Turnkey. Am I a wussy?
Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes
Turnkey. Am I a wussy?
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Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
10yTurnkey is a service just like any other service. Will you pay more for everything to be done on your behalf instead of doing it yourself? Yes, of course. Just like it will cost more money to have your car fixed by a mechanic as opposed to doing it in your garage.
It is a trade off. Do you want others to do work for you or do you want to save a few bucks and do it yourself?
One important thing to think about: When you are doing it yourself to save a few bucks are you taking time away from your other earning potential?
98 Replies
- 10yPeter GrossoPro MemberReal Estate Agent · Farmingville, NY · Member since 2014 · 164 posts · 37 votes
I live in an area where buy and hold properties don't have very good margins. If you are in the same boat then I would say it is a good way to get into Real Estate investing. If you find the right people then you work your way into their network and get better deals as time goes on. Buying and managing a out of town turnkey requires a different skill set then all the other types of real estate investing.
If you can do it in town, then you might be missing out on the a lot of the process by going TK. A better route might be to put up some cash and partner with an experienced investor in the area. You could even trade a little equity for the experience. - Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes10y
Originally posted by @Royce Talbo:
@Tony Velez I wouldn't do it. Yes it is easy and it is easy because they do all the work and take away most of the value. Secondly all you will be doing is collecting a pay check and not really learning anything. Everything should be good to go and you will not run into any problems but again how will you learn. Another issue is how do you know which TK companies to trust if you are new and dont know what you are doing. They could sell you something that seems good but after you get into it you learn that its not what it seems.
My advice is to find a good realtor who deals with investment properties and then buy one within driving distance of your home. Hire a property manager to get you started and watch how things work out. After that try managing your own property to further your learning experience. After all of this if you want to turn to TK because it is easier then at least you have the tools you need to know what is going on.
Thanks for the input brother
- Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes10y
I try to find my own deals that are "turnkey" in that they don't need much work, or simple cosmetic repairs. I have found a couple like that, but you pay more for them.
- Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes10y
Originally posted by @Account Closed:
What happens in a year or 2 or ten if the turnkey business is gone you are stuck with a property thousands of miles away with no control and as mentioned no way out without a loss
That's exactly what I'm thinking. Long term.
- Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes10y
@Adam Anderson I'd like to stay in CT. Most of the turnkey companies I see must buy distressed properties and renovate. Should I be searching for the same type of properties in CT?
- 10yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
I can't speak for have in house property management. The PM side of the business is a huge focus for me and a very sustainable long term business that can have other spin off businesses. If you work with a TK company who has in house PM, you will be fine.
- Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes10y
Originally posted by @John Cohen:
@Tony Velez turn key could be a great alternative for some people. I would rather get into a large multifamily deal as an investor, because you might have some vacancy problems with turnkey single family stuff. Single family rentals can become a headache if you pay a premium for a done deal. My recommendation is keep chugging away until you find the right deal
Thanks for your input
- San Antonio, TX · Member since 2015 · 125 posts · 102 votes10y
Originally posted by @James Wise:
One important thing to think about: When you are doing it yourself to save a few bucks are you taking time away from your other earning potential?
Good points. I would also add to this that I believe it is important to know if you have the skill level to do some of the work. I looked at a Single Family property two weeks ago where I was getting close to making an offer and turn it into a rental. The owner was a DIY guy and he installed his own laminate flooring. Needless to say the flooring was coming off in some areas and it looked wonky. Now it needed to be completely removed and redone. I think there is a lot of value in sweat equity primarily if you're a 9-5'er and aren't self employed / run a biz I just want to stress the importance of having things done right the first time. You don't want a costly mistake on your hands! So if you know how to do it, then by all means do it yourself is a wonderful idea. If you're hoping to learn as you go, I may suggest hiring someone and watching / learning / offering free help for the knowledge. I'm sure your flooring guy will be thrilled to have some free labor. lol :)
- Hvac · North Haven, CT · Member since 2015 · 298 posts · 79 votes10y
Originally posted by @Sky Mikesell:
@Tony Velez it is a good question... the reality is there is not a one size fits all... for one investor to tell you it is good or bad for you is absurd... "a good deal" is relevant to each and everyone of us... how much experience we have... what our goals are... how much money we have allocated for investing... and again what our goals are... A good deal for me and a good deal for you and a good deal for donald trump are all going to be different. If turnkey works for you right now then go for it... if you want to start tackling your own deals down the road you can. you dont have sign a contract to buy turnkey for every real estate deal forever. you are smart for asking the question... do whatever ever is a "good deal" for YOU right now.
