What Are Turnkey Properties
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13yI'm going to have to disagree with Ali Boone on this topic. Her description of turnkey properties is accurate. Or, at least that's what the sellers of turnkey properties would have you believe.
IMHO, you must be every bit as savvy about rentals, the financials of rentals, rehabbing, and the area where you're investing as if you were buying, rehabbing and managing it yourself. Ali's given you the positive side of the story, so I'm going to jump to the worst case. I've looked at a bunch of these turnkey properties. While a few are as Ali describes, many are much closer to my description.
A turnkey seller buys a junk property for a dirt cheap price. They do a shoddy cosmetic rehab that makes it look OK. They take the first tenant they can find and rent the place with a lease that looks good, but with the actual rent less than the lease states. They put their own PM in place. They sell it to an out of state investor who doesn't investigate the area in any detail. They sell it at an inflated price because the investor compares it to properties in their own area, rather than the area where the property is located. The marketing material claims taxes, insurance and property management are the only expenses, so it looks like it generates plenty of income.
The investor thinks they got a great deal. What they really get is an ongoing string of problems. Maintenance is a never ending issue. The PM is repeatedly shelling out of expensive repairs done by their in house people. The turnkey company is actually subsidizing the rent, which they can do because they make plenty elsewhere on the deal. A year later, the tenant bails out. The PM bails. The investor finds a new PM and discovers the rent is less than they were told. The new PM informs the investor of the repairs that need to be done, thanks to the shoddy rehab. And that its hard to find tenants in the war zone where this house is located. The investor decides to sell, only to discover the property is worth quite a bit less than they owe. So they stuck. Either take a big loss all at once or bleed a little each month.
Now, I've just painted a horrible picture. The only way you know which of these pictures is true is to do your own due diligence. In the words of Ronald Reagan "trust but verify". Get on a plane and look with your own eyes. Learn what's a good rehab and what's lipstick on a pig. Investigate rents. Talk to people independent of the seller of the turnkey. Drive the area. At midnight. Investigate values in the area. Forget what's a good deal where you're from and learn what's a good deal where the property is.
Realize that even the very best turnkeys come with a price. You're paying to have someone do a bunch of the work for you. That's fine, if that's what you want to do. And if you're going to invest far away from where you live, part of that choice is to pay people to do some of the work for you. Just be sure you understand and are willing to pay that price.
39 Replies
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
Hey I know you :) I'm one of those "people" that brought it up, so you may be looking to hear from other folks and get their opinions on them. No worries.
Turnkey properties mean the come fully rehabbed, with tenants in place and paying rent already, and property managers lined up to take care of the property on your behalf once you buy it. The name stems from the idea that 'all you have to do to start making money on the property is turn the key in the door'.
I think turnkeys are perfect for beginners, assuming you work with the right companies in the right markets. I have only bought turnkeys for rentals and have a lot of experience with them in several markets.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
I'm going to have to disagree with Ali Boone on this topic. Her description of turnkey properties is accurate. Or, at least that's what the sellers of turnkey properties would have you believe.
IMHO, you must be every bit as savvy about rentals, the financials of rentals, rehabbing, and the area where you're investing as if you were buying, rehabbing and managing it yourself. Ali's given you the positive side of the story, so I'm going to jump to the worst case. I've looked at a bunch of these turnkey properties. While a few are as Ali describes, many are much closer to my description.
A turnkey seller buys a junk property for a dirt cheap price. They do a shoddy cosmetic rehab that makes it look OK. They take the first tenant they can find and rent the place with a lease that looks good, but with the actual rent less than the lease states. They put their own PM in place. They sell it to an out of state investor who doesn't investigate the area in any detail. They sell it at an inflated price because the investor compares it to properties in their own area, rather than the area where the property is located. The marketing material claims taxes, insurance and property management are the only expenses, so it looks like it generates plenty of income.
The investor thinks they got a great deal. What they really get is an ongoing string of problems. Maintenance is a never ending issue. The PM is repeatedly shelling out of expensive repairs done by their in house people. The turnkey company is actually subsidizing the rent, which they can do because they make plenty elsewhere on the deal. A year later, the tenant bails out. The PM bails. The investor finds a new PM and discovers the rent is less than they were told. The new PM informs the investor of the repairs that need to be done, thanks to the shoddy rehab. And that its hard to find tenants in the war zone where this house is located. The investor decides to sell, only to discover the property is worth quite a bit less than they owe. So they stuck. Either take a big loss all at once or bleed a little each month.
