Are turnkeys overpriced?

Buying & Selling Real Estate
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Are turnkeys overpriced?

Diane Tycangco
Member since 2019 · 120 posts · 26 votes

Hi everyone!  I was thinking of buying a turnkey for the first time and was comparing the turnkey prices with Zillow estimates of what the property was worth.  The difference is so big!  Now Zillow does not know what renovations have been put into the property, right?  Also, the property management fee 8-10%, plus 15% maintenance fee - if they call the repairman or something, they tack on 15% to the repairman's bill, plus a yearly fee of $250 or a lease renewal fee of $250, adds up to a lot, especially because you are relying so much on the turnkey management since you are so far away.  What do you all think? Are turnkeys overpriced and management fees too high?  With these fees and higher prices, how can we make money?

I was looking at Memphis and am thinking of Dallas or Houston but property taxes are too high in Texas.  Any thoughts?

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Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
5y

@Diane Tycangco

Zillow is not accurate, at all. Turnkeys are sold at market price so you’re not going to get much equity when you buy but you’re also not doing any work. Google the 4 wealth generators of real estate and see which ones TKs give you. They work for some people, not all people. So it’s not really so much about the turnkey properties as it is about you and your goals! They may meet your goals, they may not. If they don’t figure out your goals and how to meet them.

Podcast Guest on Show #373
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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    5y

    @Diane Tycangco

    Zillow is not accurate, at all. Turnkeys are sold at market price so you’re not going to get much equity when you buy but you’re also not doing any work. Google the 4 wealth generators of real estate and see which ones TKs give you. They work for some people, not all people. So it’s not really so much about the turnkey properties as it is about you and your goals! They may meet your goals, they may not. If they don’t figure out your goals and how to meet them.

    Podcast Guest on Show #373
    4Reply
  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    Hi Lee, I clicked on your website and saw that you do rehabs in MO but you live in Los Angeles.  How do you do it?  I know that it is supposed to be possible as long as you have a good team and you can use pictures or Zoom or whatever but still...

    0Reply
  • Frank Hinck
    Rental Property Investor · Minneapolis, MN · Member since 2020 · 540 posts · 285 votes
    5y

    @Diane Tycangco

    Depends on the Turnkey Seller, some have goals of getting you 10% equity. Checkout Mainstay Property Group in Indy.

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  • Jonathan Oh
    Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes
    5y

    @Diane Tycangco Turnkeys are market price and sometimes more. And you need multiple turnkeys to make money. Too few then one turnover can basically wipe out your cashflow.

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  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    What turnkey company are you investing with Jonathan?  Which market? How's the Indianapolis market Frank, does it appreciate or just cash flow? 

    0Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    5y

    @Diane Tycangco

    I talk about it on my podcast episode if you want to have a listen. I actually have a few more projects that are not on the website. It’s possible but not for everyone, depends on your goals, how much time you have, etc. TK is done for you. What I do isn’t done for you, it’s a lot of work at first, less now that I have people in place, but work to get there.

    Podcast Guest on Show #373
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  • Kat He
    Rental Property Investor · Seattle, WA · Member since 2017 · 73 posts · 42 votes
    5y

    Hi @Diane Tycangco, I invest in Indy mainly for cashflow. There are areas that are revitalizing so there's opportunity for appreciation, but I wouldn't bank on extreme swings. Mainstay is pretty big and can be a 'one stop shop' for an investor--selling fixers & turnkeys, rehab mgt when you buy from them, financing. 

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  • Scott Sherin
    Investor · Greater NY Area. · Member since 2019 · 56 posts · 31 votes
    5y

    @Diane Tycangco while turn keys can sometimes be a good option, you’re essentially foregoing any “value-add” opportunity, because somebody has already added the value and reaped the benefits before selling you the property. I wanted to do turnkey at first because it felt easier and safer, but then I changed my strategy. Don’t be afraid to leave your comfort zone and search for properties that may require some amount of renovation. Break it down into steps, develop relationships with real estate professionals who can assist you, network with investors who have already done what you’re trying to do. The fear factor goes away, you end up learning a lot more, and you can end up with better returns. Hope this helps, reach out if you’d like to hear more about how I closed my first deal in Indy while living and working in NJ

    1Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    Ask the providers to direct you to a previous customer who actually made money purchasing a turnkey from them.  

    0Reply
  • Jeff Schechter
    Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes
    5y

    I own a TK company in Indianapolis, and agree with @Lee Ripma. It's more about YOU than the structure of TK. We typically work with investors who have busy careers, and don't have the time or inclination to do BRRRR's from a distance. Their time and effort is best when focused on their main career. We are all about helping our investors cash-flow, and get great tax savings.... again based on their personal income and tax position.

    Are some TK's overpriced?  Yes.  That said, there is overpricing in EVERY commodity that is sold in the world.  Getting good value is simply a matter of looking at a few metrics, and making an informed decision.