Thanks brother. I appreciate your input. Well thought!
- Developer · Palm Harbor, FL · Member since 2015 · 307 posts · 96 votes10y
Tony,
If you're not interested in doing the work they you probably should not look for total rehabs like the TK providers near do. If you have a good TK near buy and like the deal they are offering go for it. If it doesn't work out with their management you can always take over.
- Investor · Auburn, IN · Member since 2015 · 23 posts · 6 votes10y
There is a BP podcast that is specific to turnkey properties and why one investor does them. I'm sorry I don't remember the podcast number.
- Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes10y
Here's the problem with a turnkey, you're buying at retail price. Every investor on these podcasts says the same thing, buy at wholesale, sell at retail. If you're buying turnkey, you're not adding value and it costs you more than you think.
Turnkey example, you can buy a property for $100k, put $20k down, and it's turnkey and cashflows $200 a month.
Not buying turnkey. You buy a property for $80, that is really worth $130k when it's fixed up. You put down $20k, put $20k of rehab into it, and add $20-$30k of value and now it's worth $130k but you only have a mortgage for $60k. You can rent it out for $1,500 a month and cashflow $500 a month. AND you can do a cash-out refi, take your money out of it, and buy the next one and do it again. So you don't have to save for a new down payment every time.
Now which one really gets you to where you want to be?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes10y
Here's the link to the 'Can't sell at loan amount in Memphis' thread mentioned earlier by @Cal C. : https://www.biggerpockets.com/forums/311/topics/22...
As an extreme DIYer I obviously can't comment from experience with TK. No way am I turning over the management to my largest assets multiple states away.
One comment that did scare me - @Curt Davis equated TK to a new car bought from a dealership. Can't sell those within a few years for what you bought for, either.
Buying RE at full retail isn't a good idea in any scenario!
- 10yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
@Steve Vaughan I used that as an example for people to understand. There are some TK providers who sell at full market value and there are some who sell for less. regardless, it could still be difficult to sell, especially if you sell far sooner like within a few years. Buying TK is a long term play. It is also very possible even if someone purchased on their own and not from a TK provider that they would have a difficult time selling if they had to.
Curt Davis - KAIZEN Realty538 Reviews - Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes10y
IMO if your local market does not support the numbers you want, and you want to buy out of state, then turnkey is a good option.
The reason being is scale. When you are at a distance and own a few properties in a market you are a low priority for a property manager. I have bought way too many properties from out of state investors who are about to foreclose on the property. I bought a duplex last year that had one unit vacant for 8 months, we bought it on a Monday, by Wednesday we had a signed lease for $100 more than the PM was "advertising" it for.
So if you can buy enough to support a full time PM in a year or so, then doing it DIY might work out for you. If not, you get the scale of the TK's business and PM. Plus they want repeat business and have incentive to keep you happy.
Second City Real Estate4.821 Reviews - Investor / Contractor · Aliso Viejo, CA · Member since 2015 · 26 posts · 10 votes10y
Originally posted by @Tony Velez:
Am I a wussy for thinking turnkey for my first real estate investor? Be honest I can take it. 😊
Thanks
Tony V
Hey Tony,
OK I'll bite, (as a fellow tradesman), you're a wussy,..... :)
Just kidding.
I have looked, and are currently into it, and we only have 1 property currently which is managed.
So no, by no means are you a wussy for wanting to go that route.
Especially if it is out of state.
