Does Turnkey eat up too much to be a viable strategy?

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Does Turnkey eat up too much to be a viable strategy?

Chris Gerenser
Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes

Just starting out and am leaning towards Turnkey in Indianapolis and then branching out into other markets.  I'm interested if others have used Turnkey providers effectively to build large portfolios.  @Brandon Turner stresses the need in books and webinars to get the right price (say 80% of value).  I don't see doing that with Turnkey providers, but maybe I'm off base here. 

I understand that finding the best value property, improving, and managing it yourself would lend the biggest potential return, but looking to have a more hands-off approach on the rentals themselves.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y

@Chris Gerenser  Brandons advice on 80% and 20% instant equity is old news.. the markets have shifted .. what ever you pay for a property is what its generally worth today.. there is no such thing as instant equity..

UNLESS  you are sourcing the deal yourself for wholesale and then doing your own fix up work out of pocket at cost etc..

you can capture some equity that way.. forced equity but you earn it.. you just don't have it fall into your lap...

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  • Anthony Drew Gary
    Developer · Indianapolis, IN · Member since 2015 · 57 posts · 12 votes
    10y

    Chris,

    As a guy from Indianapolis who is just starting out, I'm curious what you're looking for in a Turnkey property specifically in Indy?  Are you looking to keep yourself in specific price ranges?  Specific townships?  Have you found a property management company in Indy that you're comfortable with?

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  • Chris Gerenser
    OP
    Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes
    10y
    I was looking at lower end properties as they are very affordable. The first Turnkey provider focuses on Indy so that's why This city specifically. I have switched gears to what I hope are nicer neighborhoods and possibly duplexes or 4 plexes but not sure the price range yet. Do you know the townships that are most favorable? I am in the process of determining the Turnkey provider to use now.
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Chris Gerenser  do not entertain low end duplex or four plexs in the inner city areas of any major metro area in the Mid west...

    Basically if you want to buy mid west rentals focus on anything that rents at 750 and up.. anything under that is going to bring your bottom barrel tenant.. and or tons of turn over and turn over kills you in this business..

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Chris Gerenser  Brandons advice on 80% and 20% instant equity is old news.. the markets have shifted .. what ever you pay for a property is what its generally worth today.. there is no such thing as instant equity..

    UNLESS  you are sourcing the deal yourself for wholesale and then doing your own fix up work out of pocket at cost etc..

    you can capture some equity that way.. forced equity but you earn it.. you just don't have it fall into your lap...

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  • Chris Gerenser
    OP
    Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes
    10y
    Jay thanks- you are everywhere! Btw just hopping on TurnkeyReviews...looks like a really good resource. Providing I steer clear of the bottom properties, do you think the Turnkey method is sound? As mentioned I get that I am not maximizing profit potential if I'm not finding the killer deal, fixing up myself, and managing. The Turnkey method seems sound as you give up some of the profitability for less involvement once the investment is made.
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  • Larry Fried
    Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
    10y

    @Chris Gerenser To expect to buy turnkey at 80% of value is just not realistic no matter the market. Turnkey is meant to be a relatively passive way to invest in buy and hold property, and you are going to have to pay for the service - ie: the work you aren't able or willing to do, as well as having a ready made team on the ground that finds, rehabs, and manages your property.

    1Reply
  • Chris Gerenser
    OP
    Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes
    10y
    Agreed on the 80%. That was exactly my point that to get that would take a ton of legwork to find. I'm looking to grow passive income over time - so finding a solid turnkey provider does seem to be the way to go.
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  • Ryan Cummings
    Indianapolis, IN · Member since 2016 · 8 posts · 1 vote
    10y

    @Chris Gerenser I'm a new investor in the Indianapolis area.  I've done some looking at turnkey properties.  The ones I've seen so far all seem to be priced above market value.  That has made me concerned that selling the property to get out if I want to could be difficult.  With that said, they also come with a tenant and property management in place so that is added value.  Make sure you research comps in the area closely.  For passive investing turnkey seems like a good option.  Good luck with your search.

