"Biggest mistake" was to do out-of-state turnkey investing

126 Replies

Hi all,

I have noticed my name mentioned here a few times.  All I have to say on this subject is that I have never used a turnkey company to buy my single family out of state.  I have a Residential RE agent in NE Ohio for any of my single family.  As I said on BP podcast 238, I only take financial or RE advice from people that have already gone down my road.  Be careful of taking advice from people on BP that don't have many more front doors as you do in the area you are investing. I have 109 front doors and only take RE advice from people that have a lot more front doors.  There are many people on these forums giving advice on something they have never done.

Soooooooooo, I have never used a TK, so I don't give advice in that regard. Now if you want advice on true Multifamily (5 units or more) and 1031 exchanging pricey single family properties for true Multifamily, then go to my profile and contact me.

Swanny

If find a good percentage of the turn key investors come from one state:  California.   That state is very difficult to become a landlord because the yields are low.  

I've seen many turnkey providers selling real estate investments that were BAD deals.  Their formula is to buy cheap homes in lower middle class areas, renovate, rent and resell to investors.  They often pocket 30K on a house that they are reselling for $100K to $150K.  Sounds great for them.

The problem is that their pricing is more than what you could fetch if the property were sold on the MLS. So day 1, you're in the hole. The second problem is that rental houses quickly physically depreciate with renters and have more maintenance issues than an average apartment. Performance always looks great year one. The turn key providers often guarantee performance for year one.

Conclusion:  There is not such thing as turn key investment that will last beyond year one.  Real estate investments are an ongoing concern.  They are assets that require re-tenanting and maintenance.  Out of state properties are sure to become a headache unless you have a trusted management team.  

Now, I do well because I bought my properties during the downturn.   The properties are near where I live.  I might one day invest out of state, but it would be a location that I would regularly visit.

@Jay Hinrichs Damn, that was a good answer for the average investor like me. Buy'em, fixe'em, maintain'em, pay'em off and live of the cash flow. My experience is REI is hard, fun work and a good diversification play. REI is about as passive as a heat attack.

@Terrell Garren I am stealing that line " REI is about as passive as a Heart Attack" love it.. I think folks that get disappointed with turn key are under the illusion that its like buying a mutual fund or something like that.

when in fact what is done for you is simply this.

1. a rehabber ( turn key outfit ) has sourced and rehabbed ( we hope) a rental property and sold it to you

2. they may have put a tenant in it

3. and they may own the management company ( wise move for most turn key as they keep better contact with their clients and over time this becomes  nice profit center)

Once you own it you have to be engaged and stay engaged as the owner if you don't your going to usually have disappointment.. and if you as the buyer think just because you bought turn key that you need to hardly do anything for the rest of the life of the investment well then your setting your expectations up for some disappointment.

Its not that its difficult or its something you have to deal with daily but you do want to stay engaged so it does not get away from you.   And if you do that stay engaged with your provider or PM you can manage expectations and at the end of the day hopefully realize the returns or close to it that you were anticipating or wishing for.

There is no free lunch in anything real estate related.. other than getting very lucky occasionally. Like when markets sky rocket and you were in the right place at right time.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

If a person needs to use a TK service... I'd have hard time imagining they'd be very good at picking stocks. Isn't the point of TK where you're paying for someone to do the work for you because you don't have the time or skill to do it yourself.

@Matt K.   not necessarily..  logistics come into play.. if your in CA and want to buy a rental in another market

the logistics of doing it remotely are quite tough..  So I guess in a sense your right.. you would have to fly there stay for a few months while you pick out what you want to buy then over see rehab.. then hand off to PM.. Kind of like Swanny did.

So for most this is not feasible given work schedules etc.. But nothing is precluding folks from finding a good RE broker and simply buying off MLS.. right ?