Things I am really considering for all of our RE choices right now are as follows:
- Top of a cycle, anticipated reduction of value to assets for the next 2-4 years, meaning mortgage paydown is more important right now. (just keeping it real).
- Is the company solid and not just showing "fluff"? I tend to go really conservative.
- I look at a deal as if it NEEDS to tell me why I should say yes, I am all No's at first.
- The numbers come first, then the areas economic state, and finally tenant base.
Just my .02
Steve
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes10y
Funny title. You will be spending thousands of dollars either way so wussy does not come into play. Some TK buyers experience exit issues so make sure you can deal with that first. Your chances of success are linked to the who probably more than anything else.
Good luck!
- Mobile Home Park Investor / Licensed Indiana Real Estate Broker · Chicago Area, IL · Member since 2015 · 262 posts · 135 votes10y
I'm a new investor myself. I have entertained the idea of turn-key. I think it could be a great way to start if the numbers work. I have decided not to do it because, even though I am fearful, I know I have the skills to do it on my own. Each person has a skill set. The trick is identifying yours and being honest about it. Even though the connotation of that comment may seem as if I'm saying you must know your limitations, the opposite is true too. Many people do not see the true potential in themselves. I have been guilty of that myself. I know that when I have been put in new technically challenging situations I have been able to figure them out and not only succeed but thrive. Who are you? What are your skills? How quickly do you grasp new concepts? How do you react when things go wrong? Answer those questions for yourself and you will find your path.
There is a saying that states that the defendant who acts as his own attorney is representing a fool (at least it goes something like that). Paying for expertise is nothing to be ashamed of. When you buy turn-key you are doing just that. If it gets you going then do it. If you will otherwise hesitate and get stuck in the analysis paralysis phase on a self-constructed deal then do it. If you don't make as much in return consider the lost income as an education expense. If you calculate the true cost I think you will find that the price paid is a bargain.
How you invest should be tailored to you and should be as individual as your signature. Pride and lack of self awareness can be very costly things. If you have calculated the costs and weighed the pro and cons and you decide it is for you then do not let anyone tell you different. You hold the keys to your future. Anyone who would call you a wuss for that is most likely what I call a gate keeper. They are jealous of your ability to know yourself. Misery loves company and the miserable constantly invite us to be with them by putting creative thinkers down They let others dictate their future by pandering to others opinions of themselves. You are better than that.
- 10yCurtis YoderPro MemberRental Property Investor · Tulsa, OK · Member since 2014 · 241 posts · 187 votes
@Tony Velez "Am I a wussy for thinking turnkey for my first real estate investor? Be honest I can take it."
Are you making money? If the answer is yes, then no, you are not a wussy. If you are not making money then change your strategy.
Every one of us investors uses different strategies to make money. Some take more risk and buy notes or even properties unseen from the courthouse steps. Some buy directly from the MLS and know every single dollar of the deal before they even close.
So the only person you should have to please is yourself. If you are comfortable with Turn Key, making money, then keep doing it. Make more money. Trust me, there are more than a few people that call themselves investors that are not making a dime. Good luck Tony!
- 10yPeter Dascoulias IIPro MemberRental Property Investor · Great Falls, MT · Member since 2014 · 45 posts · 26 votes
I have a full time job, so my first 5 were turnkey and when I felt comfortable I bought a duplex and single family that needed a bunch of work. I'm still glad I bought the turnkey first to get my feet wet. When I new I was getting some good cash flow I ventured out of my comfort zone. The places that were not turnkey of course have a much better ROI, but also had us stressing big time for about 6 months. All the dust has settled and i'm not sure I would have done it any other way.
- 10yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
Originally posted by @Vincent Crane:
Here's the problem with a turnkey, you're buying at retail price. Every investor on these podcasts says the same thing, buy at wholesale, sell at retail. If you're buying turnkey, you're not adding value and it costs you more than you think.
Turnkey example, you can buy a property for $100k, put $20k down, and it's turnkey and cashflows $200 a month.