Now, I've just painted a horrible picture. The only way you know which of these pictures is true is to do your own due diligence. In the words of Ronald Reagan "trust but verify". Get on a plane and look with your own eyes. Learn what's a good rehab and what's lipstick on a pig. Investigate rents. Talk to people independent of the seller of the turnkey. Drive the area. At midnight. Investigate values in the area. Forget what's a good deal where you're from and learn what's a good deal where the property is.
Realize that even the very best turnkeys come with a price. You're paying to have someone do a bunch of the work for you. That's fine, if that's what you want to do. And if you're going to invest far away from where you live, part of that choice is to pay people to do some of the work for you. Just be sure you understand and are willing to pay that price.
- Investor · Willow Spring, NC · Member since 2013 · 788 posts · 285 votes13y
Turnkey properties can be a very good option for someone wanting to get into real estate. You need to be very careful when working with companies though. Check them out extensively. You are buying one of the most expensive things you will ever buy, you are taking their word on the quality of the house, the quality of any repairs, the quality of the tenant they placed and the return on investment they promise.
You will be paying premium on the house you purchase. Meaning, if you did it all yourself, you could get the same house, repairs and tenant for less money. But many people don't want the work, just the end product.
Many times the first year profits will look good because you purchased a rehabbed home with a tenant. But later when you have a vacancy, repairs to make etc, your returns will not be as good.
Again, talk to companies, talk to people like Ali Boone who invest this way. It is definitely an option, but check it all out before jumping in.
Good luck
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
There are absolutely turnkey companies out there that do exactly what you describe Jon Holdman. No question. And it's probably true that the majority of them do that. I've bought from one before and I know first-hand the repercussions of dealing with a company like that. Although in that one's defense, they started out great and full of quality but they grew so fast they couldn't keep up and everything went down hill.
Anyway, Anna, it is very true that you can get in a pickle if you don't have a working knowledge of what is involved in a rental property, at least to the extent of being able to discern between the good turnkey companies and the bad ones. A lot of this comes down to mentoring, talk to those who do it, find out who they have bought through and how happy they have been (and why, you want to make sure they even know enough to be able to convey an accurate assessment) and do your own due diligence.
I wrote an article about turnkey due diligence, maybe it will help give you an idea of what to look for and get you familiar with what goes on with those properties.
http://www.biggerpockets.com/renewsblog/2013/04/20/due-diligence-turnkey-property/Under my posts too there is another article I wrote that explains the markups on the properties, in case that is something you've been debating or thinking about, since it's a point so many people bring up.
I can always share with you offline which companies I've worked with that I liked and didn't like, and which ones (and why) I think are worth buying with.
- 13yAnna Z.San Francisco, CA · Member since 2013 · 9 posts · 3 votesOP
Thanks Ali Boone! I'll be sure to take a look at your article.
Jon Holdman, wow thanks for showing me the nasty side of turnkey properties. It is definitely best to do my own due diligence. Would you say turnkey properties are good for beginning investors? Or more experienced ones who doesn't want to do the work of finding PM, tenants, etc?
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes13y
Hi Anna Z.,
As the owner of a nationwide turnkey company, I've served investors since January 2004 with "turnkey" investment properties...
Let me be the first to tell you that there is NO formal definition of what "turnkey" means. You can talk to several different providers in my space, and they'll all give you a slightly different definition of what it means.
I take a broader definition to the term because I'm area agnostic and don't focus solely on the property itself.
In somewhat general terms, the definition of 'turnkey' as it relates to my business is a property that:
* is in a stable or growth market.
* is brand new or newly rehabbed with renters in mind.
* is priced at or below fair market value.
* is leased, or in the process of being leased.
* is under professional property management.
* is cash-flow positive (even with maximum leverage).As Jon Holdman points out, you must do your due diligence, and this brings up the major differentiating factor that separates a typical turnkey operator from a professional full-service turnkey provider. The latter will hold your hand (in a consultative manner) and help you conduct all your due diligence.
Keep things in perspective: the turnkey model is nothing new and has been around for a very long time. It's just a label that's thrown around. A better question to ask is "what can your company help me with and provide for me?"
I can write pages on this subject. Feel free to post any other questions you have.
Continued success!
