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 Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes13y
Jon Holdman next time you can just leave the "n" out :)
"turnkey" more or less = "turnkey"
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by Steve Babiak:
Jon Holdman next time you can just leave the "n" out :)"turnkey" more or less = "turnkey"
BOOOOOOO......
Steve that jokes was bad the first time you told it! :-)
I'm going to have to start holding you accountable for your material and get you to develop some new stuff.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes13y
I'll go with the term turnkey for now. I've bought them in the past and done ok. I've also sold them in the past and need to add one twist. I believe all the posts have talked about homes in some stage of rehab. Approximately half of my sold homes were rehabbed (in some stage). The other half were brand new builts I had built in a subdivision I personally own in. Many advantages to new over rehabbed.
You don't have to worry about quality or person that did the rehab. The new home comes with builders warranty and a Builder behind the home in case of problems. This doesn't exist in rehabs. Very little in major costs/repairs for some time. Not so with rehabbed, where many are lipstick on a pig.
Management is also a non issue in my case. The mgmt team was trained by me, lives in SAME subdivision and has added rentals to his own portfolio in same subdivision.
It is easy to check out mgmt, builder and other items since their are existing homes, owners and investors for input. Easy to get review from previous investors as to how it is working out for them in same location. Rich - SFR Investor · Los Angeles, CA · Member since 2013 · 134 posts · 16 votes13y
From Ali Boone
The biggest issue I see with turnkeys is precisely this. Turnkeys are a package deal, and more often than not, pitched to new investors who can't yet gauge their comfort levels. Too often, turnkeys seem to come with such great reassurances.
You'll rehab it for me? (but you use my money and I can't control the quality)
You'll rent it out for me? (but I can't vet the tenant)
You'll even sell it to me with equity built in? (but it was your appraiser who came by)
By the way, I found your comments really insightful on breaking down a number of metros in response to the article "How to Invest in Real Estate When Everything Is Too Expensive"
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by Ryan Logsdon:
From Ali Boone
The biggest issue I see with turnkeys is precisely this. Turnkeys are a package deal, and more often than not, pitched to new investors who can't yet gauge their comfort levels. Too often, turnkeys seem to come with such great reassurances.
You'll rehab it for me? (but you use my money and I can't control the quality)
You'll rent it out for me? (but I can't vet the tenant)
You'll even sell it to me with equity built in? (but it was your appraiser who came by)
By the way, I found your comments really insightful on breaking down a number of metros in response to the article "How to Invest in Real Estate When Everything Is Too Expensive"
Ryan -
Great post. It brings up issues that good, solid turn-key investment companies have been fighting for several years and really highlights the fact that there is no definition for what turn-key investment is AND that there is still a stigma attached tot he practice as a whole by some very poor companies.
I can only answer from my companies view point, but I can tell you that there are many many companies out there in all parts of the country that treat their business in the same way.
I'm sure a vast majority of my clients would take exception to the idea that someone would say they were pitched a product and could not gauge their comfort level. Especially the accredited clients! We all know that there are investors who buy things without doing their complete due diligence. But I always like to caution in a forum like this not to jump to the conclusion that every turn-key investor is unsophisticated or that every company is simply pitching for whoever will bite.
As far as rehab goes, if an investor is putting in the money, then in my opinion (and It think this is shared by every quality turn-key company out there) that is not a turn-key property and an investor should absolutely be wary. That is nothing more than buying a property passively and hiring someone to do the work where you pay the bills.
With regards to rent, an investor who wants to vet each tenant should probably be looking for an investment where they can exercise that control. My advice would be to invest closer to home and self manage. The process of a turn-key investment should be no different than an investor hiring a management company. If they can exhibit the fact that they have good judgement and solid history as a management company, then you should not question their ability. If they cannot give you that feeling, then turn-key or not, do not buy it. But that is the nature of a turn-key investment, you have to turn over the decisions and have a level of trust in that business.
Lastly, if you are buying a property from a turn-key vendor for all cash, then you should hire a 3rd party inspector and appraiser yourself. If a turn-key vendor does not allow that, then you should absolutely walk from a deal. If you are buying a property with a traditional mortgage, then the mortgage company uses an AMC to hire an independent appraiser. If a buyer thinks there is something going on that is not up to ethical standards, then there is no way they should purchase the property.
I really appreciated your response, but I think it just shows how poorly Turn-key is viewed by some people....until they meet really high quality companies operated by good business people. They do exist!
- SFR Investor · Los Angeles, CA · Member since 2013 · 134 posts · 16 votes13y
Chris Clothier, thanks for taking your time to write such a detailed counter. That's exactly why I joined BP, to meet & share ideas with people like yourself who take real pride in their RE investments and their network!
