Questions/worries about turnkey rental props

Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes

I've been thinking about turnkey properties and one thought keeps popping up in my mind and I wonder if it's valid...since these props come with a tenant already installed, have some made a side deal with the tenants to slide some money under the table and beef up the rents for the length of the lease? Obviously I will have to do my own due diligence on rental prices but some that I've seen seem higher than market, which is what makes me wonder.

Also, how long are you locked into their property management system typically? Some of the management fees seem on the high side as well.

0 Reply

64 views

Most Popular Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

13y

Same reason flippers don't keep the houses they buy, Shari. Buying and holding isn't their model. Turnkey providers are essentially flippers. And they use the money from one sale to buy another and keep rolling it over and over. They wouldn't have the capital, most wouldn't, to hold all of them. Just a different biz model.

I'm not sure the benefit of sliding money under the table to tenants. Not sure what that would get anyone. You can always ask a separate property manager their take on what a property would rent for and compare that to what is being charged.

Then lastly, the property managers work for you, not the other way around. You are free, or should be free, to ditch them anytime you want. I don't buy into that contract nonsense with terms on time. I fire managers if I don't like them, no question.

1 Reply

See this reply in the discussion

37 Replies

Jump to latestLatest

Sort by

Dean Letfus
Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
13y
It isn't difficult to dig out the sketchy operators. Get copies of leases and read them, know what market rents are and always have a back up PM company you can use. I also always tell any new PM that I reserve the right to exit their management if I am not happy so will not sign a fixed term PMA. I have never had one fight me over it.
Obviously different cities will be different, hope that helps.
0 Reply
Shari Posey
OP
Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
13y
I like that advice about not getting locked into a rental agreement.

Another concern I have had is why aren't the turnkey companies keeping these properties if they are so great? Or selling the best deals to their family and best friends?
0 Reply
Suzie B.
Greentown, IN · Member since 2012 · 140 posts · 18 votes
13y
I would do my research in the company and find out how long you have to use their management. What have others thought of them? See if you can talk to some current tenants about quality of management, etc.

As far as them not selling to family and friends... most of our family and friends think what we are doing as far as purchasing and managing rentals is interesting, but wouldn't want any part of it themselves... even if we managed the properties for them. Just a different approach to life and investing. I love it, it's too much risk for them.
0 Reply
Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Same reason flippers don't keep the houses they buy, Shari. Buying and holding isn't their model. Turnkey providers are essentially flippers. And they use the money from one sale to buy another and keep rolling it over and over. They wouldn't have the capital, most wouldn't, to hold all of them. Just a different biz model.

I'm not sure the benefit of sliding money under the table to tenants. Not sure what that would get anyone. You can always ask a separate property manager their take on what a property would rent for and compare that to what is being charged.

Then lastly, the property managers work for you, not the other way around. You are free, or should be free, to ditch them anytime you want. I don't buy into that contract nonsense with terms on time. I fire managers if I don't like them, no question.
1 Reply
Raymond B.
FL · Member since 2009 · 2k+ posts · 357 votes
13y
Ali Boone,
A friend of mine purchased a Condo, at the height of the Market, on the West Coast of Florida.
As part of the deal, it came with a tenant with a one year lease.
After the year had passed, my friend stopped receiving the "guaranteed" rent.
The developer took that tenant and put them in another Condo,and sold that Condo with the same guarantee.
My friend had to find another tenant, and because the rental market had collapsed, she had to drop the rent. The last I knew, she was trying to get the Bank to do a Short Sale on the Condo.

Raymond
0 Reply
Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Well Raymond B. you got me. That's crazy! I've never heard of that happening. But more so, I still don't even see the benefit. Oh well. But all of that only gives the same risk as any property with a tenant, there is a risk the tenant who lives there will move out (even on their own free will and not part of some scheme). I had a property in Atlanta, similar scenario, I had a rental guarantee that guaranteed I get paid every month for a year. Just a couple months shy of that year the tenants bounced, with the appliances, and there is was no way that property would rent for the same amount. Shame on my part for not doing more research on the rental value. I should have done it and then I would've known the risk.

Same for all other investors. Some problems are out of the owner's hands, but no one can be blamed unless it's the owner themselves.
0 Reply
Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
13y
Shari Posey: The reason (most) of the properties are not held by turnkey providers is because the properties are specifically acquired and renovated for the purposes of reselling them. Call it "flipping" if you want. The rehabber is making a profit for the cost and time of finding and rehabbing the property.

Also, many rehabbers do keep some of their properties for their own portfolio. They may "cherry pick" some of the properties, but at the end of the day they still need to produce high-quality investment properties otherwise investors will not want to purchase them.

Raymond B.: The correct way to have a tenant lease structured is to have the lease in the name of the tenant and the landlord/property manager. The lease should be at least for a 1-year term. Any rental guarantee should be offered directly by the developer/builder or as a separate third-party policy NOT tied to the tenant, but rather tied to the property (as we do it). It should never be offered by the property manager.