    2Reply
  • Layne T.
    Investor · Ft. Lauderdale, FL · Member since 2019 · 71 posts · 50 votes
    5y

    @Diane Tycangco - 
    You're going to hear mixed reviews, someone very busy with no time to learn or execute on real estate who did well with a turnkey over time will be happy. Others who purchased 'not so great' properties won't be so happy. Personally, I think turnkey properties are rarely ever worth it from a 'buying 1 or 2' perspective. If you already have your market picked out, a few hours with a good broker/property manager will help you learn sub markets. From there you have much more control and inventory if you buy openly in the market with your broker vs. the limited turnkey properties, which also tend to be in a dumpier neighborhood than usually advertised (i.e. I've often seen turnkey providers saying it's a "B" neighborhood whereas it's more like a B-/C+ neighborhood).

    1Reply
  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    Layne, what market have you invested in?  Have you invested in turnkeys?  Now that I have read other people's bad experiences, I agree with you.  But I don't think I can do rehabs from far away.  There's just too many things that can go wrong.    Maybe you could recommend a good broker/ property manager to me in the market you are invested in. 

    0Reply
  • Layne T.
    Investor · Ft. Lauderdale, FL · Member since 2019 · 71 posts · 50 votes
    5y

    Hi Diane - I'm in Indianapolis myself and have a killer team for broker/property manager. The PM handles all repairs - no crazy upcharge fees - I do long term buy and hold and love the market.

    If you want to do Dallas I can send you someone as well to chat with - I looked at the market earlier this year - yeah property taxes are through the roof there - but it's a good long term appreciation market. It's a tricky place because homes may often end up with foundation issues there due to the soil, so I'd only look for homes there that are within 5 years old (and still do a foundation inspection). First year or two you may not see any cash flow at all until rents go up.

    If you're not doing a full-on rehab and worried about general repairs, that's what property managers are for. 

    0Reply
  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    Thanks Layne, I saw your message and will study the Indy and Dallas market.  Bought a property last year and cannot afford an higher priced purchase.

    0Reply
  • Jeff Fox
    Investor · Fort Collins, CO · Member since 2016 · 32 posts · 28 votes
    5y

    As stated in most of the other replies here, it depends a lot on what your goals are and how much you are willing to do yourself.  I'll add a few things from my turnkey experiences.  I purchased a handful of turnkey rentals in various markets (Indianapolis, Memphis, Phoenix) back in 2015.  It made sense for me at the time because I had a full time job and was inexperienced in these out of state markets.  The #1 lesson that I learned was the old adage "Trust but verify".  It is easy to think that a turnkey provider has your best interest in mind at all times.  Most of them are pretty honest but you really do need to double check home values, rental rates, rehab levels, home conditions, etc. to verify that you are getting what you expect for a fair and reasonable price.  It helps to remember that the turnkey provider is in business to make money too which is great as long as you can still make an acceptable risk adjusted return.  Eventually, I moved away from turnkeys and started purchasing and rehabbing my own properties.  Honestly, some of the turnkey properties that I purchased are performing very well and providing a 10-12% annual return with very little hassle.  A few didn't really perform great and I sold them off last year for a reasonable profit.  Bottom line is that if you don't have the time and desire to jump in and really focus on real estate investing, turnkeys can be great as long as you do your homework and are clear on your expectations.  If you have the time and resources to spend, you will most certainly have a greater opportunity to see higher returns when you can add the value yourself instead of paying someone else to do that.

    1Reply
  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    Hi Jeff, can you recommend turnkey companies in the markets you were in?  Also, did you physically go and inspect everything yourself before you bought?  Where can I find reliable information as to home prices and rent prices?  Thanks!

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  • Jeff Fox
    Investor · Fort Collins, CO · Member since 2016 · 32 posts · 28 votes
    5y
    Originally posted by @Diane Tycangco:

    Hi Jeff, can you recommend turnkey companies in the markets you were in?  Also, did you physically go and inspect everything yourself before you bought?  Where can I find reliable information as to home prices and rent prices?  Thanks!

     Diane,

    I purchased some stuff from the team at Mid-South Home Buyers in Memphis and they have been stellar.  There isn't a lot of appreciation in Memphis and I am not a big fan of that market anymore but my properties have been consistently cashflowing very well.  The MidSouth team has a lot of systems in place to ensure that things run smoothly and keep expenses down.  In Indianapolis, I purchased a couple of properties from Mike D'Arrigo at Pinnacle Investment Properties.  They don't actually manage the properties for me but they had good PMs in place when I purchased them.  Mike is very active on Bigger Pockets so I wouldn't be surprised if he chimes in here.  

    As far as finding reliable information on prices and rent, you will have to do some of your own research and reach out to others familiar with the market.  You can generally find a realtor that will run some sales comps for you for a small fee.  You can get rental comps by checking in with others here on Bigger Pockets and/or asking a property manager that isn't tied to the deal.  This all gets easier as you start to develop some relationships in the market.  If you can find ways to help others, they will usually be happy to help you in return.

