buy class A type stuff with the proceeds for themselves. Higher class of tenants, higher rents, newer product, generally more appreciation, less headache.

Turn key properties tend to be in areas for cash flow only and very limited potential for appreciation. The anticipated higher cash flow ( 2% ) rent to purchase price can be quickly wiped out for years with high capex and a bad tenant.

@Account Closed

  The Reality is that turn key companies are nothing more than fix and flippers.. instead of focusing on retail they focus on investor product...  I choose for my personal stuff to fix and flip retail  and or new construction... Some turn Key companies keep rentals.. the issue that most have is its very hard to get financing on more than 10 rentals.. and most of these companies will do 50 to 100 homes a year... I fund one TK company that does keep most of them. But I also provide them the long term money so they can actually keep them. Not many have access to what we provide these folks.

And if your one of the top TK companies chugging out 200 plus houses a year these guys are making millions... And I am sure they have other cash flow investments as well .. or just a lot of money in the bank.  !! or like the marketing companies they have it the best just get paid like a RE broker.. no financial responsibility on either side.

The reason most TK companies have PM is NOT for profit,  as stated above you need major mass to make PM profitable IE 1000 plus doors.  They do it to keep control of the full process... WE all see here on BP those complain about their PM.. well if they own the PM they can greatly mitigate the outcome for their clients behind the scenes and therefore get referrals and repeat business. .I have no doubt if they did not do this they would not have scaled up as some have.

The reality as well is that 2% rule or high cash flow areas of the mid west are generally in areas that do not support home ownership.. these neighborhoods were 30 years ago but many are now 50% or more rental stock.. And if you can afford to buy a home and have the credit ( the biggest stumbling block for most buyers in the mid west in those price ranges) your not going to buy were there are huge amounts of rentals.

Especially with mortgage rates were they are at.... for the price of a 900 to 1200 dollar rent most folks could buy a 150k home and in many of these markets that could be NEW construction with all owner occs better schools etc.  The very LAST place an owner occ is going to buy is in C class areas or worse that are by definition 2% rule areas .

We have a new class of citizen in the US these days... Its the life long renter class.. and they want to live in homes as opposed to apartments.. And so rents are just what they are 600 to 1200.... and that could be for a home that they could buy for 30 to 50k but does not matter they can't get a loan so they just rent all their lives.  This created a huge demand for rental product in the last 20 years.. and Entrepreneurs jumped in and filled the gap.

This started when CA prices sky rocketed and CA are Real Estate crazy and they thought hey I can buy a home out in the mid west for the price of a car.. So that's why you have Marketing companies and Radio host in the major west coast markets whose business is to just sell these homes... you don't have radio hosts in Memphis touting LA investments or buy cash flow in Fresno ! 


All I know is that when values dropped in my area to the point where properties were approaching a legit 1.5%... Blackstone Group bought 1100 homes in 7 months and basically took over and employed many of the rehabbers and property managers in town. Other groups bought several hundred at a time. At one point in 2009/2010 47% of homes were bought by these groups. I think if the values and numbers reported by many of the TK companies wouldn't be peddling to newby investors from CA and NY because wallstreet investors would be buying them in bulk. I looked at it in depth and just couldn't buy in.

@Joe Bertolino

  Hedge funds DID buy in most of the CASH flow markets of the mid west and deep south.

they also bought here in Oregon for the 1% rule.. and of course the those have gone up 35% in 4 years.

The Hedges dominated Atlanta  for instance.. and PHX ,

What will be interesting is to see over time which markets worked out the best for them.

There are many smaller hedge funds ( use the word loosely) still buying in many of the cash flow markets... Some of my guys are selling to them routinely.  But they do come and go and they do change their parameters often.  For instance one that my guys sells to at first wanted homes tenanted... then they determined that was not a good idea and now they want them vacant and they WANT to be in full control of who goes in the house.

That doesn't change my feelings because those bulk buyers will get the best deals and properties while the random dude with $50k to invest from LA or NY gets sold the lower end of their inventory. As a TK guy said in this thread, "I would keep 80% of what we sell"... who do you think gets spoon fed the bottom 20%? It goes back to the old saying "if you are at a poker table and you don't see a sucker, it's you." If the deals were that great, they wouldn't find their way to a sucker with shallow pockets from 1000+ miles away and TK companies wouldn't need to spend money advertising for said suckers.