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

I feel like the info and resources here in bp and other parts of the internet help tremendously for buying remote. I am by no means an expert but the skillet I'd use to find a reliable TK company are similar to what I'd use for finding the PM and the RE agent. I spent a considerable amount of time browings mls and using the info I found elsewhere to put together what made sense for me. The PM handled the light remodel and upgrades (mostly cosmetic to get rent ready). I can see the value of having someone do the research and work for you and you get a finished product if your time or skill set doesn't match up to REI. But I also see how this increases your risk because people know you might not know what you're really doing.

For my OOS investmentI Idid purposely look for homes that were in better condition and had big ticket items already done so that I wouldn't have to do them. I also did a 1031 exchange so I was conservative in my negotiating because the tax defferal outweighed the savings. I'm also a wierdo and would of had to verfiy and research all the TK info...which kind of defeats the point and value of that service. 

@Matt K.   Exactly a good RE broker and PM put together your deal.. it can be done that way as well.. little more work on your part ... of course instead of going to a turnkey company website or one of the marketing people like Ali or something and looking at their inventory and picking one of those..

I have a few of my vendors that do what I call turn key light... they allow the buyer to do the BRRR ... IE for the cash buyer they will find the deal and manage the rehab for a set management fee.. then pass off to PM and you refi out..

this works very well for those guys and the cash buyer.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

@David Song. True I may be lost in wandering from the differiation in stocks and TK real estate. I submit all that I intially stated, and sir,  trust me, I've seen enuff real estate addresses in every condition to with confidence say, there are stocks and bonds attached to all that are ALWAYS traded.... Pick a market, and no don't just look at the addresses or the owners, go to your stock market sources and research all that a client owns. Then look at the bankruptcy disclosures.....

Sir it's simply control releases.... The last RE bust will take 100 years or more to balance the stock market books.

Thus, you have stellar TK providers today in real estate today..... Simply put, if chickens can breed, we are going to give them room to do so and eat their eggs first thing every morning. Stock market IMO.

Turnkey strikes again! lol

Investors need to focus on what type of investing makes them happy. Me that is commercial real estate and owning some potential businesses.

My main revenue generator is my commercial brokerage business. I think a lot of multifamily is top cycle and tapped out right now.

Wage increases are stagnant for the middle class and are not keeping up with inflation. When inflation really takes off look for it to get worse. When that happens rental increases in multifamily tend to flatten out. So that type of asset you can have wild swings in vacancy and stunted rent growth on a down cycle.

One of the the great things about commercial is set leases with steady increases with national credit tenants so you know what you are getting regardless of the cycle. REIT's can have wild swings in gains and losses just like the stock markets.

I don't see buying dumpy turn key houses to make 1,200 (100 per month gross profit) if everything goes perfectly to make you wealthy. One big capital cost to replace and your expected cash flow is gone for years. I personally do not think these types of investments are that great. They are highly illiquid and low quality assets that take a high touch to perform.

Instead of buying a 50k house for cash why not buy a 200k house in a nicer area  stage 0 of a new home subdivision. Probably a better quality tenant long term and usually nice equity growth. Some like the high end quads as well. Better break even occupancy than a single turn key rental. You have 1 unit go vacant then 3 are still rented on a quad and likely to still keep servicing the debt. Turn key goes vacant you are sucking cash down the drain until you get re-rented.

For those who love turn key it's your right to load up on them. I must see about 7 different so called guru's a day in video feeds on Facebook promoting this crap now. Let me show you the free secrets to get wealthy blah,blah,blah. It gets so old seeing this stuff. 

The problem with turn key is a lot of houses in D areas are being passed off to out of towners as B- to C areas. The investors are being sold a bill of goods because the turn key guys simply cannot find the A to B locations like 3 to 5 years ago at the bottom of the cycles. The prices those are the turn key can't really sell them so push off the junker properties and frame them as winners.

Anyone thinking of buying these types of properties go visit the areas and also get the crime reports. See it in person and see how comfortable you would feel with your hard earned capital investing in those areas. Only you can make the decision.

I don't buy turn keys so I am no expert on them. I have seen on these forums people buy them almost over a decade on here  and you never hear back years later that they are crushing it and elated with the results. I am sure some are working well for the investors you just never here them come back and tell how they are doing. 