- Real Estate Investor · scranton, PA · Member since 2010 · 174 posts · 14 votes13y
For my buyers...turnkey is as described. Either it's rehabbed and rented and managed (give us a check to buy and the manager will send you profit checks)
or sometimes it's an earlier phase. Like before rehab but with qualified team in place.
same idea. Sometimes cash savings for you (less markup for me) but a bit more time between you paying money and you getting money. Often a few more decisions this way too...a bit less seamless.
either way, we usually cap rate 12 to 20 pct after management, maintenance and vacancy pads
m
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes13y
Originally posted by Bryan H.:
But many people don't want the work, just the end product.Hey Bryan: This is exactly why the turnkey model exists and the reason I started the business long ago. I saw that investors were spending $20k to over $30k in real estate "bootcamps" and they still ended up wanting to buy something rent-ready, leased and cash-flowing. You can't blame them.
- Investor · Willow Spring, NC · Member since 2013 · 788 posts · 285 votes13y
Marco Santarelli Can't blame them at all. People just need to they know, as well as they can, who they are turning over their cash to. Many make promises they can't keep, oversell a property, tenant, investment etc and then some newbie is in trouble.
I checked out your site. At first pass, I like what you guys are selling. If I wasn't such a control freak, I'd consider checking you out some more.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes13y
I buy turnkey. If you do your diligence you can avoid the scams. And its about having the right team in the market. I cannot stress that enough. My view of turnkey is rehabbed with renter in place with lease. Now I know I am paying a premium for this. If the numbers on ROI still make sense, I have no problem paying a premium. I dont care if someone made a profit or even how much. I look at each deal on its own merits. I know many here are aghast that I am leaving money on the table and if only I bought at auction, did my own rehab and found my own tenants I could make so much more money. I dont care. I have a very high paying day job that I would rather spend my time on!
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
Just to be clear for the readers, Bryan H. you said "People just need to they know, as well as they can, who they are turning over their cash to". The reality is you are turning your money over to NO ONE. You are buying a property. Who is selling that property is 100% irrelevant. All that matters is:
1. You are fully aware of the actual condition of the property, like thoroughly aware.
2. All the paperwork is legal and the title is clear.
3. You have a handle on the property management once they take over.It is up to the buyer to determine all three of those things, in addition to the market analysis, location analysis, and whatever other things you want to check up on. Where the responsibility lies is in not listening to the seller and their assessment of those things. You the buyer, and only you, should determine of those things are up to par. If you determine they are, it is of no fault of the turnkey provider if any of that is wrong. The only slide room on that I'd say is in the property management, because you can't always tell how good a manager will be, but you can certainly fire any manager you want and hire another one.
Turnkey providers can lie all day long and it doesn't bother me because I do my due diligence on the property, not the seller. I could care less who the seller is.
(slight exaggeration there because typically bad sellers will have bad products and good sellers will have good products, but it's not always that cut and dry and if it's not, buy based on the property, not based on what a seller tells you)
- Investor · Willow Spring, NC · Member since 2013 · 788 posts · 285 votes13y
Ali Boone, I'd disagree that all you are buying is a property. Turnkey companies are selling a product and a service. They are selling you a rehabbed home, the tenant, the market, the property management etc. If all you wanted was a property, you can get that anywhere. If you want a rehabbed property, then go to rehabbers. But if you want everything, turnkey, then you buy from a turnkey company who does it all for you. You are typically paying retail or above for a turnkey property. If all you got was the property, then you are paying too much (IMO) I believe a turnkey property is worth the extra money only because of the service that comes with it.
Marco Santarelli Savannah Leigh, would you say you sell a property only, or do you also sell your services?
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
I agree Bryan H.. It'd be a ripoff if you got a property and no service. I think we are both arguing the same point, and on the same side about the point, just looking at it from different directions.
You are correct- as a buyer, you want to confirm the rehab (property quality), the tenant, the location/market, and the management company. If those things add up, you may just have a good deal in front of you.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
Anna Z. I think turnkey properties are neither good nor bad for new investors. If you learn the business, learn the market and do you due diligence, you can do OK. If you just jump in and buy with no legwork of your own, you stand a very good chance of getting fleeced. When I've looked at these I can usually spend 15-30 minutes researching the offered properties on the internet and discover that they're overpriced and the rent is overstated.
Very consistently sellers will understate expenses. Almost every MLS listing for an investment property has some "this cash flows" statement when all they really mean is "with a big down payment, the rent is slightly more than your PITI payment". That's "phony cash flow" and buying such a property, regardless of the source, will result in money being sucked out of your pocket.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes13y
Originally posted by Bryan H.:
I checked out your site. At first pass, I like what you guys are selling. If I wasn't such a control freak, I'd consider checking you out some more.I'm a control freak too -- we must be twins! ;-)
- Woodbridge, VA · Member since 2013 · 15 posts · 2 votes13y
Originally posted by Jon Holdman:
Anna Z. I think turnkey properties are neither good nor bad for new investors. If you learn the business, learn the market and do you due diligence, you can do OK.I agree, and this seems to be applicable to all REI strategies.
