Turnkey Out of State Investments— how does it all work?

52 Replies

Being in a competitive market, I've researched out of state investing a bit and have always been gun shy due to not feeling comfortable buying property that I don't personally control and having to work with a turnkey/management company remotely. However I had some drinks with a buddy last night who has had success with a portfolio of SFH's in Indiana using a turnkey company that he trusts and our conversation got me thinking. What I don't understand is this: if the deals are good, why don't the turnkey guys keep them for themselves? What's in it for them to give up these deals to out of state investors for a smaller percentage than they'd keep if they just held the properties themselves? We're talking about $25k-$50 deals here so low barrier to entry, the sales commissions/ management fees can't be that great for the turnkey company and I'd expect a legit company to be capitalized such that they could buy and hold those properties themselves. So why offer them up to random out of staters if the deal is good? Not trying to be snarky here or ruffle any turnkey people's feathers, I'm genuinely interested in learning what each party gains from an arrangement like this and specifically what's in it for the turnkey company and why not just hold the property and keep all the profit?

My response will be very simplistic so hopefully someone following will get into more detail or give examples. Turnkey providers either also have a property management company as well or they may not. IF the turnkey provider also has a PM company, then the residual income in management fees is one revenue source.
One thing I have found from some turnkey providers (I don't say all because I haven't talked to all obviously) is that they buy properties for what could be pennies on the dollar, pour money into rehabbing, and then sell at a premium...so they're fix-and-flippers. This isn't to say that they don't also hold some properties to keep some cash coming in...maybe they do or they don't.
Hope this brief comment gives SOME insight. 

They do keep their best deals for their personal portfolios. I’d do the same thing.

I am in a similar situation and had the same question. The only thing I could think of is they are:
1. Selling off the under performers.
2.Minimizing risk.
3. Capitalizing on the “flip”

My buddy came to me with some properties in Chicago from a turnkey company. It seems they were buying them for around $40k-$60k and selling them for $160k-$180k.
A $100k plus rehab seems a bit odd for the neighborhood these houses were in. I almost felt like this company was literally paying the “rent” on a vacant unit with the money they made and then was suddenly going to disappear or something lol.
Something about it just doesn’t make sense to me either no matter how much I want to believe in it.

@Steve King

A lot of turnkey companies don't have the capacity to keep holding properties as buying, renovating, and holding properties can be capital-intensive and some of these companies manage and sell hundreds of properties. To personally keep hundreds of properties would require millions of dollars to be tied up and these companies prefer to sell them to keep their assets liquid to grow their turnkey business instead of becoming landlords for hundreds and thousands of units.

You are all partially right and partially wrong...

1. We do not keep the best deals for ourselves. In fact there are no best deals. Any successful company has to standardize and turn out a very similar product. As a result nearly every one of our properties looks extremely similar to every other one. In rare cases we have a property that does not come out as well or may not perform for whatever reason. Sometimes it's just due to surprises during the rehab Those are the ones we actually keep as we do not want to put out an inferior product. Often times those get sold off to a wholesale Market.. or we just keep them and accept the lesser performance.

2. We don't look at Property Management as a huge profit Center. It exists to keep investors happy. When investors are happy they buy more properties.

3. We do not make an enormous amount of markup on each property, but we do make it up with volume and do very well. Most sales represent approximately what we would gather in rent over a period of two years. That's an attractive number for a flip. That only works because of systems and volume... See #5..

4. We essentially have a rolling inventory. Investors always get first choice.

5.. we do enough volume and have rehab processes dialed in so well that we can deliver to the investor a product better than what they can do on their own. It's about systems and economies of scale. As an example if you wanted to come to Indianapolis, buy a wholesale property, hire contractors, rehab it then find an outside management company to find and manage tenants, you would have a very difficult time getting the same long-term results. And you'd have a lot of time effort and heartache into the process. We simply offer a very attractive done for you solution, and even give you a one-year warranty on any property you purchase from us.  