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

The article is great. Highly recommend watching the videos as well.
However I feel like one MAJOR aspect is overlooked in his approach. Which is Leverage. Yes you do need to work on your RE property and RE based passive income is not really passive even at a high level (you still need to make phone calls to you PM company once in a while
But I think the time and effort and sometime lower return overtime, is totally offset by the fact that you were able to leverage yourself into a future position.
Of course everyone should do whatever make them feel good. If you absolutely love your job and industry and still want to be FI, sure. Go with this GDI stuff and build it up.

But I think RE is a more emotional game for most people (even after mastering how to separate your emotions from the deal)

So I think that's the big point that was missed. LEVERAGE.
Sure, tax benefits. Absolutely debt pay down. And of course the undisputed king - positive Cashflow.

(Probably) No bank will give you leverage to buy GDI or stocks. They will with Real Estate.

Here is a vid of my nephews best friends house.

https://www.youtube.com/watch?v=6_LJy7vqjyQ&featur...

My sisters friends sons friend came over to help(not at this house) and he was electrocuted and died, she(my sisters friend, was there when it happened)

Extremely sad situation. My sister and family are ok.

The best way for you to have a dividend yield is to invest in utility stocks. They don't go up nor down during bear/bull cycles.

@jay

The agent was ok, good guy but wasn't really what I'd say investor friendly just from a value point. I'd buy my primary home from him but we just had different ideas of rentals. The lender which was a referral from him was a disaster and the title company wasn't much better. I ended up closing the house my self basically because the lender told the title company oh hey he can do it just send him a link to the paperwork. It was a disaster and actually why I found this site because of weird closing letters. I actually got money back from the lender because they messed up so bad and couldn't sell my loan till they got missing info...AFTER I closed on the house haha.

The PM basically did the TK light...and I'd be all over that. The project management side of things even if slightly more expensive still makes sense because it should save me time and travel expenses.

Originally posted by @Diogo Ferreira:

The best way for you to have a dividend yield is to invest in utility stocks. They don't go up nor down during bear/bull cycles.

Utility stocks don't go down in a bear market? 

http://ciovaccocapital.com/wordpress/index.php/stock-market-us/utility-stocks-are-they-really-safe-in-bear-markets/

invest in SFH for appreciation, invest in multi-family for cash flow. That's how Swany did it, if his condos in Ohio not in San Diego, he couldn't later 1031 into apartments. the difficulty is to convert dead equity to cash flow. Swany timed it perfectly.

Alex, one of the key assumptions your blog friend makes about dividend growth investing is the past track record of rising dividends will continue. In other words, either you or he can accurately predict which dividend stocks will perform better than the market.

If 97% of professional investors can't beat the market, what's your edge?

Not to sound harsh, but beating the market over an extended time period is next to impossible. Throw out this comment if you are lucky.

Worse, I see a lot of dividend investors who chase yield while ignoring all the risks that come with a concentrated portfolio. If you own less than 50 stocks, you have a concentrated portfolio.

For example, I know a guy who lives off of his General Electric (GE) dividends for retirement. His income cratered during the 2008 crash when they slashed the dividend from $1.24/share to .46/share. Today, the dividend is .95/share. 

By the way, he owned a substantial amount of shares since he inherited them from his Grandfather who worked there all his life as a senior engineer.

I believe, he was cashing in around $35,000 per year in dividends and then his income was cut by more than half along with the value of his investment.

Keep in mind, GE was a "dividend aristocrat" and one of the first companies in the Dow Jones Industrial Average back in the day when the Dow was only 12 stocks compared to 30 today.

Real estate is a business. It offers higher returns than stocks due leverage, high barriers of entry along with large capital inflows as you maintain the asset. All of this can be mitigated by hiring the right property manager, buying for cash flow and maintaining the proper cash reserves for roofs, appliances, plumbing and heating.

It's not a set it and forget it investment like buying index funds (less risky than buying individual stocks).