As far as finding a PM, I always prefer to first consider professionals who have a reputation that allows someone, in my network, to confidently refer them. Everyone I know who doesn't have a regular mechanic, and needs one, hears about my trusted mechanic. I get nothing in return. I just like knowing a professional is getting good business, and my friends are getting good service; win-win-win.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes13y
Originally posted by Bryan H.:
Would you say you sell a property only, or do you also sell your services?It's definitely both, and you can't separate the two. Some of the "value add" we provide our clients includes:
1. market research and selection,
2. due diligence assistance,
3. hand-holding and free consultation through the entire process,
4. and last but not least our one-year rent guarantees.Bryan you're correct in saying, "If you want everything, turnkey, then you buy from a turnkey company who does it all for you."
Continued success!
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Anna Z., Great question and, so far, some really great responses. About 3 years ago I posted a question on here asking how others define Turn-key. I Think Marco Santarelli did a really good job of explaining that there is no FORMAL definition of a Turn-Key investment. I think we all have an idea of what it should be, but every market can have multiple different companies with their own variation of a Turn-Key investment.
Jon Holdman I think I recall when i wrote that forum post, you were definitely commenting and in the same manner as on this post. You definitely paint the bleakest, shadiest and definitely most corrupt picture of what a Turn-Key investment can be and one that I think a large number of investors consider to be true. As Ali Boone pointed out, anyone who tries to provide a quality Turn-Key service and product has run up against this description and usually because it is an accurate portrayal of some companies. But not all! So I have to disagree with your description - an investors experience with Turn-Key does not have to be the way you described.
So far Marco and Ali both have given some great responses and they are definitely two voices that I respect because they do care about the outcomes of other investors. Here is my .02 cents on some of this.
There is no reason to rehash for Anna all of the advice that is on here. An investor who purchases a Turn-Key investment needs to be thoughtful and patient before purchasing. They need to spend time researching the market they are considering and then the companies they are considering doing business with. Solid Turn-key investments are available in any real estate cycle and in many different regions and cities across the country. You just have to remember not to rush and to get to know who you are doing business with.
Lastly, in my opinion, to answer Bryan H. - an investor buying a Turn-key investment property should never buy for the bells and whistles like guarantees. There are some great people out there that I have respect for that still use guarantees as a selling feature. Personally, I don't. This is not a knock on those companies, I simply believe that a property that has been renovated properly and has a tenant that has been properly vetted before being placed should not need a guarantee. Too often it is not the good companies that you have to look out for, but the bad companies that use guarantees to cover their poor business practice.
So, In my opinion, an investor is buying a mix of both a product and the service that comes with it. A great service with all the bells and whistles like guarantees, provided for a shoddy property with shoddy work is a horrible investment. When the guarantee is gone the economic basics will crumble. Same is true for a great property that comes with really bad service and poor property management. Both examples are going to end badly for an investor.
So investors should stay focused on buying in a market that they are comfortable with a company that they are comfortable and then they should be patient and make sure they buy a property that meets their needs. Forget all the glitter that accompanies properties and just focus on buying the right property for you from the right company. And BE Patient! There is no need to rush - spend your time getting to know who, where and why and you can have a great Turn-Key investment.
- Investor · Portland, OR · Member since 2012 · 266 posts · 128 votes13y
Anna Z.
I'm a small fish in a big sea, and I am yet to purchase a turnkey (but I hope to purchase my first in about 6-12 months), but I believe that turnkey is *not* a good first investment.
I only own a few, but I have learned a ton from owning and setting up rentals. I learned about PMs which is a huge point (fee structure, services and who provides them, ad strategy and resources, etc.) - and made some mistakes. I learned about market rent and rehabs - and made some mistakes. I learned about repairs and vacancies - and made some mistakes. I learned about price vs value vs worth and continue to make mistake mistakes. And I'm sure that I'll run into significant tenant problems here before too long...
Anyhow, after owning a rental for 5 years, I just now feel ready to do the due diligence to purchase a turnkey property. If I had tried to do so 5 years ago, I would have been in over my head, and likely fallen for one of the many shoddy companies.
With all of that said, I had the luxury of setting up the rentals in my home market. I see that you're in SF so maybe that's not a viable option for you.
