Is Turn Key a Good Idea?

18 Replies

If I could have a dollar for every time this question was asked...

To be frank, I had always answered - No. However, upon closer examination the answer is - it depends. Depends on where, how, and with whom...

Much needs to be said, and I've written a couple of articles on JustAskBenWhy. If you are interested in TK, please check out the article here.

Ben

This may be one of the oldest arguments on Bigger Pockets; most are either one way or the other.  It is good to see someone coming around to the idea.  Turnkey is a model that is for investors who do not have time or want to be involved.  For all the reasons why individuals are anti-turnkey (over inflated #'s, bad rehab, the way the area is sold vs. the reality of the area, lack of market knowledge, overpaying) can all be avoided through due diligence, studying and visiting the market and aligning yourself with an excellent team.  But if the one reason someone does not like turnkey is the profit, then I think that reason is short sighted as individuals who have to hire contractors to renovate their distressed purchases will pay a profit margin to the contractor very close to the profit margin of a Turnkey provider.  In your example, the rehab is $12,000; I would say on average, that is not enough.  That sounds like a lipstick on the pig type rehab. But using your scenario, any decent contractor that does good work, on time and on budget will mark that up 40% on a job that small.  Profit $4,800.  Sure, you can find a contractor to do that for 20% markup, but those contractors are like buying a C class deal. High risk, high reward, tons of micro management, especially in today's market where home renovation, rental home renovation and new construction are slammed to the point of turning down business (at least that is how it is in Memphis).  My good friends who are contractors are booked until the end of the year.  Back to your scenario, with the 40% markup, the difference between turnkey profit and contractor markup is $5,200.  I cant speak for all turnkey providers, but we dont charge for the first tenant placement since I own the property management company.  That saves $800 in your example.  We offer certain warranties that reduces first year maintenance cost to very little. Lets just call that a $600 value.  Now the difference between doing it yourself and going turnkey is $4,000.  That seems like a fair premium to eliminate the risk attempting to renovate a home as a novice.  A couple of mistakes during a rehab can cost twice as much to undo.  Sure painting, laying flooring and installing light fixtures are easy.  But what about your contractor installing a 3 ton AC unit when their is a 2 ton furnace in place and now you have a mold problem to fix on top of having to install the right size AC unit.

But none the less, it is good to hear that Ben is slowly coming around to the idea!!

Originally posted by @Alex Craig :

This may be one of the oldest arguments on Bigger Pockets; most are either one way or the other.  It is good to see someone coming around to the idea.  Turnkey is a model that is for investors who do not have time or want to be involved.  For all the reasons why individuals are anti-turnkey (over inflated #'s, bad rehab, the way the area is sold vs. the reality of the area, lack of market knowledge, overpaying) can all be avoided through due diligence, studying and visiting the market and aligning yourself with an excellent team.  But if the one reason someone does not like turnkey is the profit, then I think that reason is short sighted as individuals who have to hire contractors to renovate their distressed purchases will pay a profit margin to the contractor very close to the profit margin of a Turnkey provider.  In your example, the rehab is $12,000; I would say on average, that is not enough.  That sounds like a lipstick on the pig type rehab. But using your scenario, any decent contractor that does good work, on time and on budget will mark that up 40% on a job that small.  Profit $4,800.  Sure, you can find a contractor to do that for 20% markup, but those contractors are like buying a C class deal. High risk, high reward, tons of micro management, especially in today's market where home renovation, rental home renovation and new construction are slammed to the point of turning down business (at least that is how it is in Memphis).  My good friends who are contractors are booked until the end of the year.  Back to your scenario, with the 40% markup, the difference between turnkey profit and contractor markup is $5,200.  I cant speak for all turnkey providers, but we dont charge for the first tenant placement since I own the property management company.  That saves $800 in your example.  We offer certain warranties that reduces first year maintenance cost to very little. Lets just call that a $600 value.  Now the difference between doing it yourself and going turnkey is $4,000.  That seems like a fair premium to eliminate the risk attempting to renovate a home as a novice.  A couple of mistakes during a rehab can cost twice as much to undo.  Sure painting, laying flooring and installing light fixtures are easy.  But what about your contractor installing a 3 ton AC unit when their is a 2 ton furnace in place and now you have a mold problem to fix on top of having to install the right size AC unit.