6. Needless to say this is very attractive to investors from other parts of the country that can't get the same price-to-rent ratios that we can get here locally. TurnKey is not for everyone, but it does make a lot of sense for an investor who has a busy career and wants excellent returns, but who still wants to be more passive about the process.

Originally posted by @Steve King :

Being in a competitive market, I've researched out of state investing a bit and have always been gun shy due to not feeling comfortable buying property that I don't personally control and having to work with a turnkey/management company remotely. However I had some drinks with a buddy last night who has had success with a portfolio of SFH's in Indiana using a turnkey company that he trusts and our conversation got me thinking. What I don't understand is this: if the deals are good, why don't the turnkey guys keep them for themselves? What's in it for them to give up these deals to out of state investors for a smaller percentage than they'd keep if they just held the properties themselves? We're talking about $25k-$50 deals here so low barrier to entry, the sales commissions/ management fees can't be that great for the turnkey company and I'd expect a legit company to be capitalized such that they could buy and hold those properties themselves. So why offer them up to random out of staters if the deal is good? Not trying to be snarky here or ruffle any turnkey people's feathers, I'm genuinely interested in learning what each party gains from an arrangement like this and specifically what's in it for the turnkey company and why not just hold the property and keep all the profit?

Sellers of these assets have long & short term gains you need to look at. You need to balance out your long term gains (keeping the rental properties) with your short term gains (selling the rental properties).

You can keep funding your down payments on the long term holds with the cash you make from the short term sales. If you do not keep feeding cash into the machine with the short term sales you would run out of money as the rental income doesn't come in fast enough to replenish the acquisition costs.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

This post has been removed.

Thanks for all the great replies! Very helpful. Just like any business when the profit margin and sale price per unit is lower, the volume has to be higher. Makes perfect sense. Turnkey markets are very interesting coming from CO. 

Originally posted by @Steve King :

Being in a competitive market, I've researched out of state investing a bit and have always been gun shy due to not feeling comfortable buying property that I don't personally control and having to work with a turnkey/management company remotely. However I had some drinks with a buddy last night who has had success with a portfolio of SFH's in Indiana using a turnkey company that he trusts and our conversation got me thinking. What I don't understand is this: if the deals are good, why don't the turnkey guys keep them for themselves? What's in it for them to give up these deals to out of state investors for a smaller percentage than they'd keep if they just held the properties themselves? We're talking about $25k-$50 deals here so low barrier to entry, the sales commissions/ management fees can't be that great for the turnkey company and I'd expect a legit company to be capitalized such that they could buy and hold those properties themselves. So why offer them up to random out of staters if the deal is good? Not trying to be snarky here or ruffle any turnkey people's feathers, I'm genuinely interested in learning what each party gains from an arrangement like this and specifically what's in it for the turnkey company and why not just hold the property and keep all the profit?

@Chris Clothier had a response to this question recently

look at the questions at the bottom of this blog post, and read the 4th one from the bottom

Updated 22 days ago

oops forgot the link https://www.biggerpockets.com/renewsblog/mastering-turkey-real-estate-build-passive-portfolio/

Originally posted by @Michael P. :

They do keep their best deals for their personal portfolios. I’d do the same thing.

 I have been on the funding side since turnkey became a thing in 2001  .. I have never seen them high grade the inventory as you allude to.

IE keep the best sell the rest.. Many own very few rentals themselves... then many own hundreds and every thing in between.. Sometimes they keep the ones they cant sell the worst houses not the best.

Originally posted by @Derek Crawford :

I am in a similar situation and had the same question. The only thing I could think of is they are:
1. Selling off the under performers.
2.Minimizing risk.
3. Capitalizing on the “flip”

My buddy came to me with some properties in Chicago from a turnkey company. It seems they were buying them for around $40k-$60k and selling them for $160k-$180k.
A $100k plus rehab seems a bit odd for the neighborhood these houses were in. I almost felt like this company was literally paying the “rent” on a vacant unit with the money they made and then was suddenly going to disappear or something lol.
Something about it just doesn’t make sense to me either no matter how much I want to believe in it.