*shrugs*
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
Chris Clothier my description is deliberately bleak. That's because after Ali's post, Anna Z. replied:
Maybe she didn't mean it that way, but that sure sounds like Dan Aykroyd sliding down the fire pole in Ghostbusters. And I did say "Ali's given you the positive side of the story, so I'm going to jump to the worst case." There are some bad actors in the turnkey space. If you're unaware, you can get seriously hurt. We've had posts here from people who have been hurt.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
Chris Clothier Excellent response. I agree on the guarantees, it's more often the not-so-hot companies that offer those. I would know! Had to pick a few pieces of those off the ground myself.
Jeremiah B. You make valid points about the things that one needs to be familiar with in order to properly assess a rental property investment, whether turnkey or not, it applies to all of them.
To go slightly against what you commented.... I always say that no one should invest outside their comfort level. Where the trick comes in is to expand your comfort level to allow for the investments you want. There are several ways to do that, and for you, your method of learning each individual step, over the course of 5 years, is what has now expanded your comfort level. That is perfectly fine and it's a very smart way to do it. What people need to realize tho is that is not the only way. Another way to do it is to find excellent mentors. Doing that will propel you forward tremendously and move you along faster, and smarter. If you have great mentors who are experts in the turnkey space, then there is no reason that you need to learn rehabbing tidbits, tenant tidbits, management tidbits, none of it. You would learn a very thorough working knowledge of those items, which I agree you need to know, but you don't have to experience all of them to gain that knowledge. There are other ways to learn it that are a lot faster and will let you get into investing faster so you are making returns starting sooner.
Perspective. You just spent 5 years gaining your knowledge in prep for buying a turnkey (more or less, for my example). I guarantee you that what you learned in that 5 years will not prevent all problems, and you will still have more experiences to learn from, unfortunately. It's how REI works, the lessons never stop. I started buying turnkeys 2 years ago, which is the same time I started learning turnkeys. I started the learning and the buying at the same time. Had I gone your route, I would not own the properties that I do, earned the cash flow that I have, and built the equity that I have in each of them (bought at a killer time in Atlanta so they all have equity already). There were mega growing pains, absolutely, and with one house in particular I lost out on a lot of cash flow because of the growing pains. However, I'm still ahead of where I would be had I not bought them at all, waiting to learn every nut and bolt. Had I learned all the nitty gritty before I bought, would I have avoided the problems I did have? Ehhh, maybe. But more likely, maybe not.
Point is, for the readers, there is no way to educate yourself on any aspect of this industry so well that you won't hit any obstacles once you start. I'd say shoot for a 60% level of education, find a great mentor, and dive in. Learn the other 40% as you go. You just can't learn 100%, ever, in REI without actually doing it. There's no way.
Officially my longest forum comment ever. Sorry Anna! You sorry you asked the question yet? If you haven't noticed, turnkeys are a very popular topic for debate. People either loathe them or love them.
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by Jon Holdman:
There are some bad actors in the turnkey space. If you're unaware, you can get seriously hurt. We've had posts here from people who have been hurt.I agree - it has been an easy term to use when marketing for buyers. And there are companies that have no intention of creating value for a buyer that use the term because they know it is a good marketing term. And, unfortunately, enough people do not do good due diligence when buying property out of town. It doesn't matter if they are using a Realtor or a Turn-key company - it is your purchase so you have to dig into details more closely than some have done.
I've always liked reading your posts - pretty straight forward and no waffle on your feelings - good or bad. I appreciate that.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes13y
Originally posted by Chris Clothier:
...it has been an easy term to use when marketing for buyers. And there are companies that have no intention of creating value for a buyer that use the term because they know it is a good marketing term.I agree Chris: It is because of this reason that I've tried to move away from using the term 'turnkey'. I've experimented with other terms like "fully managed", but at the end of the day, I haven't found a good replacement and investors seem to (sort-of) understand "turnkey" better than anything else I've come up with.
I think the solution for companies like yours and mine is going to be education. We have to help investors clearly understand what to look for and what to avoid. (This would also address Jon Holdman's point.)
- Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes13y
I have never seen "Turnkey" properties in my market as being transparent for what they are, just lipstick on a pig. Being in the high cost of the Northeast they don't cash flow very well.
IMO, to make it in this market is having a team of electrician, plumbers and HVAC people ready to help you just like you have a team of accountants, lawyers and realtors. The properties that give you appreciation and more importantly cash flow are ones you have to go in to rehab or "harden" for rentals.
Again this is for my market of CT and your results may vary. Sorry I have seen too many newbies get in over their heads in this game.
Like others stated, please do your own due diligence and understand what exactly are you looking for and capable of doing.
Enjoy!
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