But none the less, it is good to hear that Ben is slowly coming around to the idea!!

 Hahah - well, I wouldn't say I'm coming around to it. Wait for part 2 in the series, which comes out later this week :)

Fair enough, but at least consider what I have laid out as most people do not think of going around turnkey as a huge risk to take on if you don't know what you are doing while rehabbing a house.  Things are much different actually doing it then what is seen on TLC or HG Network.

Originally posted by @Alex Craig :

This may be one of the oldest arguments on Bigger Pockets; most are either one way or the other.  It is good to see someone coming around to the idea.  Turnkey is a model that is for investors who do not have time or want to be involved.  For all the reasons why individuals are anti-turnkey (over inflated #'s, bad rehab, the way the area is sold vs. the reality of the area, lack of market knowledge, overpaying) can all be avoided through due diligence, studying and visiting the market and aligning yourself with an excellent team.  But if the one reason someone does not like turnkey is the profit, then I think that reason is short sighted as individuals who have to hire contractors to renovate their distressed purchases will pay a profit margin to the contractor very close to the profit margin of a Turnkey provider.  In your example, the rehab is $12,000; I would say on average, that is not enough.  That sounds like a lipstick on the pig type rehab. But using your scenario, any decent contractor that does good work, on time and on budget will mark that up 40% on a job that small.  Profit $4,800.  Sure, you can find a contractor to do that for 20% markup, but those contractors are like buying a C class deal. High risk, high reward, tons of micro management, especially in today's market where home renovation, rental home renovation and new construction are slammed to the point of turning down business (at least that is how it is in Memphis).  My good friends who are contractors are booked until the end of the year.  Back to your scenario, with the 40% markup, the difference between turnkey profit and contractor markup is $5,200.  I cant speak for all turnkey providers, but we dont charge for the first tenant placement since I own the property management company.  That saves $800 in your example.  We offer certain warranties that reduces first year maintenance cost to very little. Lets just call that a $600 value.  Now the difference between doing it yourself and going turnkey is $4,000.  That seems like a fair premium to eliminate the risk attempting to renovate a home as a novice.  A couple of mistakes during a rehab can cost twice as much to undo.  Sure painting, laying flooring and installing light fixtures are easy.  But what about your contractor installing a 3 ton AC unit when their is a 2 ton furnace in place and now you have a mold problem to fix on top of having to install the right size AC unit.

But none the less, it is good to hear that Ben is slowly coming around to the idea!!

 Hahah - well, I wouldn't say I'm coming around to it. Wait for part 2 in the series, which comes out later this week :)

@Ben Leybovich  not all turnkey providers sell the house with tenants in place.  Most good providers who have been in the biz for a while will have more buyers then houses, thus turn time from acquisition to sell is quicker.  My turn cycle is down from 101 days last year to 75 this year.  It is not always possible to buy, renovate, place tenant and sell within that time frame.  Because we are holding the property for shorter amounts of time, we can factor that into our price as holding cost is smaller.

My question is, in your scenario how is buying outside of turnkey (assuming still use of a property mgr)  any different then buying turnkey in respect to cost, maintenance and risk?  Your paragraph "Expense of a Turnkey Rental" is a expense whether or not it is Turnkey or non-Turnkey.  Now if your assumption is that all turnkey providers are doing the bare minimum, then that is not a fair assumption.  We spend almost 2x that on average. As for placing a tenant just to have income coming in for the PM company could happen whether or not it is turnkey or not if a PM is used.