    0Reply
  • Garrett M.
    Investor / Attorney · Orange County, CA · Member since 2016 · 37 posts · 19 votes
    10y

    @Chris Gerenser, my business partner and I are currently asking the same question.  In Seven Years to Seven Figure Wealth, Brandon Turner explains how, with just $20,000, he grows his wealth to over $1,000,000 in seven years.  An analysis of his wealth creation shows that a massive 45% of his wealth was made by purchasing undervalued properties.  Yet another 29% of his wealth is made through forced and value appreciation.  Just 22% of his wealth was made in cash flow (the last 4% was mortgage pay down).  The lesson I learned from reading that book is that purchasing undervalued properties and forcing appreciation, not cash flow, made Brandon wealthy.

    Similarly, after speaking with dozens of the most successful investors I have met with here in Orange County, not a single one told me they achieved their great wealth through cash flow properties; much less turnkey properties.  All of them told me fascinating stories of purchasing hugely undervalued properties in down markets from distressed sellers.  The majority of them self-managed their properties until they grew to such a size where they needed property managers. 

    I find this discussion very interesting, so I look forward to hearing your thoughts.

    3Reply
  • Carlton Francis
    Real Estate Professional · Irvine, CA · Member since 2016 · 33 posts · 17 votes
    10y

    I am very interested in this discussion as well. Brandon's short e-book was a big influencer while writing up my business plan, and I've also been considering the possibility of buying Turnkey rentals in the future.

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  • Juan Diaz
    Flipper/Rehabber · Emeryville, CA · Member since 2015 · 158 posts · 124 votes
    10y
    Originally posted by @Garrett M.:

    @Chris Gerenser, my business partner and I are currently asking the same question.  In Seven Years to Seven Figure Wealth, Brandon Turner explains how, with just $20,000, he grows his wealth to over $1,000,000 in seven years.  An analysis of his wealth creation shows that a massive 45% of his wealth was made by purchasing undervalued properties.  Yet another 29% of his wealth is made through forced and value appreciation.  Just 22% of his wealth was made in cash flow (the last 4% was mortgage pay down).  The lesson I learned from reading that book is that purchasing undervalued properties and forcing appreciation, not cash flow, made Brandon wealthy.

    Similarly, after speaking with dozens of the most successful investors I have met with here in Orange County, not a single one told me they achieved their great wealth through cash flow properties; much less turnkey properties.  All of them told me fascinating stories of purchasing hugely undervalued properties in down markets from distressed sellers.  The majority of them self-managed their properties until they grew to such a size where they needed property managers. 

    I find this discussion very interesting, so I look forward to hearing your thoughts.

     Value increase is the way to wealth, but extreme value rises only happened in markets where supply is highly constrained (East and West Coast). Betting on the value increases that California investors enjoyed during a once-in-a-lifetime housing crisis seems like a difficult strategy to duplicate. Sure, they made lots of money that way, but the odds of it happening again are pretty small.

    If you're looking for rise in home values, buy in gentrifying areas before they start to gentrify, but that can be a difficult thing to identify.

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  • Adam Bontrager
    Investor Relations Manager · Cleveland, OH · Member since 2015 · 117 posts · 50 votes
    10y

    @Chris Gerenser 

    I don't think the question is so much "is turnkey a viable strategy?" but rather "does the turnkey strategy fit with my personal goals and strategies?"

    Before deciding on a particular strategy, you need to first determine what your goals are.  Are you looking to do real estate full time or do you want to be a more passive investor and let someone else deal with the day to day headaches?  

    The beauty of real estate investing is that there are multiple strategies and options available to you.  What @Brandon Turner has done purchasing undervalued properties and forcing appreciation is incredible, however, this strategy requires you to be extensively involved in the business and it's not for everyone.  In my experience, turnkey properties are an excellent way for investors who are busy with other pursuits to get in on the real estate game without having to be extensively involved in the process details.  

    Ultimately you need to decide what your goal is in real estate and then plan from there.  

