Turnkey Real Estate Investing

137 Replies

Hey BP!

So In my continued research into real estate investing, I came across Turnkey Investing. They offer a lot of positives for the investor who is just starting out or is looking into part-time investing. I know active investing can be very time consuming but the "all in" costs are bit lower. My question is Turnkey Investing a positive strategy for part-time investors who may not have the full resources to start out?

Be ready for a debate to break out!

But for myself...I'm all in favor of it. I started out with turnkeys for myself, and one of the reasons I love them is they offer a lot of built-in expertise that I would never have going at it alone (assuming you work with a good turnkey provider, at least). I think having the hard stuff done for you (rehabbing, etc.), it lets you focus on learning the fundamentals of investing. Learning those will set you up huge for success in other realms later. When you take everything on yourself, you have to learn everything (which is a lot) so inevitably you may miss a lot.

Many will contend, but I think they are great! I wouldn't have done it any other way for my own purchases.

@Dexter Wallace - Like @Ali Boone said, this is a highly debated topic.  On the top right is a search bar and if you type in "turnkey" you will see hundreds of threads, blogs, ect.

I feel that for some people it can be the right investment opportunity.  There are many buyers who have had great experiences and who continue to buy.  There are also buyers who have had bad experiences.  If you do your research/due diligence and your expectations are realistic then there is a good chance you will have a positive experience.  

There are hundreds of providers, make sure you find one that you trust.  

Thank you guys for the advice. I know people will have differences of opinions. I would love to be able to do active investing but the amount of resources right away it seems like this could be a good strategy to start out until you gain more experience 

@Dexter Wallace I'm in the same boat as you. I've been researching TK investments for the past few months. I fall on the side with Ali in that I'm still learning a lot and think it would be great to have a bit more hand-holding going through the first purchase with a provider that is well respected and knows what they are doing. I also live in a market right now that is probably slightly over-valued so out-of-area investing seems like a good choice for me.

@Dexter Wallace

There is a lot of information for and against TK providers on BP.  If it was a model that did not work, then so many people would not be doing it and there are people on BP sharing their positive experiences.  It is simply a matter if it fits what you want.  I summed up several forum post I made and put it in a blog about what to look for in a TK provider.  Take a look.  The legit ones on BP are often times finding themselves defending the model, which is another reason I wrote the blog.

One of the benefits especially for someone like yourself that lives in California, is that you are able to purchase a property that actually cash flows as a rental and still have all the pieces in place to manage the property.  We work with a lot of California investors and that is why most of them are looking into turnkey providers to start with. 

Another benefit is that you directly gain from the experience of the turnkey real estate company that has most likely down 100's or 1000's of transactions  but you have to make sure you're working with a reputable company.  There are  many moving pieces to real estate and it can be easy to miss things that will come back to bight you in the end.  One of the biggest pitfalls is a provider going cheap on construction work and not the right property management relationship especially if your out of the area.  It's tempting for providers to go cheap on a job and sell the rental at top dollar to a turnkey buyer that will end up costing the investor a lot of money through maintenance and repairs.  If your property management company isn't on the ball, you can have excessive vacancy times and maintenance that ends up costing a lot more than it should to fix.

Hope this helps.  Good Luck!

Well, after a long hiatus I am back on Bigger Pockets.

I started with a "turn key" company many years ago in Cleveland. I think the people who go into the "turn key" business are generally well intentioned people looking to make a prosperous venture. This is nothing against turn key providers. They provide a valuable service which is bring to investment opportunities to otherwise unsophisticated real estate beginners,,,,for a price. A pretty BIG price.

The acute problems come after the sale. After the glow of all the promises wear off the more mundane aspects of owning and managing rental properties come into play. 

I can just hear the groans. "Well, if you have the RIGHT "turn key"/property management company you shouldn't have any problems." 

Picking the RIGHT property management company and expecting unending success is like having to pick the RIGHT spouse and expecting a successful marriage---and only after a few emails, maybe a phone call or two and if you are lucky an in person meeting with the property manager. All of the reality of the horrors of what will unfold next will play out over the next several months and possibly at the expense of several more thousands of dollars coming out of your pocket.