Chicago many times those units your talking about are 2 flats... so 60 to 80k rehabs are not uncommon and like any other flipper they want to make 15 to 25k per deal.. just like any other human in the flipping business.. if people expect companies to do all this work to make 5k or something then they need to do it themselves. 

Originally posted by @Jay Hinrichs :
Originally posted by @Michael P.:

They do keep their best deals for their personal portfolios. I’d do the same thing.

 I have been on the funding side since turnkey became a thing in 2001  .. I have never seen them high grade the inventory as you allude to.

IE keep the best sell the rest.. Many own very few rentals themselves... then many own hundreds and every thing in between.. Sometimes they keep the ones they cant sell the worst houses not the best.

 U r the guru.  I just heard on one specific padcast from a turnkey marketer that he or she keeps some of the (best) deals for their personal portfolio. Appreciated their honesty. Was not a direct provider tho.

I am newer to the turnkey biz but I sell mine when they are renting well and appreciated so that I can free up some capital to buy other ones. As someone mentioned above, appreciation equal to a couple years of rent is worth selling when there will be another one purchased behind it. I then can property manage it and realize ongoing residual income. 

A few points I considered when looking at turnkey.

1.  Can I get a similar or near return with much less risk investing in a reit?

2.  I expect the turnkey operator to make a profit:

a.  on managing the property 

b.  on the repairs related parties make when the manage the property

c.  on the rehab.

d.  on the note if they manage financing or have a financing partner.

3.  Would they do that in a way to optimize my returns or their returns.

I ended up investing on my own.  Even in Colorado there is enough return to make it worth going alone versus paying someone else.

Last note, Have you considered Colorado tax leins.  The rules there are goofy but it is easy to do.  And if you want to get better returns you can always invest in Florida or Arizona returns which I expect would provide a better nonleveraged return than most turnkeys.

Good luck

There is a physician in Texas that flips and sells them as turn key. My friend bought one and it’s been terrible. Tons of issues that were hidden and crappy tenants.
I think they keep the best for themselves and flip for the profit.

Bethany Rankin, Real Estate Agent

Thanks Jay.
These were small single family 2bed/1bath homes in pretty bad neighborhoods. It was hard for me to believe that someone would want to live in a $180k fully upgraded home in a neighborhood with run down homes selling for almost 5-6 times less. But then again a lot of people are doing similar flips in Compton over here by me but the numbers are just a little more conservative.

I think Mindy is right though, it really just depends on the company. I wasn’t trying to imply that all Turn-key companies were scams, I apologize if I came off that way. I am new to this.

Beware of turnkey properties.  Here is the risk:  Some of the operators are buying in lower middle class areas.  They make their profit when they sell to you.  Question #1  Can you get out of the deal?  In my market, there is little local appetite to buy full priced rented single family houses.  Most of the turn key buyers come from out of state.

I own lots of rented houses, but I am local.  I find that the investments do very well in the first years.  But the turnover costs of single family rentals is way higher than apartment buildings.  Also the  building maintenance is way higher than apartment buildings (adjusted on a per unit basis).

On the positive, I get longer staying tenants and fewer defaults.  

Last, know your market.  In my market (Chicago) there are immense differences in the quality of neighborhoods.  Smarter to invest in a better area if you can afford it.

@Steve King interesting topic. Just like anything else in REI there are good players in the turnkey market and bad ones. I’ve bought turnkey in Memphis and so far it’s been a good experience. Turnkey providers may not want to keep these properties for themselves because it requires a lot of capital. Usually on the Order of millions if they’re selling 100s per year.

There are plenty of legitimate reason to want to do turnkey. You get a good rehabbed product in a decent neighborhood instead of taking all the risk yourself by trying to rehab long distance. In my opinion that’s the biggest way to lose a lot of money quickly. If you’ve got a successful career and make decent money but don’t have a lot of time turnkey can be a good alternative.