Not buying turnkey. You buy a property for $80, that is really worth $130k when it's fixed up. You put down $20k, put $20k of rehab into it, and add $20-$30k of value and now it's worth $130k but you only have a mortgage for $60k. You can rent it out for $1,500 a month and cashflow $500 a month. AND you can do a cash-out refi, take your money out of it, and buy the next one and do it again. So you don't have to save for a new down payment every time.
Now which one really gets you to where you want to be?
Hang with me on this one and this is assuming a investor is buying out of state. If investor is local, then my manifesto below is not really applicable.
Lets look at scenario # 2. I am not following the deal. If someone is buying for $80,000 and it needs 20k in work, why is the investor putting down 20%. Which banks are lending on distressed properties? Most want 20% skin in the game. In your scenario, right up front the bank would require $20,000 down for a 80k buy with 20k rehab. If you have a great relationship with the bank, they will lend you purchase and rehab based on the appraised amount, but most out of state investors will not get that.But you don't mention the closing cost and holding cost. That comes to about 4% of the loan amount after owners title insurance, lenders title insurance, vacant house policy (after 3 months your on your own), recording fees, doc fee, prep fees, etc. If someone is going through hard money lending, add 3 to 4 points on that. But for this example, lets assume the bank is going to finance a out of state investor for this (which may not even be realistic if there is not already a relationship involved). After 3 months and if the budget stayed at 20k (and I would argue buying that sweet of a deal would exist in most markets and only have 20k work to really fix up the house so that you are not getting killed by deferred maintenance), this investor would have about $3,000 in holding cost (taxes, utilities, yard up keep and interest). So basically after up front closing cost and holding cost, all in for $107,000. Appraisal comes in at 130k, cash out refi (which I am thinking takes 6 months of seasoning, but I could be wrong), I believe conventional financing will do 75%. Loan amount is $97,500 and closing cost and escrow would be about $5,000. Bank is 80k loan is paid off. Your out of pocket cost is the 20k original amount, $2,500 on loan difference, 7k holding and purchase cost. Out of pocket cost is $29,500.
Same scenario with Turnkey. That turnkey company could get that 20k rehab done for 12k (most bigger TK companies don't hire contractors, rather they manage themselves and leverage their volume into huge discounts). They can self fund the deal and reduce purchase closing closing cost to $750. They dont buy vacant home insurance, rather they put on their master builder policy for $70 a month, cutting insurance cost in half. So there holding cost is about 1/2 that, lets just call it $450 a month. Same deal, but turnkey company is all in at $94,100 after 3 months and other investor is all at $107,000. Investor negotiates with turnkey company to sell at $114,000 and pay 2% closing closing cost. Out of pocket cost for investor in this scenario is $25,520. Less then the other way. Loan amount is $91,200. Cash flow is more through Turnkey.
Now in the investor purchase direct scenario, if that investor has a hard money relationship, he can reduce his out of pocket cost to roughly $7,500, but how many hard money lenders are lending 100% to purchase and refi these days to a out of state investor who will be managing a renovation from a different area code. I came up with out of pocket cost of $7,000 via HML loans $105,000 to cover his points (assuming 3%) and 2% for title, owner policy, closing fees, etc., thus $0 brought by investor to table. That lender will probably charge 12%. Holding cost for 3 months is roughly $5,000. Refi that out at $97,500 and it is $2,500 at close to pay off lender plus the holding cost of $5,000. That would be the best leverage way.
Now if investor is paying cash, but most don't have that kind of cash laying around, then the out of pocket cost is less then the HML scenario.
This investor direct purchase is assuming the contractor does what he is supposed to do, does a good job and on time.
Lastly, I can't speak for every market, but the 80k deal that rents for $1,500, worth $130k and only needs 20k in work is very far and very few in between. I see that deal in Memphis and Little Rock being bought at 100k and not 80k. If your lucky, in the first 30 days, you may get $2,500 off the list price on a Fannie Mae foreclosure. Maybe 5k off on foreclosures from other banks. HUD, if it makes it that far, you will get about a 5 to 8% discount (they will take around 10%, but other investors will out bid you).
