Property in same neighborhood as a TurnKey provider?

17 Replies

Hi all, 

I’m a bit of a novice and these forums have been fantastic. I’m specifically looking at out of state investing because of where I live (Los Angeles). This led me to research turnkey providers and that strategy of buying from them. 

From my understanding, TurnKey providers are geared towards investors who want to do the least work possible (less time / less return). They rehab the property and find tenants, and therefore charge a markup. The other end of the spectrum are investors who do the buys/rehabs themselves (more time / more return). 

I am somewhere in the middle....I don’t want to do an out of state rehab, but I have more time than the typical TurnKey investor. What I don’t have is insider knowledge on out-of-state markets and which neighborhoods to invest in vs avoid. 

Is it a viable strategy to find an almost ready-made property (minimal repairs) in the same neighborhood as a TurnKey property, buy it, and then find my own property manager? Essentially piggy-backing off the TurnKey providers market research to find the good market and neighborhood...specifically looking at market data that companies like Jason Hartman’s group or The Real Wealth Network are in. Could even use the same vetted property management companies that those networks pitch. A bit more work on my end, but (hopefully) with more return.

Would a semi-TurnKey strategy like that juice up returns? Any holes in this strategy?

Thanks all!

Neel

@Neel P.
It would juice up returns if: 1) you can get a property for cheaper AND 2) if your team or network is better than or equal to the turnkey team.

Not saying it can’t be done, but #2 is definitely harder and will take more time. But, I’d say this is a viable strategy and I think others have done it. Good luck.

Originally posted by @Kyle M. :

Neel P.
It would juice up returns if: 1) you can get a property for cheaper AND 2) if your team or network is better than or equal to the turnkey team.

Not saying it can’t be done, but #2 is definitely harder and will take more time. But, I’d say this is a viable strategy and I think others have done it. Good luck.

Thanks for the input Kyle. So here is the situation I'm looking at:

Turnkey Property

List Price: $99,000

Cash Flow: $250/month

Size: 3BR, 1300 sq ft. 1980 Property

The turnkey company bought this property in May 2017 for $50,000 and did renovations, now selling for $99,000

No too far from the turnkey house, there is this property (not by a Turnkey provider, but a normal sale):

List Price: $120,000

Size: 4BR, 2500 sq ft. 1990 Property

This property is almost twice the size (by sq ft) and newer, and doesn't need much renovation....its pretty ready. What it does NOT have that the turnkey property is providing is existing tenants and existing deal with a property management company to manage it.

So basically....how much of a premium are we paying a Turnkey provider for existing tenants and a built-in property management company? Or is the vast majority of the premium paid for the renovations?

This can vary by price and market but typically a turnkey provider is probably making 15-30k per transaction. So if they bought it for 50, probably 20 Into it and sell for 100.

@Neel P.

The two properties you described are apples and oranges.  The more expensive property is larger and newer.  But, I would almost guarantee if you did a cash on cash return analysis on both properties, the $99K turnkey one would give you a higher return.  The situation would be different if you found an identical property to the turnkey one listed for LESS.

The main questions you want to ask yourself are (after first vetting and getting comfortable with the team) if you are comfortable with the returns on the turnkey property AND will it appraise at or above $99K.  Good turnkey companies will sell it to you at or slightly below "retail" value.  As long as you are buying at or slightly below retail, it doesn't really matter how much of a "premium" the turnkey company is making.  

Turnkey companies are essentially flippers with a property management department.  So they make money on the equity gain after the renovations, then they make money off the property management.  

Also remember larger homes probably mean more maintenance. I’ve done turnkey and non turnkey. The non turnkey gave me slightly more equity but I could lose that if it requires a lot of repairs (which will likely be the case). If I don’t have any repairs or very few in the turnkey for several years it could easily be a wash.

What about considering a neighboring market that you could drive to like Las Vegas, or Phx? If you had a rehab project in one of these markets, you could easily drive (you said you have the time), and do some of the work yourself. Either one of these markets can be easily researched from where you are sitting. If you are okay to manage the rental, then just place a CL ad for tenants, or break down and pay a Realtor to list it on MLS for you to screen, and secure a tenant and lease.

which city/area these properties are IN. I noticed most of the turnkey providers selling properties at full retail price and sometime higher. Appraisal comes below the sale price.