@Joe Bertolino

  all good points  :)   With Blackstone and Colony offering bulk package loans to experienced operators... ( one associate I know who is turn key and keeps a lot of inventory closed a big one with Blackstone)... the bigger turn key companies can keep more of the inventory if they wanted to.

The issue comes with these lenders wanting to drop the loans at 500k minimums.. And they usually want some seasoning etc... So again hard for a TK company that does not have millions in cash to bank roll putting together enough homes to package them to Blackstone or Colony. Or they have to borrow HML to acquire inventory and they are paying a guy like me steep rates to floor inventory...

What the Blackstones of the world need .. is a buy fix and then refi product.. Much like on the west coast we have banks that will do lot and build combo then roll into a perm.

If these big players offer that product and then the Turn key guys really don't start keeping all the properties instead of selling them off.. then I would say your spot on..

But at the end of the day... their business is to make fix and flip profits Not cash flow. regardless of what the OP said about wishing he could keep them. they need the big hits to create enough income to afford to be in the Cash flow business.. Just like west coast investors make salaries were they work so they can afford to be cash flow investors.

Or like me  I don't keep any of the new construction I build... I can only live in one at a time.

Why do turnkeys sell to investors?

1. Many times investors buy cash. So fast closing

2. Many investors will buy multiple properties. So you need to deal with fewer known buyers

3. No listing or realtor involved.

4. Many midwest markets are mostly investor owned rental neighborhoods. But funny how nobody buying apartment buildings complains about no owner occupied units!

As for keeping for themselves. the company I bought from also had their own portfolio of dozens of properties in the same areas. There are just too many homes for any one entity to keep.

@Anish Tolia

. Many midwest markets are mostly investor owned rental neighborhoods. But funny how nobody buying apartment buildings complains about no owner occupied units!

Anish that's funny !!!.

on the flip side though many lenders will not lend into condo projects that have to many renters in them... they require a certain % to be owner occ.  and I suspect there is a good reason for that.

@Jay Hinrichs Thats true. In the development where I own a town home in San Jose the HOA says no more than 2 out of the 9 units can be rented at any given time. As of now mine and one other are rented. So no other owner can rent theirs out at the moment.

:But at the end of the day... their business is to make fix and flip profits Not cash flow. "

Jay Hinrichs

There is  not a better answer for all the questions and answers from investors looking to purchase from a Turn-key person.  They are interested in selling you( one of their houses )not in your cash flow after the sale.

This thread has the same issue that every thread about turnkey properties.  Turnkey is a marketing term - it does not define nor signify anything.   A one-man band can open up in any city and start advertising today that he has Turnkey properties for sale.  Without any experience, background, team or real plan - if they can find a marketplace and advertise, they will be viewed by the public as a Turnkey company.  There is a vast difference between many of the companies providing these passive investments.

As for your @Account Closed - you may be right about why some tk companies keep management, but not us.  In fact, the reasons you listed for a tk company to keep property management is the exact reason they may have a crap reputation.  Property management is a business just like any other.  Properly organized, staffed, trained and with the use of efficiencies like technology, it can be incredibly profitable.  We realized this long before we started and property management is a key factor in our success.  It is also a key factor in our profitability.  There are 11 distinct income streams in a profitable management business.  Like any other business, if you treat the customers right, do what you say you are going to do and manage it properly, you can build each of those income streams and grow your business.    

There was also a comment about 2% deals on here.  Those are unicorns or disasters if not both.  I have written so many articles about the dangers of buying property just because it says turnkey or some company uses that phrase in their marketing. Investors can find true 2% deals out there - however, they will not be turnkey deals.  If they are, the investor will not be happy in the long-run.  

I repeat my comments about turnkey.  It is a marketing word that denotes nothing about the product, the company, the size or success rate of the company or clients.  It is just a real good buzz word.  Again, not every company operates the way we do and because two companies both call themselves turnkey, does not mean they are anything alike.

@Chris Clothier

  agreed all companies have different methods of running their business.

and I agree on the PM side of things... once you get to the mass and scale you have its a very nice business. Not so much when your running a few hundred homes not enough doors to make any significant money.

But what I wanted to point out was the OP comments were they stated that turn key companies have PM  so they can feed their PM company then get huge fee's for PM etc.

In most case's this is just not the case at least from my experience.  And of course if you watch the growth of  a Turn key company many start with out sourcing PM  find it frustrating and then understand they need to bring it in house like you did.  And client control and happiness is I am sure your number one goal... And the best way to do that is to make sure they get their RENT  LOL .. because it all starts there...and ends there both with the investor and the Tenant.