Turn key providers are in the business of making a profit. There is nothing wrong with that. EXTREME caution and due diligence are warranted when dealing with turn key providers and their in house property managers,,especially when more than $50k is at risk. The good ones will cost you a LOT of money and will represent significant downside risk to your portfolio, especially if you have to carry mortgage debt and if you experience significant repairs(likely in the beginning.)

No property management company I have ever come across has been able to decrease the amount of repairs a property needs, decrease tenant vacancy rates, or communicate with me in an effective manner. Quite the opposite. After I fired my property management firms, my rent was collected on time, my repair costs suddenly went down and I was no longer paying 10% for a "management fee". Suddenly my properties were up 30 plus % and now even more. And I got to know all of my tenants; some of who I had to let go and others who have stuck with me for years.

Yes, I had to learn the business. I had to speak to a few tenants. I actually had to visit my properties a few times each year. But over the years I have developed systems and practices that now all hum along nicely. It's just not that hard folks. I read the comments above about not having the time or the "expertise" to start with your own real estate investments and I just shake my head. This is not rocket science folks. Its people, process, product. There is nothing very complicated about a simple income producing duplex with two tenants. Even in the worst of areas I can make this property work. We don't intentionally go into the worst of areas but the point is that BAD THINGS WILL HAPPEN regardless of where your properties are located. Your ability to bounce back from a setback is what will make you successful in your investing. 

You may not even know of a vacancy if you have the "wrong" property manager. Much better for you to find out on your own and deal with it in a common sense way and get on top of it. I have many permutations of every horror you can imagine happen at several of my properties while under the care of property managers. Almost all of which I could have done a better job of handling on my own had I given myself permission to do so and let myself out from under the shackles of "not being an expert" in the field.

Food for thought: If you are going to own LESS than 3 properties and just want rental income for some diversification , the using a "turn key" provider and outsourcing your rental income management MAY be for you. Be prepared to experience low positive cashflow though or even losses. HOWEVER, if you are looking to build a portfolio of rentals of greater than 3 properties you must learn the business. That does NOT mean you need to study toilet repair, HVAC principles or drive a junky car to your properties. The modern landlord today can use technology, other people and some basic common sense to solve and manage many investment property issues.

Bottom line: Be prepared to pay significant sums in profit to "turn key" companies for their service. While there is nothing wrong with this, factor this into your long term investing goals. While I maintain that 80% of all "turn key" companies/property management firms are excellent.....;))), its the bottom 20% I worry about--and those are the ones that will cause you significant financial losses,,,,,and the ones to run, not walk away from.

All the best !

Faisal

@Faisal Sami   much of what you describe rest squarly in the asset class.

if one is going to buy lower end assets then out of state ownership in my humble opinion is pretty risky... only locals who can watch them like a hawk can really make those lower end deals work to any thing that measures up to a reasonable risk reward scenario.

ITs not the house punching a hole in its own wall. or picking up crayons and writing all over the walls. over never taking shoes off and carpets are ruined once each season.. I look at some of these places and I swear it has to be intentional   not sure how people can be that careless and hard on homes.  ITS THE TENANTS that do this... for good bad or indifferent that's the issue. 

So whether you buy turn key do it yourself or what have you tenant selection will make or break you deals.. and were do the best Tenants rent.. well they rent in the best homes.  pretty logical thinking there  LOL

@Jay Hinrichs , what you are saying is true. You CAN buy in higher and higher asset classes however this significantly diminishes cashflow. 

And it does not mitigate downside risk. A $30 toilet repair in the hood could run into the several hundred dollars uptown. So with a $200k property cash flowing at an anemic $200/month, any number of small repairs like a furnace repair, garage door not working properly, or a sprinkler issue could wipe this out and more in a high end property.

While it sounds logical to buy more expensive properties and get higher class tenants, from the investors prospective this does not bode well if the higher class property remains an alligator over time.

I own "higher class" rentals as well. The issues are different and MUCH more expensive. It's more of an appreciation game with higher class rentals. Buy now, break even for 10 years and sell for maybe a $50k profit in 10 to 15 years. Its a very long investment horizon. I think from a purely investment point of view its somewhat counterintuitive but true to think that a well managed portfolio of lower class rentals will outperform the higher end rentals over time.