- 13yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Hey Ryan Logsdon, I am a HUGE believer in this site because the power is not in the site itself but in the engagement from such a great group of individuals who know their stuff! Im sure you will find some really, really good people to network with on this site.
Best of luck!
Chris
- Seattle, WA · Member since 2013 · 39 posts · 2 votes13y
I think Turnkey's can be a great investment for starters as most of the work is done for you. But I always tell my clients that buy from us that even with turnkeys, the risk of repairs and maintenance or property evictions are possible and they are free to choose their own management companies.
The difference between a turnkey and investing in a fixer upper is that the work is done for you and you pay a slightly higher price for that. Aside from that nothing really changes than what you would be doing on your own.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes13y
Howdy Ryan Logsdon. You bet, those are absolutely legitimate concerns and things you should be worried about when buying a turnkey. Luckily tho, there are easy ways to mitigate those risks.
Rehab: they don't use your money, they rehab it before you have any money on the table at all (although I have heard of companies who do use your money, but I haven't heard of that nor would I go for that). When you put a property under contract, you have the right to hire a 3rd party home inspector (the 3rd party part of that is key because you want someone with no affiliation or bias towards the turnkey provider so you can get an accurate, real assessment of the property) to look over the property. That way you are confident in the quality of it. If it's not up to par, you bounce on the property and move to another.
Tenant: As part of your due diligence, ask or information on the tenant who has been placed and if you don't like what you see, bounce on the property. If there isn't a tenant yet and they are looking for one, ask to be the final approval on anyone they find. You don't have to close on the property before it has a tenant, so you can know exactly who is in there before you close. You can also talk to the PM and find out their criteria for letting someone move in.
Equity: Equity is never a sure thing no matter who does an appraisal or an assessment. And it shouldn't be why you buy a house anyway. But if you do want to have a confident feel for how much equity is there, hire an RE agent to run a CMA (comparative market analysis). That 3rd party, again with the 3rd party, agent will give you a value regardless of what the seller says it is.
You're right that you are buying a package deal, but you don't have to always keep it as a package. You can fire the PM that comes with it on day 2 and hire your own. You own the house. You can get rid of tenants, you can do whatever you want.
I wrote an article about turnkey due diligence which covers where the real risks are in turnkey buys and how to mitigate those risks. Check it out-
http://www.biggerpockets.com/renewsblog/2013/04/20/due-diligence-turnkey-property/ - SFR Investor · Los Angeles, CA · Member since 2013 · 134 posts · 16 votes13y
Thanks a lot, Ali Boone!
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes13y
From my own personal experience, I have to disagree with a couple of posters that stated the turnkey properties are normally sold and pitched to new investors. In my case on the "turnkey" properties I mentioned above, exactly 100% went to investors who already owned multiple rental properties. This was over 20 purchasers. Maybe I just run in different circles than others. One owned 11 before adding one of mine. Two of the purchasers are Bp members.
p.s. Maybe it was because of concessions or the price/rent ratio.
- Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes13y
Originally posted by Rich Weese:
From my own personal experience, I have to disagree with a couple of posters that stated the turnkey properties are normally sold and pitched to new investors. In my case on the "turnkey" properties I mentioned above, exactly 100% went to investors who already owned multiple rental properties. This was over 20 purchasers. Maybe I just run in different circles than others. One owned 11 before adding one of mine. Two of the purchasers are Bp members.You're absolutely right Rich:
Turnkey investments are for ANYONE. Half of our clients are seasoned investors with multiple properties. Some are wealthy individuals. We have two clients out of Los Angeles that purchased nine (9) properties EACH in the mid-west, one after the other, because of the value and convenience.
So I have to agree that they are not just sold to "new" investors.
- Fukuoka, Fukuoka · Member since 2012 · 148 posts · 29 votes13y
Second what Marco Santarelli said, above - we're complete turnkey (including management and exit strategies, all done in-house) - and the vast majority of our clients are diversely hedged all over the world - they wouldn't dream of trying to manage anything themselves - they do bottom lines and executive calls, and are quite happy to remain in this position, entrusting the ongoing sourcing, facilitating and managing of deals to reliable contractors like ourselves.
Takes all sorts, I don't think there are any concrete rules about who uses turnkey and why.
- Real Estate Investor · Boynton Beach, FL · Member since 2014 · 8 posts · 0 votes12y
I think this is the first time I've literally become out of breath reading a forum post.
Thanks for your responses....
As a prospective "turnkey" client/customer I definitely have my questions/concerns
I understand that turnkey companies are in the business of providing a service and part of that value cycle is making money.
I have no problem paying a little more for convenience/expertise
I value my time and would love to partner with quality turnkey company.
I guess the hard part is finding the good companies through all the junk.
@Ali Boone I'll definitely reach out to you soon. I'd like to hear your opinions and recommendations
Frank
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