Originally posted by @Neel P. :

Hi all, 

I’m a bit of a novice and these forums have been fantastic. I’m specifically looking at out of state investing because of where I live (Los Angeles). This led me to research turnkey providers and that strategy of buying from them. 

From my understanding, TurnKey providers are geared towards investors who want to do the least work possible (less time / less return). They rehab the property and find tenants, and therefore charge a markup. The other end of the spectrum are investors who do the buys/rehabs themselves (more time / more return). 

I am somewhere in the middle....I don’t want to do an out of state rehab, but I have more time than the typical TurnKey investor. What I don’t have is insider knowledge on out-of-state markets and which neighborhoods to invest in vs avoid. 

Is it a viable strategy to find an almost ready-made property (minimal repairs) in the same neighborhood as a TurnKey property, buy it, and then find my own property manager? Essentially piggy-backing off the TurnKey providers market research to find the good market and neighborhood...specifically looking at market data that companies like Jason Hartman’s group or The Real Wealth Network are in. Could even use the same vetted property management companies that those networks pitch. A bit more work on my end, but (hopefully) with more return.

Would a semi-TurnKey strategy like that juice up returns? Any holes in this strategy?

Thanks all!

Neel

One can fairly easily go to most turnkey areas and buy stuff off the mls, get a property manager and you are a landlord for less to a lot less than what the turnkey company offers. That is just a fact and understand many decent areas homes are not in need of full rehabs or are ready to go as is. You also would have a much larger selection vs nearly any turnkeys companies inventory. Virtually any good local agent on BP will do that and many specialize in that. I think that is how the majority of rental homes are purchased. Some also find the good PM first then the home or self manage with team (lawyer, handyman) if it is just a couple homes to start.  

I guess you are talking no LA for initial price reasons? As LA is #1 nationally for total returns ( cash flow + equity) since 2000 if we are talking max profits. There are a host of good reasons for that and partly why it cost more in the first place. 

Good luck with your search! 

Sorry @Matt R. , but I must disagree with your statement about going to turnkey areas, buying stuff off the MLS, getting a PM, and being in it for a lot less. You state that this is "just a fact," but it is NOT a fact. I'm a partner in a successful TK company here in Indy, and we would not survive if this were a fact. The reason companies like ours do well is because many investors understand that this is NOT a fact. They want to leverage not just the demographic knowledge of the TK, but the SYSTEMS within that TK company.

Anyone buying on the MLS may be paying closer to retail, and is definitely paying some commissions for realtors.  Further, they are ignoring any opportunities that are off-market.  Secondly, rehabbing that property from another city, and hiring others to do the work is not going to be as cost effective or as efficient as teams like ours that are doing 20-30 projects at a time.  Thirdly, just because a property has "professional management," does not mean that it will perform well long-term.  Property placement and management of tenants is crucial to long-term performance, and protection of the asset.  If just buying something on the same street was the key, there would be a lot more successful LD investors.  Many of our buyers are investors that have tried that, with results that have been far less than what they had hoped.

Originally posted by @Jeff Schechter :

Sorry @Matt R., but I must disagree with your statement about going to turnkey areas, buying stuff off the MLS, getting a PM, and being in it for a lot less. You state that this is "just a fact," but it is NOT a fact. I'm a partner in a successful TK company here in Indy, and we would not survive if this were a fact. The reason companies like ours do well is because many investors understand that this is NOT a fact. They want to leverage not just the demographic knowledge of the TK, but the SYSTEMS within that TK company.

Anyone buying on the MLS may be paying closer to retail, and is definitely paying some commissions for realtors.  Further, they are ignoring any opportunities that are off-market.  Secondly, rehabbing that property from another city, and hiring others to do the work is not going to be as cost effective or as efficient as teams like ours that are doing 20-30 projects at a time.  Thirdly, just because a property has "professional management," does not mean that it will perform well long-term.  Property placement and management of tenants is crucial to long-term performance, and protection of the asset.  If just buying something on the same street was the key, there would be a lot more successful LD investors.  Many of our buyers are investors that have tried that, with results that have been far less than what they had hoped.