Suzie B. & Shari: You should not be "locked" into a lease agreement. Although your lease with the tenant is for a fixed term, there will likely be terms set within your management agreement with the manager. Outside of those terms, you are not "locked" into that agreement and you should be able to change managers at your discretion.

Continued success!
0 Reply
Shari Posey
OP
Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
13y
Marco, you really didn't address Raymond's experience. You can have a tenant lease for a year and then that tenant moves on his own into another of the developer's properties.

Bottom line is the rent must be market rent and not more than what any prop management company can find a renter to move into it for. I read on another thread that I should call 3-4 prop mg companies to get their take on rent price for the unit, which Ali alluded to as well.
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
13y
Shari Posey

http://www.biggerpockets.com/renewsblog/2013/04/09/dirty-truth-turn-key-real-estate/

Thoughts?
0 Reply
Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
13y
Hi Shari Posey,

Yes, I agree with you. The rent must be at or near market rent from the beginning. Inflated rents can be a sign of something wrong elsewhere, and one should never forecast using inflated future values.

And yes, it is a good idea to talk to several property managers for a better idea of what current markets rents are. There are also a few websites that show what others are asking/renting their properties for. A little due diligence goes can go a long way.
0 Reply
Phil Z.
Real Estate Broker · Orange, CT · Member since 2013 · 951 posts · 218 votes
13y
I would figure out what the rent should be and use that. What happens if that tenant leaves? .. then you have to get a new tenant at fair value. Consider it a temporary bonus.
1 Reply
Shari Posey
OP
Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
13y
Ben--Thanks for the link. Since I'm looking out of state, I am willing to pay a premium. I'm just not sure how much of one.
0 Reply
Lukasz K.
Banker · Las Vegas, NV · Member since 2013 · 13 posts · 1 vote
13y
Shari,

I was in a similar situation years back. My group purchased roughly 500k of real estate from a bulk seller with properties under land contract. Yea, they were cash flowing alright - most were of questionable condition. We ended up hanging on to them as long as possible to season the notes for sale and ran for the hills - we did make money.

Our problem was that our purchase was on a national level with properties spread all over and this organization had a team of realtors/PMs etc that would sell them for us. They performed as stated however we later realized these were *NOT* the assets nor headaches we wanted to deal with.

If you have significant capital to invest (I don't know your situation) a safe bet is partnering up with a hard money firm and becoming a transactional funder - kind of the same concept except you don't end up being a slumlord... Personally I run away from pre-packaged products and turn-key investments. If you want to stick with your original plan/question why not just find a good Realtor in your area that currently runs property management and move slow - acquire nice properties and play it safe staying within your metrics. In essence its kind of like your turn-key idea - except you get to go through the motions together and know EXACTLY what your getting.
0 Reply
Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
13y
Hi Shari -

Not sure if I can really add anything to your question that some of the other commenters have not already said, but your best bet is just due diligence until the point you are satisfied you are not going to be dealing with those issues. There are absolutely bad apples in the Turnkey business just like any other opportunity. Just because they are Turnkey opportunities does not mean there is any less due diligence and I would imaging that buying out of area requires even more research on your part before buying.

That said, I think the problem you are describing would be very, very rare. There are many reputable companies with very good reputations and plenty of information for you to find as a buyer at this point. I don't know them all, but I think you could find a good company in just about any major market where Turnkey investments are working.

best of luck -

Chris
Podcast Guest on Show #224
REI Nation4.577 Reviews
Website View Page
0 Reply
Shari Posey
OP
Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
13y
I own and manage in my own area. I would like to buy a couple of properties for cash in cheaper markets. I am more concerned with the credibility of a turnkey company. For some reason in the back of my mind I think of them as used-car salesmen. Funny because I know that's how a lot of people look at us Realtors.
1 Reply
Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
13y
Shari Posey:

Paying a "premium" is a relative term and a subjective number. Relative because you are not buying wholesale or rehabbing something yourself. Subjective because what you may consider a premium might be a fair or good deal to another. My opinion on the best way to measure this is my running your numbers on the property and decide if you're happy with the cash-flow and rates of return.

Chris Clothier is right about the creditability of the provider you're working with, as well as the rest of their team. I've been in this space since 2003 and I've seen some shady companies come and go, but like Chris said, those bad apples are somewhat rare.

Continued success!
0 Reply
Jeremiah B.
Investor · Portland, OR · Member since 2012 · 266 posts · 128 votes
13y
Marco Santarelli - thank you for jumping into these discussions. I dig your insight! I also dig your website, though I wish your business worked with newer homes :)

Following up on the premium question above: Comparing renovated houses in the same neighborhood, what is the premium paid for the convenience of a turnkey property. To say it another way, if a house would sell for 100K on the open market/MLS, what would that house's likely turnkey cost be? 103K? 108K?

I don't mean to knock the premium - having a (good) tenant/PM in-place is a real value and one worth a cost. I just don't know what cost the buyer is paying.

