Exit strategy with turnkey investing

31 Replies

I've considered turnkey investments (provider buys property, totally rehabs it, then sells the property with a tenant and PM service in place) but I can't see a the viable exit strategy with this type of investment. My concern is that the provider gets the benefit of the forced appreciation from the rehab, and the buyer receives a nicely cash flowing property whose ARV exceeds the local market making a later sale very difficult (unless appreciation is rock solid and consistent). Perhaps the circumstance is far more dynamic than how I'm thinking about it. Ntl, I'm curious if turnkey investors feel they do have a reasonable exit strategy? Turnkey providers feel free to chime in also, if you like.

Once your TK house is purchased, the fact that you bought it TK does not matter, since TK is simply a shortcut way of buying a property - yes you pay a premium for that and so it would be factored in. You need to approach exit strategy the same way you'd do it for any other property: purchase price vs appraised value, location/market, renters vs homeowners in neighborhood, appreciation potential, schools, etc.

For myself, after a change in investment direction/priority, last year I was able to sell 5 properties originally purchased via TK. Our PM manages for a large number of other SFH investors and was able to find a buyer for the portfolio in their network. Since our sale was within 2-4 years of the properties purchased, the closing costs on both ends really ate up our profits. Your exit strategy can suffer regardless of how you buy if you don't hold long term.

I'm a turnkey provider from Memphis, TN. The exit strategy for turnkey property is almost the same with other real estate properties. You can refinance it and the most obvious exit strategy is to sell it. But you have to hold it in long term.

All the best!

@Aaron M. turn key is simply a method of acquiring a property and has nothing to do with your exit strategy. There's an assumption that you will pay above market value for a turn key but that's not true with most good turn key companies. Turn key companies make their profit through the equity gained by improving the property, not by charging above market prices. Unless they are selling to all cash buyers, they can't charge over market value since lenders require an appraisal so don't automatically buy in to the notion that you pay more for a turn key. And don't buy in to the notion that you will automatically have built in equity if you do everything yourself. There are a lot of moving parts and a lot of people involved and a lot of things can go wrong. The advantage that turn key companies have that an individual doesn't have is 1. The turn key company is buying further upstream at better prices. They are not buying off the MLS
2. Turn key companies have significant economies of scale when it comes to buying materials and things like HVAC systems
3. Turn key companies usually employ the same crews full time and have much more control over their labor costs. 

Like any strategy, turn key isn't for everyone. If you're buying in your local market, have some experience and know how and have the time to manage and oversee a project, then doing it yourself might be the way to go but if you're doing it remotely, have no experience and have a demanding job and family life, turn key is probably the best way to go. 

What everyone else is saying about it being bought turnkey doesn't matter--it's the same exit strategy as any rental property--but to your point about buying at the price you buy a turnkey for, you have a valid question. A major clarification to what you said though is--you shouldn't be paying more than market for a turnkey. Some providers make you, but that's not cool and none of the ones I work with do. So instead of buying over market, you're buying at market, so normal appreciation rates apply and depending on when and where you buy, you might even get larger market appreciation on top of it. All that on top of the monthly cash flow and the 3 other profit centers of a rental property: tax benefits, equity build via mortgage paydown, and hedging against inflation. So yeah you don't get the forced appreciation on the buy, but plenty of ways to profit and all the normal exit strategies apply. The key is to not buy in a declining market. That's the only time the value you pay to buy it would negatively affect you.

Ok, let me give you a real answer. I bought several turnkey type properties in Indy and sold a bunch of them last year. So the good news is there is an exit strategy. Depending on what type of property it is though the exit will vary. For most C class type turnkey your only viable exit is another investor. This is also true for any multifamily property. So the price you get will be dependent on investor sentiment and what they are willing to pay as a multiple of rent and of course the condition of the property. Upside is you lose no rent while the house is on the market. Finding investor buyers is not that easy. There are some online brokers or you can use marketing companies that sell turnkeys. 

If you have a SFR that is in a better neighborhood (A/B class) you could sell retail to an owner occupant through a traditional agent. Downside here is that you have to keep the property vacant during the process which could take several months. But you may get a better price (even after paying 6% commission).

If you buy at full market price and try to sell in under 5 years, you will probably lose money. Thats true with any property turnkey or not. If you hold long enough to pay down the mortgage substantially, collect some ongoing cash flow and get a little appreciation you will do fine. 

Originally posted by @Joe S. :

1. Pay to sell

2. Pay to keep if over paid.

3. Break even if everything perfect.

Please expand on this.

 

Originally posted by @Aaron M. :

I've considered turnkey investments (provider buys property, totally rehabs it, then sells the property with a tenant and PM service in place) but I can't see a the viable exit strategy with this type of investment. My concern is that the provider gets the benefit of the forced appreciation from the rehab, and the buyer receives a nicely cash flowing property whose ARV exceeds the local market making a later sale very difficult (unless appreciation is rock solid and consistent). Perhaps the circumstance is far more dynamic than how I'm thinking about it. Ntl, I'm curious if turnkey investors feel they do have a reasonable exit strategy? Turnkey providers feel free to chime in also, if you like.