I think the thinking that just because someone is poor means they will destroy property is not entirely true. Yes there is risk there. But it can be managed. There are tools and ways to do this. 

@Faisal Sami   why buy rentals at all then... ? 

and it gets back to that rust belt mid west /  vs our west coast arguments which are better.

at the end of the day if your in a non appreciating market why buy a rental at all buy a different investment all together buy notes or buy small business that you can manage and make money.

My best rentals in the mid west were new constructions hands down.. they break even all these years but the tax advantages and principal pay down is worth it.. since they are a breeze to manage and I have put less than 2500 into anyone of them over 7 years of ownership as again they were all brand new.. and the rents are the top rents for the county so I get white color tenants that keep the home as neat as my own. ( generally) I did have one get trashed. though..

However I can see your perspective you live there and work there and there is no question that you can make these work and successfully if you want to be in the landlording business.

Most turn key folks are thinking PASSIVE not landlording business... at least that's what they want it to be.

but I am a value add and appreciation guy so I will never fully subscribe to making money 200 a month per property.. unless I bought 500 of them.. and I did buy 350 of them. and it was the happiest day of my life when I got bought out by partners... I can tell you that.

I think folks are having some very nice success these days in turn key at the 65 to 125k range with 65 being higher end in some markets.

@Jay Hinrichs ,, thank you for the informative response. The 350 house buy sounds amazing. 

I get people from time to time asking me to set them up with a "turn key" rental and even make offers on my properties. I have resisted so far if I think the investor wants a totally passive income source. I just don't think it would be doing them a service to set them up to fail like that. I have only sold to investors who I feel are going to take an active role in managing their properties and are willing to follow systems and management for the tenants.

The answer to the question of "why buy rentals at all" is the same answer to any of the other investments you mention: to make money.

The true wealth in real estate investing is to buy and hold for the long term. That has been said ad nauseum by many. I would submit that buying and holding positive cash flowing rentals actually represent LESS risk to an investor as they are continually DECREASING their cost basis in the investment and will eventually represent a great stream of income once the debt is paid off or all the capital has returned home. And yes I do have rental properties where I have spent less than $2500 in maintenance over the years. It does happen.

Waiting on or betting on equity increases over time can and does happen. For me personally I have not been able to make that model work, but heck I am willing to learn that too.

 Buying notes is a unique niche business. I deal with notes all the time. What do you do when a note goes bad? In Ohio where I invest, you can do a land contract but if the buyer has paid 20% or more in equity into the note or has lived in the property for 5 years or more you have to foreclose on the property instead of evict the tenant. A foreclosure process is a very lengthy legal process. Buying mortgages also leaves you in a similar situation if things go south and from time to time Murphy's law WILL kick in.

My best rentals in the midwest are cash flow duplexes which generate reams of cash year over year and don't require a whole lot in repairs. Because I govern the tenants and have systems and processes in place to address small problems before they become big ones these properties do really well. 

Conventional wisdom is that this is some sort of elaborate rocket science and these properties require ICU level care..... but that simply is not the case. 

Some basic common sense, a willingness to learn and some persistence are all that are needed. And by the way, I am NOT an onsite landlord. I don't even live in the city I invest in. My model is distance landlording and its been working. I do go to the properties once every three months for two days and do walk throughs with my employee and contractor through every property.

Most people who enter into real estate investing are entering into a business that DOES require the active involvement of the owner if they hope to make money. I really do not believe there is such as thing as a PASSIVE real estate investment if you are going to own and attempt to profit from rental investment income property. You may be better off investing in a mutual fund or REIT.

I have yet to see consistent net CAP rates in excess of 10% on turnkey rentals managed by a property manager. But again, I am open to learning what people are doing that is new and effective. That is why I am here.

All the best!

Faisal

it is my belief that most turnkey properties under estimate capital expenses. I believe in low cost markets capital expenses will exceed $200/month (in a today's dollars) on any SFR. I use $400/month is So Cal for SFR cap expense ($300 on multi units which in my case are both smaller and share certain items (such as roofs, foundations, plumbing, etc) reducing costs).

So make sure you are going to get a top property management company and make sure that the capital expenses used in your cash flow calculations are conservative.  There are quite a few forums/blogs dedicated to capital expenses and property management. 