Bottom line, I thin your scenario better points out the bottom feeder turnkey provider. These are the ones making guarantees such as "tenant on day 1", promising awesome returns on a $45,000 property which we know is not true. These bottom feeders area also known for rehabbing to the bare minimum to make #'s look great and ignore obvious deferred maintenance b/c they can't sell their properties on services, reputation, partnerships, experience, great team, etc.  A savy investor should be able to see through those and new investors need to understand "if it looks to good to be true, it probably is."

While your blog is good "buyers beware" and informative to new investors needing guidance, it does not represent the Turnkey Companies that have been in business for several years.  

@Alex Craig - spoken like a TK guy lol:)

Alex - if you are buying 80'es sticks that rent for $1,200+ then 2 things are true:

1. CapEx and R&M will be lower and easier to manage.

2. Economic losses associated with tenants will be lower.

In this case I'll believe you enough to at least look at your numbers.

If you are renting 60'es sticks or older for $700-$800 or less, there's just no money there. It's just numbers, Alex. That's not enough rent to underwrite the losses over a reasonable hold period; specifically not if the first 10% of gross goes to TK provider. 

@Ben Leybovich

I don't think I am disagreeing with you if I understand your terms correctly.

Buy a home in the 80's (thousand I assume) that rents for $1,200, then the overall experience is better.  But buying a home in the 60's (thousands I assume) and renting in the $700 and $800 is not going to financially work out.  I agree 100% and I think any reputable turnkey provider would agree.  While the #'s look awesome on the $700 to $800 rent, several factors over a long period of time will work against you; namely the tenant.

So we agree on that.  Right?

You article is pointing pitfalls to watch out for, right? Your response to my follow up comment is focused on price points and not the model itself and remember, we agree on your follow up comment to me.  What about the turnkey provider selling a home in "A" class areas in nice middle class suburbs with solid schools or "B" class areas that people like to live with more home owners then renters and still large presence of owner occupied sales.

Couple of questions though about your article.  Promise I am not trying to be a wiseguy and remember, I agree with your analysis of properties with low price points; I am clarifying that you are only pointing out turnkey providers operating in the low income housing sector of the business.

1) You have a paragraph named "The Expenses of a Turn-Key Rental".  What is the difference of expenses of a property whether or not it is bought turnkey or non-turnkey, regardless of the price point? I would say cost are lower going turnkey if bought from a good provider who allows his clients to pick any inspector and that provider fixes 95% of the things on the report.  Wouldn't you agree?  The other options is someone doing the work themselves and if that individual is not in the business, they open up opportunities to make major mistakes that could cost 2x as much to fix or pay a contractor whose profit is not to far off from the turnkey providers profit who does not use contractor.  Who would you rather have your profit? The contractor who may disappear with your money or the Turnkey provider who is managing your home?

2) You mention "you are taking your money out of California, Vancouver, or New York and bringing it to the Mid-West to buy dilapidated housing in a place which is loosing jobs and population, what are you really doing…think about it?"  What if the house was not dilapidated and the market was adding jobs?  Wouldn't your blog want to be specific to that so that you don't scare people out of going turnkey into markets or areas within markets that where the houses are not run down and values are going up? What if the house looked like the link below and that house was located in the Top 100 places to live in the United States?  Or what is the house located in the 2nd link was already rented for $1,150 in the # 1 market to live in with population under 1 million people by Kiplinger's magazine?

https://cbproperties.box.com/s/vsxricz1pyz2k2r6z15...

https://cbproperties.box.com/s/kg80661txg7hzpw0xkz...

Like I mentioned, I am not trying to be a wiseguy. I like reading well written, interesting articles and having friendly debates.  Don't take it any different.  Some people get their feathers ruffled so easy on these forums.  In my opinion (that one on asked for)

I still think your article should clarify that you are specifically talking about bottom feeder turnkey providers buying in bad parts of town, doing sub par rehabs and selling deals based on #'s along and not service, rehab of home that could reduce vacancy and maintenance, team, etc.  Those providers are not running a sustainable business; they are just house flippers and real estate hucksters. Big difference between that and TK companies that have been around for several years and have a clear business plan to stay in the business for several more.