    0Reply
  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    Thanks for the tip Jeff.  I will keep your recommendations in mind.  I have never heard of Mid-South before.  I will go to their website and take a look.  Memphis has appreciated a lot since 2016 and I don't know if it will continue but with covid, I think even more people will go online and use delivery services that's why I am considering Memphis.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    5y

    I'm sure others have said a lot of what I'm going to say (haven't read the other posts). But a few things:

    - not all PMs upcharge maintenance 15%. Based on everything you said, it sounds like you've talked to one turnkey company in particular (I can guess who). They add a million charges to things that many others don't.

    - can't compare to Zillow. Zillow isn't accurate anyway, but especially not when comparing apples to oranges. The most accurate thing will be getting the appraisal done on the property--that's how you make sure you're paying what you should.

    - come turnkey companies force you to make up the difference for a low appraisal, which essentially means they make you pay over market for the property. None of the turnkey providers I know make you close if the appraisal comes in low. You should be paying right around market for a turnkey.

    - Dallas and Houston are going to be on the lower-end of cash flow for the turnkey markets. Memphis I'd consider the middle of the road--there are markets that have higher cash flow than Memphis and others have lower. So market choice matters as well.

    There is a misconception out now that you have to overpay for a turnkey. I partially blame the turnkey companies who do charge over market, but that's not the majority of them. Otherwise you're going to pay market and normal PM fees... PM fees are PM fees, turnkey or not.

    0Reply
  • Diane Tycangco
    OP
    Member since 2019 · 120 posts · 26 votes
    5y

    Hi Ali, actually I have researched about 5 Memphis turnkeys and 3 or 4 of those charge 15% maintenance fee.  I have been looking at the price trend for some Memphis properties and they are all over the place!  Up and down like a yoyo so it is hard to determine historical appreciation.  I talked to a company and I think the guy said they make you pay for the difference in a low appraisal.  Where do you invest?  Do you know of a reliable turnkey company in a market with good appreciation with houses maybe $100k.  That's my budget.

    Thanks for your input.

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    5y

    @Ali Boone from my personal experience, 95% of Turn-Key properties through a Turn-Key Companies are overpriced in the Houston Area. 

    They are very scared and the numbers never work for me and my Investors.

    That's why I have focused on creating a deal from MLS listings by looking for motivated sellers.

    Thank you

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    5y
    Originally posted by @Wale Lawal:

    @Ali Boone from my personal experience, 95% of Turn-Key properties through a Turn-Key Companies are overpriced in the Houston Area. 

    They are very scared and the numbers never work for me and my Investors.

    That's why I have focused on creating a deal from MLS listings by looking for motivated sellers.

    Thank you

    When you say overpriced, what do you mean specifically?

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    5y
    Originally posted by @Ali Boone:
    Originally posted by @Wale Lawal:

    @Ali Boone from my personal experience, 95% of Turn-Key properties through a Turn-Key Companies are overpriced in the Houston Area. 

    They are very scared and the numbers never work for me and my Investors.

    That's why I have focused on creating a deal from MLS listings by looking for motivated sellers.

    Thank you

    When you say overpriced, what do you mean specifically?

    Not leaving any meat on the bone for investors. This is what I have experienced in my market. It may not be the same in your markets.

    [email protected]832-776-9582Podcast Guest on Show #469
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  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    @Wale Lawal What you describe is guaranteed to happen when the seller has much greater knowledge about local market conditions than the distant buyer, especially one who is turning to turnkey because he/she has too many demands to invest in any other way.   Either the property will be overpriced or located in a much worse neighborhood than advertised.  

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    5y

    @Diane Tycangco you can't generalize. It all depends on the turn key company, but keep in mind that good turn key companies make their profit by improving the property and creating equity. You shouldn't count on having built in equity but you should pay over market value. Here are a few questions to ask your turn key company which will give you an idea if they are selling over market value. 

    Do they allow financing or just cash purchases?
    What percent ot their properties appraise for less than the asking price?
    Do they allow for an appraisal contingency?
    If it doesn't appraise, does the buyer have to come up with the difference?

    I wouldn't put much stock in Zillow Zestimates. They may be reasonably close in some markets but are way off in others. Keep in mind that the Zestimate is just am automated valuation model driven by computer algorithms. There is no human judgement involved at all. In our markets of Indianapolis and Kansas City, the Zestimate is often way off of the ultimate appraised value. 

    With regards to property management, that is not unique to turn key properties. As long as your properties are being managed, you are going to have management fee's regardless of how you came to acquire the property. Property management is critical to success if you are out of state and not managing the property yourself. It is so important to vet them well. None of our PM's charge a lease renewal fee and that is something I would avoid for sure. 

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