 I understand there could be exceptions. This has been my experience after researching 100s of turnkeys of the BP variety and I am generalizing. For fun shoot me over a couple samples. A couple counter points, not every home needs a rehab and there is not a mystery to systems that are exclusive to turnkeys to solve. When I see the average Tk company, they may have a handful of properties at any given time vs the hundreds to thousands perhaps on mls. The mls typically would have more buying options in that math. I have yet to see any TK company pass an off market value systematically to the retail investor buyer but always open to see that example. I am not saying don't buy TK either, just sharing my research. Good luck! 

@Neel P. If you have a little more time on your hand you can find your own broker and procure your own property yourself. If the construction is not that large you can find your own contractor remotely and find and inspector to check up and verify it. That what I did but only after buying a couple turnkeys to get started.

Don’t assume it’s a great area just because there are turn key operators there. In fact the larger ones here in Indianapolis operate in some of the worst areas. Some turnkey guys put out great products in great areas, but you can’t assume that’s true.

Also, there are a few companies that do “pre-turnkey” products where the client buys the home themselves the management company performs the rehabs and finds the tenant and then manages the home. Saves a lot of the markup that is needed for the TK company buying the home themselves and taking risk.

But it can be done and is often. It would be more effort than picking a done home off a website, but having one company hold your hand through the process is easier than remotely managing a construction which is incredible difficult. Not to mention picking a solid neighborhood.

Either way, jump in and get after it.

Good luck!

@Matt R.    "Just for fun" examples are prohibited here, but you can find what you want to see in a couple of mouse clicks.  You are right in that a good TK company may only have a few properties on their site at any given time.  In our case, we sell everything we get.  Often times, there are deals that never even make it to the website.  We also find that investors with too many choices have a harder time making a choice.
To put things in perspective of the bigger conversation here, we have access to the MLS, and almost never find a deal there. It's our obligation as a TK provider to put the investor in the best position for long-term, and relying exclusively on the MLS to find those kinds of returns for investors would put us out of business. Yes, there are more choices on the MLS...more does not mean better.

Originally posted by @Neel P. :

Hi all, 

I’m a bit of a novice and these forums have been fantastic. I’m specifically looking at out of state investing because of where I live (Los Angeles). This led me to research turnkey providers and that strategy of buying from them. 

From my understanding, TurnKey providers are geared towards investors who want to do the least work possible (less time / less return). They rehab the property and find tenants, and therefore charge a markup. The other end of the spectrum are investors who do the buys/rehabs themselves (more time / more return). 

I am somewhere in the middle....I don’t want to do an out of state rehab, but I have more time than the typical TurnKey investor. What I don’t have is insider knowledge on out-of-state markets and which neighborhoods to invest in vs avoid. 

Is it a viable strategy to find an almost ready-made property (minimal repairs) in the same neighborhood as a TurnKey property, buy it, and then find my own property manager? Essentially piggy-backing off the TurnKey providers market research to find the good market and neighborhood...specifically looking at market data that companies like Jason Hartman’s group or The Real Wealth Network are in. Could even use the same vetted property management companies that those networks pitch. A bit more work on my end, but (hopefully) with more return.

Would a semi-TurnKey strategy like that juice up returns? Any holes in this strategy?

Thanks all!

Neel

 It would be possible. Just make sure you are prepared for the hours you'll need to invest into getting it ready. Good luck!

@Neel P. TK is mostly (but not always) a bad idea at this point in the cycle. Watch out! 

For every one good TK provider there's 99 bad ones. If you haven't looked at a 100 deals yet keep your powder dry and underwrite more opportunities.  

HINT: tenant turnover cost is not the same as maintenance and repairs AND it's the most often omitted expense in a TK/SFR/Little Deal model somebody is trying to sell you. :)


Originally posted by @Lane Kawaoka :

Neel P. If you have a little more time on your hand you can find your own broker and procure your own property yourself. If the construction is not that large you can find your own contractor remotely and find and inspector to check up and verify it. That what I did but only after buying a couple turnkeys to get started.

 Thanks for the insight Lane! I was thinking of starting with 1 TK purchase then doing it myself after. Are you glad you did TK first, or do you think you should have just gotten your feet wet immediately by doing it yourself?

@Neel P. being from Seattle at the time... I think it really depends you can go either way. Maybe we can chat about it.

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