Respectfully,

Alex


No - 80'es refers to 1980+. 80es wiring / plumbing / foundation, etc.

A Class means 7 year old construction. No such thing as TK A class :)

B Class in Memphis is going to cost $120,000+. 1980 +. Sure - this is the space where Memphis Invest, if I understand correctly, @Chris Clothier , operates. And this is why they are able to achieve stable returns.

Is that the size of it, Chris?

Okay, I gotta say I really loved your article on this, Ben.  But I'm also a fan of your $30K pig series and think your article with Serge Shukat about expenses was probably the best blog post ever on BP.  I really don't think you can ever say enough on this topic because people just won't listen and ignore the realities of expenses.

Yep, that's the one.  It really was an excellent piece that was well-researched and well-reasoned.  Despite the uproar, I failed to see any criticism that rose above the level of "nuh uh."  Most critics also seemed to completely miss the point of the article.  Finally, I did not see any critic who had actually owned the properties that you criticize for any length of time that would have allowed them to speak intelligently about them.  (Read 8-10 years).  Anyway, not trying to hijack the thread.  Just wanted to say I thought your recent article was a nice addition to the series.

Originally posted by @Ben Leybovich :

No - 80'es refers to 1980+. 80es wiring / plumbing / foundation, etc.

A Class means 7 year old construction. No such thing as TK A class :)

B Class in Memphis is going to cost $120,000+. 1980 +. Sure - this is the space where Memphis Invest, if I understand correctly, @Chris Clothier, operates. And this is why they are able to achieve stable returns.

Is that the size of it, Chris?

 Not entirely.  First, there is such a thing as Class A Turnkey properties.  We have built close to 40 properties in  in-fill neighborhoods from the ground up and investors have purchased those properties for the purpose of long-term buy & hold.  They are absolutely A Class properties in great neighborhoods and our price points on those are between $160,000 and $189,000.  We've even begun working more and more opportunities in Germantown, which is absolutely A Class. There is a lot of demand from renters in these price points.

As for the properties you described as B Class, I would say that both Alex (as the owner of his company) and my family (as owners of ours) as well as at least one other vendor in Memphis all migrated up the chain to find better properties in better areas of town.  Do they all fit your definition, probably not, but a large majority - by a wide margin -  of what we sell in Memphis does.  Dallas and Houston are almost 100% your definition of B and up.  

I am going to agree with @Alex Craig that you are spot on with your criticism of Turnkey as it applies to those companies that use it simply as a marketing term to attract eyeballs to their subpar properties, management and operations.  There are a ton of choices for buyers today and much of what is marketed as Turnkey can be described as high-risk crap.  Here in Memphis there is crap marketed everyday that fits the warning label of your articles.  And to Alex's point, it is not just the house that is crap, but the company or operator themselves.  They have no way of being able to deliver a consistent experience for the investor.  They don;t have the business experience, acumen or team so the investor loses quite often.

Lastly Ben, the biggest risk for a buyer today wanting to purchase Turnkey is that there is no definition.  It has become a buzzword with no meaning.  Buyers have to be so cautious and really do their due diligence because it is difficult to tell companies apart from their marketing.  Today more and more companies are simply copying the marketing of companies who are bigger or more established and the buyer has no idea of what distinguishes the good from the bad.  Buyers Just have to be super cautious if they are going to purchase Turnkey.

Hi there,

From what I've seen in my market here in Germantown turnkey properties in popular Metropolitan suburbs have a tendency to be overpriced and to potentially have some real pitfalls. The best deals I've seen here have 1-3% COC return once all expenses and average vacancy rates are taken into consideration. It's pretty pathetic. You're better off putting in the work to find a good deal.