If you can get both a top property management company and the cash flow you desire with conservative cap expense estimates then you may do great with turnkey. 

You will, of course, not be able to obtain the instant equity that can come with doing your own rehab. Also in general the property owner will be more diligent property manager than a property management company but the inexperienced diligent property manager may still make mistakes (such as not thoroughly screening tenants) as part of the learning process. 

So I believe turnkey can work but like every large investment you need to do your research to verify it is likely to be a good investment (research capital expenses, the property management firm, vacancy rates, local economy, ... - everything). 

Hello!!

I truly understand try by to find a simple way to get started, hopefully put some money let someone else do the work and then collect a check.

Initially I began my investing career looking into fix and flips, then shifted my attention to the Notes side of the business. I found that area to be an excellent opportunity to create passive income and strong capital gains

Looking forward to connecting with you, who knows maybe even do a deal together!

@Faisal Sami   your in the business of owning and running rentals HUGE difference than the Southern CA investor buying one to 4 rentals ... the mortality rate for those folks is high.. if they choose low end hard to manage properties.. and or choose a poor operator.

Ali who is mentioned works with a company called Maverick they choose a very poor operator in Birmingham.. there has been a few threads on people buying through maverick and with this operator who did not even make it a year before the crap hit the fan with rehabs not done rents not paid etc etc.

I know many in the rental business,, I fund one company in the south to the tune of over 150 rental houses in the last 26 months.. I funded each and everyone of them  the A and D and the long term funding... and they make it work just like you do.. but its their job. Its anything from passive its what they do...

And your very correct about notes in Ohio.. that would be the last place I would buy notes.. I would not buy any note in any state that is a mortgage state.. Only trust deed states with the trustee having power of sale.

And or many of these folks could just invest with their local HML and make 10 to 12% with very little effort or risk.. the Southern CA folks have all sorts of options.. Norris group being AAA rated and a very nice place to park money.

Your mind set is clearly mid western IE no appreciation probably never will be and the ONLY way you can make money is with positive cash flow.. I get that.

And I don't agree that true wealth is only created in cash flow.. Maybe if you can scale it up like you probably have.. but your average investor will never scale up.. one financing precludes its.. and or they are too busy making money at home.

The real true wealth is made in path of progress plays.... and appreciation if your going to be a small time player.. but those go against conventional wisdom of CASH flow is the only way.   One of the greatest investments in the US and open to anyone and is totally passive is buying timber ground in the Northwest you will make 10 to 14% per annum accrued.. Guess who the largest owners of timber land in the US are and or financers of same..

John Hancock and the Harvard endowment fund. 

So many more ways to get true wealth in the US other than buying low end rentals in the mid west.. there just is... but I get it ... price of entry is low so people go for it.. And I am sure like I said 50% succeed the other 50% are your future sellers  LOL>

There's a reason why all these TK companies are sourcing, rehabbing, selling, and collecting the management fees - it's because there's more money to be made doing that than holding those properties long term.

So is the California buyer the sucker in the transaction? Maybe, maybe not. But, if you look at the property's entire risk/reward ratio, that investor just gave up a large chunk of the reward while keeping all the risk.

That said, it may STILL be better than the alternative for that investor (doing nothing, paying off student loans, heck... buying more shoes).

It reminds me of the story of Levi Strauss - in a sea of starry-eyed newly arriving miners, the guy who gets rich with the least risk is the one selling all those folks their jeans.

Everyone has different skill sets and various levels of money. Faisal you might have inherent skills that make property management seem easy to you and dealing with difficult tenants.

So in this regard it might seem that everyone can do it just as easily as you can. I used to think that way 10 years ago. Then I realized what comes naturally to me with commercial real estate some get it and others scratch their head and say "help me with it". So these days I make no assumptions.

I have seen analysis sent by even some of the most respected turn key companies who are really big by others who wanted me to review as they were looking at buying 20 houses vs getting into commercial real estate. I did not agree with the turn key providers assessment. The worst ones use only 30% for total operating costs and vacancy, lost rents, etc. Others that are closer I have seen 40 to 45% which is more realistic. 50% is a good guide to go by and if landlord pays utility 55 to 60%. Turn keys do not like using conservative numbers as it is hard to make the profit projections look presentable for the lower quality areas they are selling.