    3Reply
  • Anthony Drew Gary
    Developer · Indianapolis, IN · Member since 2015 · 57 posts · 12 votes
    10y

    Chris,


    I would look in Washington Township or Speedway first.  If you're looking to stay within some of the guidelines of the forum and look for rents north of $750, you'll best be served in those areas.  All of suburbia in the counties surrounding Indy will also hit that metric.  PM me if you want any additional lays of the land!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Garrett M.  one has to realize that were Brandon lives is were he invests. and he lives and invests in an area of Washington that has low valued real estate because of a dead and dying logging and fishing industry... you cannot buy at those price points in any of he major markets.

    Plus its easy to say in the last 8 years  .. anyone buying 6 years ago or so.. bough in a window of time and low prices as  has never been seen before in the US.. its no great mystery for those that started after 09 and bough in those years.. It was timing.. it was not some great real estate acumen..

    Now the turn key markets of the mid west have and will always be like this.. as everyone who sells them or know so them comment on you have a very stable market it dos not go up much and it does not go down.. values are based on what investors will pay for cash flow.. and that is about 1 to 2% of gross rents... with the magic number being 10% COC returns.. this is what will get investors off the fence.

    Those that got rich on cash flow generally have pretty sizable portfolios.. so unless one has the ability the drive and desire to scale up in the cash flow business.. then there are better ways to make more money in RE... IE  forced appreciation deals.. new construction... lending ,,, quick flip wholesale type situations.. etc etc..

    the most money I bet your aquantances talk about being made though is the Path of progress....

    IE they had land that was a farm and now is in the city and just sold to a developer for a zillion dollars.

    I have a property in Rohnert Park CA.. I paid 26k for in 1995.. its on the market for 3 million ... no cash flow but some nice appreciation.. it was unbuildable raw land but as I looked at the city and the direction it was going in I bought it paid cash put it away.. it is now in the city and zone multi use residential with a commercial overlay... this is were big hits are made

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  • Alice K.
    Investor · San Francisco, CA · Member since 2015 · 306 posts · 211 votes
    10y

    Completely agree with @Jay Hinrichs regarding market prices. Everyone and their dog wants a home at 70-80% of the value.

    Doing that caused me to lose 2 homes not too long ago as I was trying to get an "acceptable" cap rate, when in reality, the area I was looking at just didn't have those fabulous high cap rates to begin with.

    3Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I think turnkey homes are fantastic investments, for the turnkey operator. For the investor purchasing them, not so much. There are probably some very good turnkey operators that consistently leave enough "meat on the bones" for the investor to make a return, but I think most milk each property for whatever they can get out of it, doing the minimium "lipstick on the pig" renovations, inflating the price to over market value, puffing up their pro forma financial projections, jacking up their property management fees/kickbacks, etc. without much regard to if their clients lose money, and there are plenty of uneducated buyers where they can do this and more of their high profits paying out of state marketing affiliates (many of whom are here on BP posing as investors and talking up how great out of state turnkey is) to locate new buyers since they get no repeat business after their buyers figure out they're losing money. The thing I don't like about the model, and this applies to property management and contractors too, is that the provider's interests are always at odds with the investor. The more the investor pays, the more the provider makes.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @David Faulkner  pre 2010 or so I would completely agree with your comments.

    however as I work in the space and you know that I am not keen on low end rentals anywhere

    but the top tier turnkey guys have really upped their game.. I took the brunt end of a lot of what your talking about from 08 to 2010 when I foreclosed on 200 plus homes and became the proud owner of some LA based investors cash cow homes :)  who got caught up with a crappy turn key company.. so I can totally agree with that sentiment.

    Now a days with the top teir guys they really do first rate rehabs.. I know because I fund them and I don't want my money at risk..  a few of them take the homes down to the studs and everything is brand new.. and since I fund them and see the huds I know exactly what everyone is making..

    And the TK folks % wise make about what a retail home flipper makes because I do this myself and fund a bunch of those guys as well in 12 markets . some run on tighter margins and sometimes I wonder why they do it.