If you had a lender like Blackstone that would 80% fund your A and D then roll you into a perm at todays rates... would you then consider at this juncture in your companies business life to forgo the selling of the assets and just keep them all... ?

that was the original question I think   why if these are such great deals do the sell them and why not keep them..

Of my answer is easier said than done  LOL  ...  But if anyone could do it I would think it was MI

Originally posted by @Jay Hinrichs :

@Joe Bertolino

  Hedge funds DID buy in most of the CASH flow markets of the mid west and deep south.

they also bought here in Oregon for the 1% rule.. and of course the those have gone up 35% in 4 years.

The Hedges dominated Atlanta  for instance.. and PHX ,

What will be interesting is to see over time which markets worked out the best for them.


I analyze the Private Equity and Hedge Fund cash flow model during the downturn, but didn't have the connection to pull it off.  The profit is in equity, not cash flow, for these big boys.  

Say they buy $1MM worth of real estate generating just 7% cash on cash return. If they can resell it as a REIT with 5% yield, that means they could sell this asset for $1.4MM. That's 40% ROI. If they can cash flow these assets at 10% CoCR, the ROI is 100%. It's a very lucrative business. These big boys went into the cash-flow markets for a reason. They are looking for a big payday in a relatively short amount of time. Whether or not they can pull it off is another issue.

After they sold the assets as a REIT, whether or not the REIT will continue to perform as promised is someone else's issue.  They already got paid.  It's Wall Street style baby.

@Chris Clothier

  I saw you already answer the last question... and I think that goes to the question of leverage and cash... as you get older the less you want to leverage and all of a sudden owning things free and clear seems like a good thing..

taking on that kind of debt as you state if you had a down turn or some other GFC that could bust a company... I just think of Opus  multi billion dollar developer in 07 and bust in 2010... So agree with you on debt management... plus if it aint broke why fix it...

Now its time for the Jet  !!!


As an investor for cash-flow, equity and a flipper, I can tell you that there's no right or wrong answer.  So far, the biggest pay-off has been equity return.  The equity can be tapped tax-free while I have to pay all kinds of taxes on my flips.  Cash-flow will help with paying the bills, but in no way, shape or form it builds wealth.  You have to own a lot before they're building wealth.  

At 8%-10% cash on cash returns, you're looking at making $200-$250/door on a $25k investment on a $100k property.  You will need to own 40-50 properties to give you $10k/month.  That means you need to invest $1.2MM - $1.5MM of your own money to get to $10k/month.  Owing 4-5 properties will not cut it.  

With appreciation play, it comes with rent growth.  We have experienced 50% rent growth in the last 3 years.  Properties, that were making $100-$200/door, are now making $600 to $1k/door.  For every $500/month in rent growth, you can tap $100k of equity in your property tax-free/deferred.   

When it comes time to liquidate, I sell the least desirable properties and trade up to better asset classes.  I would think other investors tend to do the same.  All in all, a combination of all three has been the best approach for me although the equity return has been the BEST.

Just food for thought.  

@Minh Le

  those are great behind the scenes comments on the hedge funds.  until we know the back ends of those deals we are left wondering what they were thinking when all along a 5 to 7% return to them means millions..

so in reality a hedge fund could drive rents down if they wanted to as well.. just to make sure they have the best tenants and their properties are full and they are still doing quite well. raise rents and really cash in.

I agree to fully round out a portfolio investors should be thinking about upside movement of the value... the quote " appreciation is icing on the cake" while a nice sentiment is really I think a poor philosophy to follow... one needs to either force appreciation buy in an area were appreciation takes you for a nice ride,, or were rents can move up dramatically in a fairly short period of time those are the only ways in rentals one is going to make any kind of real money.

Although what some would think is a reasonable return on investment and risk others would not be happy with... I think many investor would be tickled pink to have 1 to 2k in NET cash flow a month... were others would not be bothered with those amounts.

Originally posted by @Jay Hinrichs :

@Minh Le

.. the quote " appreciation is icing on the cake" while a nice sentiment is really I think a poor philosophy to follow...

Based on what I have seen on here, the people using this phrase are either 1) have something to sell (wink wink), or 2) are clueless about what appreciation can do to their financial wealth building process.  Of course, you don't know what you don't know so there's no reason to waste time and get into those debates.  This is why I like talking to guys and gals that have been in the RE biz for 40 years.  I like to learn on other people's dimes.  LOL!!!

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