 TKs are mostly meant to be long-term investments. If you try to cash-out too early it could be risky. They are buy-and-holds not buy and sells. As long as appreciation holds firm at 3-4% you can probably sell it in 6-10 years and work out fine. 

Great Question. Rented single family properties have a challenge for disposition. The local MLS plaform, which is powerful, mostly attracts buyers who want houses to live in. So when I want to sell an investment single family house, I wait until it is vacant, fix it up a bit and then sell it on the MLS. The buyer pool multiplies this way. If an investor wants to buy it, I'll give them time to line up a tenant so they won't have excessive downtime after closing.

Another way to sell:  Roofstock is a platform that people can sell their rented houses.  There are also a few prominent national brokers who specialize in selling portfolios of single family rental homes.

Now for me to gripe about turn keys.  A significant amount of turn key investments are very questionable.  I've analyzed them in a few markets, especially my own.  I think the out of state buyers are going to have a hard time recouping their initial purchase price for some of these properties.  And most likely the cash flow will be a disappointment, unless you luck out with a long term tenant.  Single family rentals, especially turnovers, are costly.  

I have never bought a turn key, but I invest in the same product. I just put them together myself at a significant discount than my local turn key providers.

If you're thinking exit strategies with turnkey... you want to be sure you're buying in A to B grade neighborhoods.  If you buy a C grade property, it may be harder to "exit" considering you will have limited buyers... aka investors only.  A and B grade neighborhoods you may be able to sell to a homeowner if the property is vacant. 

Originally posted by @Aaron M. :

@Caroline C. @Ali Boone @Matthew Irish-Jones  @Mike D'Arrigo @Aigo Pyles thank each of you for sharing your perspective.  I think my pov was driven by my experience with a prior TK provider where I thought the sales price for the property greatly exceeded the market.  Really appreciate you sharing your thoughts.

You "thought it did"? Did you have an appraisal done?

 

@Ali Boone Good question. I did not get to the appraisal stage. My thought as to market value of the property was based on my own assessment of neighboring properties.

@Aaron M. Good timing for this question (atleast in my case). I was looking at couple turnkey options for an out of state investment as well. This thread gave very valuable perspective to look at if turnkey is choosen as an investment. 

This is all about risk and how it is priced. If you buy a falling down house in the worst part of town it is high risk and high return. If you buy something that you can BRRRR it is a different risk and less reward. A turnkey should be priced top of market. All things being equal it is less risk than doing a renovation or just buying a house from an individual owner. The TK has renovated the house and found a tenant. Eliminating most of the risk and should be compensated for it.

With that said, it is not for everyone.  If you can manage the time and risk, there are higher returns to be found with a greater risk.  I agree TK's do well buying, as many have huge marketing machines.  I am not so sure about the scale of economy.  While they may be able to get a lower cost, there is a fixed cost for labor and materials.  They also have a ton of fixed costs that individual investors do not.  Beyond the production costs of the renovations, they have to run a business. This requires sales, HR and Finance.  If the turnkey provider does not have a finance executive, and not a book keeper, my advice is RUN.  TK is not a simple business to run.  You must fulfill a number of roles.  Marketing company, Real estate agent, GC and Property management.       

@Aaron M. I've purchased turnkey and BRRRRs (and everything in between). A turnkey is a BRRRR... just not your BRRRR ;). Generally, you have to wait for the market to appreciate. However, if you are buying right, you also are getting paid 5 ways: cashflow, tenant paydown, depreciation, appreciation, and inflation hedge. Also with turnkey, before I purchase, I can evaluate if it will work to flip to another investor in 2-5 years, make an AirBNB, make a corporate rental, or upgrade the property in some way and flip retail. Those are all exit strategies.

@Whitney Hutten Hi whitney, i was just following this thread. They are all great strategies to exit out. Can you share which turnkey you have worked with (i'd assume Out of state) ? When you planned getting a turnkey, did you also plan a potential exit strategy before going through the closing ? and if yes, how did it work out ? Thanks 

I bought a turnkey in KS, MO 2017 for 100k. Rents for 1150$, mortgage impound account 700$. Refinanced it last month to 2.875%, it appraised for 139k. I don't plan to sell it. I plan to enjoy the cash flow and use it for my retirement in 15 years. My exit strategy is being financially free

Originally posted by @Aaron M. :

@Ali Boone Good question. I did not get to the appraisal stage. My thought as to market value of the property was based on my own assessment of neighboring properties.

A big lesson I've learned in REI (and life, I suppose) has been to not jump to conclusions based on my own guesses. Just gives myself unnecessary stress. No point in assuming anything without the facts. Once I know the facts, then I can make a decision. None of it needs to involve emotions.

 

@Aaron M. @Harshavardhan Challa

You are giving too much importance to turnkey factor. Any market you choose always have good realtors and prop mgt companies. You can use them to buy and rehab. Buying turnkey does not mean you are getting a top of the line rehab product. Also if you choose to go turnkey route, make sure you buy from the provider instead of a marketeer. Find from public records at what price did they buy the property at and have the education to guess rehab cost and of course their profit

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here