    And there is no question about the subliminal marketing of these homes by folks on BP and these folks make a commission no doubt.. and it would be nice if they would just come out with it.. Like Norada he makes no bones about it.. :)

    The issue really comes down to the investor.. and the Morrisinvest thread is a perfect example. you have a Rookie turnkey guy who thinks he has solved the world hunger problems and enters the 40K  TK space like he has found some holy grail only to bury his people in crappy investments and those that follow him are newbies who have no clue that what they are about to buy is going to fail miserably over time I know been there done that.. so have the better turn key companies.

    The real draw to turnkey is the investor who wants in the game have 30k or so liquid decent credit and thinks that cash flow positive is the only thing that makes sense. they could buy west coast break even or negative cash flow but they are told that's no good ... so there they go.

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    10y
    The margins are getting thinner and thinner. So you have to purchase and know what you are doing. It's a sellers market when you are baited into paying cash and cannot put any financing or appraisal contingency. If you are cash flowing 200 a month then one big item will make you go red for the year.
    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    10y

    Buying properties at 80% of their true value is great but not practical if the investor is hoping to have everything already done for them. People don't just hand over equity on a silver platter, you have to work for it. That work takes time, money, connections,  experience, past failures & successes.

    Look at it this way. If you have a dollar and I offer to trade you 80 cents for it are you going to take that deal? Of course not, that is a rip off. But Let's say your dollar is in a cage with a lion and the only way to get it is to go inside of the cage. Does my offer still seem like a rip off?

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Alice K.:

    Completely agree with @Jay Hinrichs regarding market prices. Everyone and their dog wants a home at 70-80% of the value.

    I never could get Devil Dog interested in real estate.  Here she is (bored) telling me to let her know when I convert the appreciation into kibble.

    0Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    Turnkey-reviews.com which I seen mentioned is a great site to take a look at. 

    @James Wise

    @Federico Gutierrez

    Are some great resources on turnkey properties as well. 

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  • David D'Ambrosio
    Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
    10y

    Turnkey properties arent going to be homes you buy below market to get built in equity.  They are generally for people who want to invest for cash flow but dont have the time, skill set or location to buy crappy houses and make them nice.  Dont be lured in to lower priced houses wherever you are looking, they typically look great on paper but the tenants actually have to pay rent and not destroy the house which is dicey.  Thats why they look so great on paper.  I would say its better to buy one house at 120,000 in a nicer area with a solid tenant than two 60,000 houses in a C area.  Less aggravation and your more likely to get the return you are expecting.  Especially when you are investing at a distance

    2Reply
  • David D'Ambrosio
    Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
    10y

    Also wanted to mention that from what i see about duplexes/fourplexes in areas like Indianopolis and Kansas City etc,  they tend to be risky.  The tenants tend to be lower quality than those who would for a marginally higher rent, just rent a house.  I would say multiplex non commercial rentals probably make more sense in areas that typically have higher costs for SFHs.  Im no expert on this, but I was excited to buy multiplexes in a few areas and all my research pointed me away from them and back to Single family.

    0Reply
  • Christopher Aleman
    Dalton, GA · Member since 2015 · 23 posts · 13 votes
    10y
    Chris Gerenser it all depends on your strategy but buying a property too close to market value can put you in a serious bind if you had to sell for unforeseen circumstances. As a first time investor, if you have the cash, I would highly recommend waiting until you find a property decently below market value that only needs (or at least appears to need) minor repairs. Personally, I wouldn't buy a turn key at market value because no matter what upgrades have been done, buyers will always look at the year it was built. If you don't have the cash (and are not interested in private or hard money lenders to get it) or desire to rehab yourself, I'd recommend finding a good deal on a nice spec SFR. Brand new properties (built right) should have very little maintenance, new spec homes are often priced close to the older homes in the area, and everything will be up to current code. With that being said, the more equity you can have from day one, or force in month two's rehab, the more security you'll have in your investment.
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Christopher Aleman  for this exact reason one needs to really monitor were new construction pricing Is at... those are great points and valid

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