If you believe in set it and forget it for individual stocks, consider the GE example or other dividend powerhouses like Enron, MCI Worldcom, Bear Stearns, Lehman Brothers, Citigroup, and on and on and on.......

Your famous blogger mentioned how the yield on cost will easily surpass a turn key rental.

In my experience, nothing could be further from the truth.

As rents rise with inflation, your yield continues to accelerate. Unlike a company that decides to cut their dividend, my rent yield continues to climb. This was my experience during the 2008 crash. When my investment portfolio fell 50%, my real estate portfolio fell by 10-15% in value, but my rents continued to march higher.

I just looked up one of my rentals that I purchased in 2000. The annual yield on cost 19.3%. This number does not include other returns like appreciation, principal payments by tenants and tax write offs.

I'm not a turn key investor since I like value add deals and live in an area where it makes sense to buy and hold for cash flow and modest appreciation.

All investments have risks. I just don't want you to get the impression that dividend growth investing is all unicorns and rainbows. 

@Cory Binsfield where in the country in 2008 that property value dropped 10-15% and rent kept "raising" not falling? I'd love to know and invest there.

@Account Closed

After reading your post, it is difficult to figure out what you are trying to say.

Are you investing in Dividend stocks or OOS TK? Which one do you think is better?

Originally posted by @Alex Silang :

So I'm in the process of looking at turnkey investing. I even made a post about it on BP but it didn't get many responses. 

A blogger I follow is "FIfighter". He's pretty reputable in the financial independence blogosphere and has a decent following. He achieved financial independence around the age of 30 through real estate investing. 

He used to be a big fan of turnkey investing, owning a smattering of turnkey properties. He's owned them for maybe 5 years, which is nice for information because on BP you only getting the newbie turnkey investors.

This is what he said (DGI is investing in stocks with high dividends):

  • Dividend Growth Investing (DGI) >>>> Turnkey Investing. DGI is 100% passive, Turnkey Investing is a pain in the ***. Again, don’t fixate on Day 1 numbers. The best DGI stocks start off at 4% yield but the growth rate will surpass turnkeys in no time so your Yield on Cost (YoC) starts to outperform only after a few years down the road. With turnkeys, properties need to be maintained and you can only defer maintenance for so long before those costs come due. Newbies never factor this into mind when doing their initial Day 1 analysis. 12% cash-on-cash return on Day 1 will NOT be 12% in Year 5 (probably)! A property will NEVER perform as well as on Day 1/Year 1! Dividend growth stocks get better with time, turnkey properties don’t! My biggest investment mistake ever was going out of state and buying turnkey properties.

http://fifighter.com/financial-independence/though...

What do you guys think of this? I found this a bit shocking as this is someone who I look up to. He's maybe a top10 financial independence blogger.

Thanks!

 A couple of things.  I have read FI Fighter's blog for a couple of years.  He is an incredibly bright guy who brings a lot of great analysis to the table.  Having said that, he jumps from place to place on his investment strategy.  Each new thought has the life expectancy of a fruit fly.  A few years ago he was Dollar cost averaging, then  all about buying property in the bay area, then he was doing side hustles with friends to buy properties with negative cash flow, then he had a portfolio with a couple of momentum stocks, then he went to all gold, then has been selling some of his houses and been dabbling in all manner of stocks of development play miners, and believes the stock market is massively over priced.  

HE did early retirement from Apple and now is traveling, mostly in SE Asia.

I think the generic term turnkey investing is a function of what did you get into the property for?  and what will it return.  I also think you need to do a LOT of background research on any potential Turnkey partners. 

I think there are legitimate companies out there, in that they buy houses wholesale, do quality rehabs and possibly do the property management.  I haven't done any deals with them so I have no first hand experience, but based on their presence on BP, their podcast etc, I think the Memphis Invest guys are in that boat.  I think based on their interviews they are a legitimate business that has systematized the soup to nuts procurement, rehab, leasing and property management of Turnkey investing.