1 Reply
Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
13y
Hey Jeremiah B. -- Thanks very much for your compliments!

BTW - we used to offer new-construction homes exclusively, but when the housing market "crashed", builders stopped building and new-construction dried up overnight. That's changing again today and we offer new-construction in three difference markets.

Also following up on the "premium" question above: the "premium" should not be confused with paying above the fair market value (FMV). The "premium" is the price difference between buying it turnkey and buying a distressed property and fixing it up yourself. (This is the give-and-take of not doing all the work yourself.)

Using your example above, the property that would sell for $100k would still be purchased for $100k or less by an investor. Therefore, it does not imply paying above FMV. (The only time that might happen is in a heated market as we see in Phoenix today.)

Continued success!
0 Reply
Shari Posey
OP
Residential Real Estate Agent · Long Beach, CA · Member since 2008 · 432 posts · 63 votes
13y

Marco pointed out another thing I don't understand about the turnkey model. Why not take these gem properties and sell them on the MLS for more money? In my market, a seller is going to get top dollar from buyers on the MLS. (At least if the agent is exposing it and presenting all offers.) Is the only savings to both the seller and buyer of turnkey properties the real estate commissions?
0 Reply
Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
13y
Originally posted by Shari Posey:

Marco pointed out another thing I don't understand about the turnkey model. Why not take these gem properties and sell them on the MLS for more money? In my market, a seller is going to get top dollar from buyers on the MLS. (At least if the agent is exposing it and presenting all offers.) Is the only savings to both the seller and buyer of turnkey properties the real estate commissions?

Companies can have many reasons for not selling to owner occupants or through the MLS. Usually it has to do with the dynamics of the market and the demand from owner occupants in the neighborhood. The ability for buyers to get financing can also play into the decision. All of that is going to be market by market. I think it would also be wrong to assume that turnkey companies are not using every means possible to sell properties. Many probably are selling to owner occupants and taking advantage of the MLS to sell their homes.

You asked a question earlier in the forum about why turnkey vendors do not simply keep properties if they are such good deals. Many turnkey vendors that I know around the country do keep some properties themselves, but they have access to more properties than they could possibly keep. So they are both building their portfolios and selling properties for other investors' portfolios.
Podcast Guest on Show #224
REI Nation4.577 Reviews
Website View Page
0 Reply
Jake Kucheck
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
13y
This is the same principal that applies to lenders retaining servicing contracts on mortgages they originate and sell off.

If your model is to create lots of things and sell them, but those things require maintenance, then you might as well be the one to do the maintenance since the buyer of those things is likely not equipped to handle the maintenance (or at least not any better than you).

So, just like lenders will originate, bundle and sell off mortgages while retaining servicing (or at least, used to), turnkey companies will buy, fix up, and sell properties while retaining PM. Doesn't make them unscrupulous, just makes it a good business model.

The same concept applies to the pool installation company, the HVAC installation company, etc...
0 Reply
Jake Kucheck
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
13y
BTW the developer from Raymond B.'s story sounds like a genius!
0 Reply
Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Again, it's a different business model. The turnkey providers could list on the MLS and sell to primary homebuyers, probably for more money if they wanted, but the problem with primary homebuyers is they need a lot of hand-holding, it's not about the numbers, it's about emotions, they can take forever, they all usually need conventional financing which takes forever, etc. Versus investors who are numbers-driven, make decisions a lot faster, less hand-holding, and a lot of them pay cash (not all) so the providers are able to sell through multiple houses more in the same period of time than with primary homebuyers and with a fraction of the hand-holding headaches.

As far as the markups, I wrote an article about my take on them0
http://www.biggerpockets.com/renewsblog/2013/02/16/turnkey/
0 Reply
Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
Ali Boone are the only turnkey providers you recommend large companies? What if I wanted to be a turnkey provider? Would a sole individual (or a partnership) be a good provider of turnkey properties?

From what I'm hearing you say, all a turnkey provider does is:
- Buy the property
- Rehab it
- Get a tenant and a lease in place
- Provide property management
- Sell the property to an investor who then receives the rental income and pays the expenses.

Is this accurate?
Podcast Guest on Show #29
0 Reply
Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
No Dawn A. they aren't only big companies. Anyone can do it. I know a couple mom-n-pop size turnkey providers.

Yep, that's pretty much what they do. But a couple significant things that turnkey providers are exceptionally good at (or should be) are 1. finding deals, more specifically being able to negotiate insanely good deals so as to maximize their profits later, and 2. being able to rehab thoroughly and to a nice quality but very cost effectively. If you have to pay retail for paint supplies or whatever supplies, you aren't going to make as much. The big boys do so much volume that they are able to get everything cheaper.

So for both finding the deals and rehabbing, you want to have some kind of upper hand on cost. Otherwise your margins aren't going to be all that great and it may be more of a pain. The turnkey providers move hard and fast, but need the power to do that.

I would talk to Chris Clothier. He knows better than I do exactly what goes into running a turnkey company, and he does an amazing job at it.
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.