Thing to lookout for include price point, management being under one roof and reasonable “guarantees”. If they outsource management to someone else that’s not true turnkey and you probably want to look elsewhere. If they guarantee rent for a year that’s also a res flag. They shouldn’t need to do that. They should be selling a product in a good enough area where that isn’t necessary. For price point if they’re selling turnkey at 40 or 50k that means they need to squire it at 10-15k, which is probably not in a good area.

Typical turnkey house I’ve bought is aquifer for 30-40k, spend estimated 20-30k in rehab and purchase for 70-80, rent is 750-800.

@Steve King it's far easier for investors to quantify returns vs quantifying risks. There is a fairly good list of the risks mentioned above. The trick becomes converting the risks to dollars. 

@Mindy Jensen I wish I had read your comment earlier today, I just now wired my entire life savings to a TK provider in a "hot up and coming" neighborhood in Nigeria! JKLOL. In all seriousness though very good point. I'm guessing the most absolutely critical piece to the turnkey puzzle is finding the right people to work with. That's the primary reason I have not gone the TK route: I don't have any cousins in Indiana, Fayetteville, East Memphis, or Olive Branch (wherever that is, or wherever the best turnkey market is). Even if I did, my cousin would also have to be a carpenter, plumber, roofer, home inspector, mortgage broker, realtor, property manager, black belt in aikido and fortune teller all at once for me to trust them enough to basically raise kids together. Having kid's with a cousin is weird. Beyond the huge issue of taking a giant leap of faith with a TK partner, the more I learn about it the less I like it. My love for Colorado is part of what lead me to invest in real estate here after all. I see you're in Longmont; we're neighbors! Longmont is a great place.

@Greg Carrier thanks I will look into tax liens in CO. Another avenue I haven't explored much yet. Have you had success with them?

@Steve K. from Honolulu wow thanks for that link, what a treasure trove of info from Chris Clothier and then I went down a rabbit hole of "TK" threads. I can see why turnkeys are an attractive product for people living and working in expensive markets who have lucrative careers that keep them busy outside of real estate. I can't see myself taking that leap any time soon for many reasons but I love hearing stories from folks who have had success buying and selling turnkeys. It's been eye opening to  learn about markets that have enough inventory to support such an industry. One concern would be getting a loan on a sub $50k deal. I can't imagine a lender wanting to work with a client when just the fixed costs of processing the loan would be a high percentage of the purchase price. I guess this is why TK providers prefer cash (that and being able to speed up the process to achieve volume and also control the due diligence phase). IMO real estate investment only makes sense compared to other investments because we get to use the bank's money on the purchase, and then the tenant's money to pay down the note. If I just wanted to park $50k out of my own pocket in a place that I hope it will appreciate and that I know it will spin off a little cashflow in the meantime, I would choose dividend paying blue chip stocks. Less risk, easier to manage, more liquid, etc. The only reason I would prefer to use cash in real estate would be for a flip, and the TK company has basically already taken that opportunity. Furthermore if the TK property is selling for $50k or under, then you know the TK company paid ~$10k or less for it, which means there are likely to be other $10k or less properties surrounding it, which means Class D or F areas which means high risk. The only way to make real money would be to hold a bunch of these to achieve a certain volume which means a lot of exposure to that high risk market. But like I said up top it's an intriguing market and I'm glad to be able to learn more on this site from people who have had success investing this way and also those who make their career providing turnkeys. It seems like the key is in finding the right company in the right market offering properties that are at least $100k to avoid the true war zones and also to be able to use financing. I'm sure any TK provider that sounds too good to be true is just that, and on the other hand the TK companies that offer modest, consistent returns and have been doing that well for a long time are providing a good service for which there is strong demand. As the disparity in wealth between places like CA and the midwest grows wider I'm sure the TK market will grow bigger. It's an interesting niche.   

@Steve King I got started with buying turnkeys because I lived in seattle.

Initially it worked well mostly 100k houses that rented for 1000 a month. I would stay away from a stuff that rents for under 900.

The problem is it’s not scalable. I got to ten properties and it was just too much of a chore and all for a measly 3000 of cashflow a month.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.