A Class means 7 year old construction. No such thing as TK A class :)

So I guess then all the 1920's and 30's homes in my neighborhood that sell for over $1.5M are just C and D class properties then? Damn. Wish I had known before I bought here!

Originally posted by @Anish Tolia :

A Class means 7 year old construction. No such thing as TK A class :)

So I guess then all the 1920's and 30's homes in my neighborhood that sell for over $1.5M are just C and D class properties then? Damn. Wish I had known before I bought here!

 Anish - I've read enough of you to know that you are a smart dude...what gives...?!

In a land-locked location exhibiting economic growth pressures, the equity appreciation warrants a complete re-build (the right way) of a 1920 house. All of the systems can be updated, and it's money very well spent. 

This isn't the case in Ohio, Indiana, Kentucky, and Michigan whereby a TK 1920'es house hasn't added positive value in 50 years. CapEx in a house like this is akin to throwing good money after bad, which is why it doesn't get done. You know this is what I meant, Anish - why are you being smart with me?

Originally posted by @Chris Clothier :
Originally posted by @Ben Leybovich:

No - 80'es refers to 1980+. 80es wiring / plumbing / foundation, etc.

A Class means 7 year old construction. No such thing as TK A class :)

B Class in Memphis is going to cost $120,000+. 1980 +. Sure - this is the space where Memphis Invest, if I understand correctly, @Chris Clothier, operates. And this is why they are able to achieve stable returns.

Is that the size of it, Chris?

 Not entirely.  First, there is such a thing as Class A Turnkey properties.  We have built close to 40 properties in  in-fill neighborhoods from the ground up and investors have purchased those properties for the purpose of long-term buy & hold.  They are absolutely A Class properties in great neighborhoods and our price points on those are between $160,000 and $189,000.  We've even begun working more and more opportunities in Germantown, which is absolutely A Class. There is a lot of demand from renters in these price points.

As for the properties you described as B Class, I would say that both Alex (as the owner of his company) and my family (as owners of ours) as well as at least one other vendor in Memphis all migrated up the chain to find better properties in better areas of town.  Do they all fit your definition, probably not, but a large majority - by a wide margin -  of what we sell in Memphis does.  Dallas and Houston are almost 100% your definition of B and up.  

I am going to agree with @Alex Craig that you are spot on with your criticism of Turnkey as it applies to those companies that use it simply as a marketing term to attract eyeballs to their subpar properties, management and operations.  There are a ton of choices for buyers today and much of what is marketed as Turnkey can be described as high-risk crap.  Here in Memphis there is crap marketed everyday that fits the warning label of your articles.  And to Alex's point, it is not just the house that is crap, but the company or operator themselves.  They have no way of being able to deliver a consistent experience for the investor.  They don;t have the business experience, acumen or team so the investor loses quite often.

Lastly Ben, the biggest risk for a buyer today wanting to purchase Turnkey is that there is no definition.  It has become a buzzword with no meaning.  Buyers have to be so cautious and really do their due diligence because it is difficult to tell companies apart from their marketing.  Today more and more companies are simply copying the marketing of companies who are bigger or more established and the buyer has no idea of what distinguishes the good from the bad.  Buyers Just have to be super cautious if they are going to purchase Turnkey.

 Haha - and that is why when the time comes that I can't find the strength to invest for myself and need to become more passive, you'll get a check from me. I like the asset class you are in. And while you'll never convince me that TK makes money, I am pretty sure that with you I wouldn't loose money. And when this becomes the focus, I'll look you up :)

@Ben Leybovich Of course I know what you meant. Its just that this A,B, C classification is really subjective and depends on the location. As you said, in a high economic growth area with no land, and no new construction, a 20's house can be A+. But even in midwest areas like parts of Chicago, many older homes are worth a lot of money. Neighborhood more than age of home determines its classification. And then in detroit you have mansions that are worth a Big Mac plus back taxes. Maybe it came off a bit snarky but I was just trying to make that point in a funny way.

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