MY guess is if you invest with Memphis Invest and hold for 20 years, you will do fine.  You will at least match the market, cash flow will go up over time etc.

I also think the Turnkey business has a high propensity for fraud. You generally have first time or otherwise inexperienced investors who in many cases want to invest in other states. It is very easy to 'play' with the numbers to make a deal look good. Overly optimistic ARV's, hard money loans, shady tenants with unseasoned or flat out fraudulent payment histories abound. Many will pass off C or lower neighborhoods as class B neighborhoods, and the financials blow up immediately.

MY biggest issue with Turnkey investments is I think the market is getting near a top.  3-4 years ago, when property was undervalued and market prices were half of what they are now, it was fairly easy to buy a house, rehab it, put in tenants, do the property management and then sell it to an investor who could then make a big cash on cash return.

IMO the market is too competitive right now.  I think there are very few deals that make any sense to do, let alone deals where someone does the rehab, and has the margin enough to sell them as turnkey properties where the buyer truly makes an amazing return.  Prices have come up too much for me to think that turnkey deals on average will make a lot of sense. (not that there aren't a couple out there)

Lastly, IF you have the right deal, in the right market and have long term funding, I would think that cash flows would get better over time. 

If insurance, property taxes and maintenance/management costs go up with inflation, and rental incomes do the same, then it seems to me with a fixed cost on your mortgage, that over time your margins will get better not worse on rental Rental properties.  B

ecause your next biggest cost is your financing, and that will stay fixed until the house is paid for. And like another poster mentions, 15 or possibly 30 years later your returns should go WAY up because once the loan is paid the free cash flow goes up.

.

I think that is good advice. Turnkey investing is not a high return investment. I would call it diversity of your investment portfolio, but not high return investing. A few reasons: turn key sellers take all the equity out up front and it is single family investing, not large multi.

Large multi allows for efficiency and economies of scale and/or buying dozens of SFs within a few miles. Also buying value add is your best way to explode your ROI.

Medium ventured tagline logoTodd Dexheimer, Venture D Properties, LLC | http://ventureDproperties.com | Podcast Guest on Show #248

@Joseph M. There are no bullet proof stocks. 2008 was not a year for real estate as well.

@David Song. You were correct in stating that I was lost in my initial post to this post.  I have no interest in stocks and bonds, dividends, etc., only real estate. My bad.

But to answer your question about OOS turnkey investing, I think it beats the stock market hands down for the average to mid level investor who has funds in a trust, on hand, IRA, and so forth. Its what type of assets, their PP, and market where purchased as TK investments which will indicate the quality of service the TK provider can provide.

For example, you are in Redwood City CA. Home values, rents etc., are greater on the west side of the railroad tracks than the east side thru out the city and along the rail line thruout the county, as can be seen from a real estate value map. Both are extremely high compared to many OOS markets.... Anyone with a sizeable investment amount would look, at least IMO, to the turnkey providers on the west side of the RR tracks to PM TK investments on the eastside. Why? If they accept the job, their name and reputation would be the Brand the local renters would recognize and probably flock too.

 But on point.... A TK investor in your market can take their investment funds, invest in an OOS market, get maybe 3-6 more assets in their portfolio, and depending on how they purchase can be free and clear in 5-10 years of debt.... Maintenance issues., etc., etc., can't be anticipated, but swiftly resolved with a stellar PM company.... Not so with stocks. bonds., etc. 

If something gets broke on Wall Street, the entire infrastructure feels it. Too, a stock, bond, etc., may be in an individual's name, but if they are not the major shareholder, there is really no decsion making delegated other than hold or sell.... With a real estate asset, the owner has the power to decide based on its performance, not an international cobweb of third party facilitators.

@Cory Binsfield I guessed you would say mid west. it's hard to believe rent never dropped during the great recession of 2008 in the mid west. I remembered @Jay Hinrichs mentioned he was a private lender in the mid west when the market crashed, all his investors walked away because tenants stopped paying. but somehow you were able to increase the rent and people kept paying in 2008? come on get real. there are people here who have been through the last crash.

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