Anyone buying turn key PLEASE check on the roof, a/c, hot water heater, electrical, plumbing, heater, etc. You want all the big ticket items brand new, permitted if required, and installed and operating correctly. If you are going to buy based on 40% operating costs then the big ticket items better all be replaced. If not you are going to be in for a HUGE surprise when those capital items eat up all the cash flow you thought you were getting for years.

Turn key companies love to throw some cheap carpet and paint and replace a few knobs and call it (newly renovated!). I call it a POC (piece of crap) that is a money loser. Some turn keys investors bought years and years ago even if capital items needed replacing they have ridden the SFR recovery in some equity growth to offset it. Now with SFR top market people are really asking for it buying these properties. Little to no appreciation, heavy future repairs, potential economic future downturn creating flat rents and losing value each year with inflation.

I have never been a fan of these properties and never will be. If you are investing your only 50k and it goes bad then it's not a good idea. If you have 1 million and have play money to throw 50k at something and see if it does throw off a cash cow then you could experiment.

Just go in on these properties with the premise that you could lose the whole investment or take a big loss. Do not believe the hype sold by TK providers. They make the big money selling the property and managing it is the necessary evil to get the investors to purchase.   

Originally posted by @Dexter Wallace
  
My question is Turnkey Investing a positive strategy for part-time investors who may not have the full resources to start out?  

Welcome to BiggerPockets.

The real question here is WHAT DO YOU NEED?

Turnkey real estate investments are a great option and solution for people who don't have the time, knowledge, resources, capital, or patience to be involved throughout the entire process. 

Do you want to be an active or passive real estate investor?  (Refer to my podcast episode #001)

There are some benefits to doing it all yourself and taking on the extra risk in exchange for the potential added equity in the end.

On the other hand, being a passive real estate investor will still provide you great returns and cash flow without the hassle and headache involved in being involved actively from beginning to end.

I have done, and still do both.  I've invested out of state for 12 years now.  I can argue for and against both strategies, but in the end it comes down to what you NEED and WANT to do about it?

I also suggest listening to episode #004, "Turnkey Real Estate Investing Explained".

These forums are full of opinions, both for and against investing out-of-state, and in turnkey properties.  Always consider the source of the opinion as there are some who will only actively buy and rehab their own properties; while others will only purchase turnkey property.

Define your criteria.  Do your due diligence, analyze the numbers and the opportunity, and YOU decide whether a deal is good for you or not.

Continued success!

@Alex Craig ,, in the lower end rentals a toilet repair is usually a toilet repair is usually a toilet repair. In our higher end rentals we have had some toilet repairs that have turned into bathroom remodeling jobs. The wax ring had gone bad which led to rotting of the wood beneath the floor and we had to rip out the a fair amount of the tile only to discover more rot and the sink had to be taken out and replaced. Tenants in the higher end rentals tend not to complain as much and may not even realize that a small problem is getting bigger. 

When a tenant in a higher end rental complains about a problem we tend to take it very seriously and repair it to the 9's to maintain the high end nature of the home.

@Jay Hinrichs ,, very interesting. I especially like how you phrased "the mortality rate for those folks is high." Very true. From time to time I come across turn key carcass properties from investors who at one point thought a totally passive real estate investment was a good idea--only to watch their entire investment tank and lose some more. 

Very intrigued by timber ground in the Northwest. Not my area of expertise but very interesting

@Joel Owens ,,, agree with most of what you said. I would add that real estate investing is simply not for everyone. It does require skills and persistence. 

The turn key companies would have one believe it is for everyone. Some turn key refugees will come away from the experience swimming. Others will simply sink. 

Everyone has inherent skills. The key is to figure out what those skills are and what you are good at and run with that. 

Turnkey seems like an easy route that "everyone" can take to become real estate moguls. I have seen people walk away from the turnkey experience for the better, more savvy, more grizzled and based in reality. Others simply pack up and go home. I believe for the former there is plenty of opportunity. The latter should have never gotten in the game to begin with.

I think pt investing is great for turkey buyers. A lot of my investors from cali are less then part time. Some of them are high level professional with 0 time to deal with properties. Good luck, do your research and you'll do well. 

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