- Cave Creek, AZ · Member since 2015 · 51 posts · 13 votes10y
I like what @vincent crane said but those deals are hard to find!
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Alex Craig one thing I disagree with you on is the turn key operators cost of capital to buy and rehab... Most if not all are borrowing money to do this.. not doing it out of pocket.. there may be some but I don't know them and I know many personally in many states.. Most use HML and or private money loans so their cost of capital is usually 12 ro 14% apr. plus their closing costs to buy lenders policy and all the others. this of course is added into the equation. Where turn key providers make their money is were all front end fix and flippers make their money they make it on the buy... rehab cost are the same basically for most rehabs no one is getting 50% better pricing yes some better pricing no doubt and your using johnny lunch bucket guys for most of your labor not bonded and insruaed contractors that's the only way you get those costs that low.. I know I send out 300 to 500k a month to rehab draws LOL... TK makes it on the buy they get the best deals that is were the profit is made then they sell for a premium over market that between those two things that is were the margins are made in the TK industry.
I agree not being local and trying to rehab is very dangerous. Especially in the lower end asset class's most west coast investors really don't understand the dangers in a place like Memphis with rehab.. being theft and actual physical danger if they are in the wrong hoods and don't know better.
- 10yAlex CraigBusiness MemberReal Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
@Jay Hinrichs Your right. Most TK providers use HML, myself included, but not on all. Personally I self fund some, use HML (at 2%/10%) on others and go to 2 different banks in Memphis at 1% & 4.5%. If I use line of credit on primary, then that is 0 points and 5%. We fund all deals in Little Rock at our bank b/c the interest rate is 4% and loan points are 1/2 a percent and they loan 80% of the appraised value.
I disagree 100% on the renovation cost. Some TK providers may be using Johnny Lunch buckets and unlicensed contractors and getting a tad bit of a discount, but some companies are just better at running a business and I include myself in that. I don't use contractors at all; since I own the property, I can act as my own contractor. All our subs are licensed, otherwise my GL insurance would be astronomical. We pull electrical, plumbing and gas and HVAC permits when necessary. We get roof laid at $35 a square labor. We get a discount off retail on shingles from Home Depot; we pay $17.25, retail is $23.25. All orders get run through the bid room, to which we get discounts on that too. I buy HVAC direct through from a nationwide supplier. Off the top of my head, the cost of a 3.5 ton AC unit is $725, shipping $100 is usually about $100, but other items are on that order. Labor is $350. Permit is (off the top of my head) is $100, bringing total AC install on 3.5 ton unit to $1,450ish. Furnaces are cheaper. Installing a hot water tank is $600. The labor I use to do the ceramic tile, vinyl plank flooring, painting, siding repair, floor refinish and other trades that do not require a license or permit cost me about $2,500 on average week and we are normally out of a house in 10 days. These guys do an awesome job and have done almost all the renovations at my personal home.
Maybe I am naive, but most will not get those sub-contractor cost or discounts on material purchases unless they develop a relationship with one of those subs and that is not going to happen on a deal or 2. The Germantown or Collierville house wife that calls out repair companies for every nit picking issue is more important then a one or 2 deal a year investor. But I am pretty confident on my presumptions as I used to hire contractors and I am saving a ton managing the projects in house. I actually just had one of our investors tell us they paid $2,500 for a new AC unit in Indy. For about a grand more, I can get an entire system installed.
I think there are 2 types of TK providers. There are the ones that truly know how to run a business efficiently and those running there company out of their home and simply being a house flipper.
Agree 100% on your last paragraph. But from my understanding talking to our clients who own in multiple markets, that problem exist in Indy, KC and St. Louis.
- 10yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
Ben, you are over analyzing it too much, it's a lot more simple then that. I can't expect everyone to understand it so the idea was to use simple terms.
Curt Davis - KAIZEN Realty538 Reviews
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