Does Turnkey eat up too much to be a viable strategy?
Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes
Does Turnkey eat up too much to be a viable strategy?
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes@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...
45 Replies
- Real Estate Professional · Atlanta GA · Member since 2015 · 615 posts · 225 votes10y
@Chris Gerenserit all depends on your strategy. if you are more into money management mode then turn key is a great way to go about it.
Make sure if you go into that direction you go with a legitimate provider. One sure way to get killed on the turn key side is to go with someone that misrepresents numbers, and can't fulfill the back end support.
But, if you are more on the active making money mode side I would set up a business model that will allow you to put these types of deals together yourself.
I have done both, PM if you want any additional help.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Chris Gerenser As another experienced player in the TK space, I thought I'd jump in to second the points made by @Jay Hinrichs (sorry I'm like your one man cheer squad lately ;) and @Adam Bontrager.
Turnkey, done well, can absolutely provide value. But it really comes down to what you want out of your real estate investment and what you are willing to put in to get it. If you can/will/want to be super hands on - do the hunting, the buying, the rehabbing, the marketing, the tenant selection, the management, the maintenance etc. - all on your own, then heck yes you can make better margins than you would with TK. But that's sort of the point. Turnkey is about passive income, which means it is specifically designed to appeal to investors who - either because they either don't want to or don't have the expertise/time to do so - are not willing to do all the legwork themselves.
Think of it like a stock portfolio. You absolutely can build a diversified and actively managed portfolio on your own and, if you know what you're doing and put in the time and research, you can make a killing. But you need to actually put in the effort. A lot of people want the advantages of a fully diversified portfolio, but also recognize that they are not going to be willing or able to put in the time and effort necessary to build and manage it well. So instead they hire a manager or invest in a mutual fund that, in turn, uses their investment to purchase a diversified range of securities. Yes, the investor gets less of the returns than he would if he had built the exact same portfolio and managed it in exactly the same way himself, but the trade off is that he didn't have to do anything but transfer funds and check in every once in a while. If you want to manage it all yourself and take on both all the risk and all the reward, then it's time to hit the books and start building your own portfolio. If you would rather not become a full time stock trader, or would prefer to have a professional do some of the heavy lifting, you just have to find an advisor or fund that you feel good about.
Which leads to another great parallel between TK and more conventional investing. Not all providers are equal, by any means. Just like you can't say 'I want to make passive income by investing in mutual funds' and then just throw all your money at the first fund you read about, you also can't just assume that whatever TK outift you hear about, or whichever one boasts loudest about their returns, is going to be a money maker or even a trustworthy investment partner. You have to do the research to determine which investment is worth your money. You can have two mutual funds built to mirror the same exact index - passive funds which, by definition, do not require any active management and should have very low expenses as a result - but you will still find a surprising spread in the expense ratios of otherwise identical funds. Why? Because some mutual funds are hoping you won't know enough to look closely, or will invest with them just because they have a flashy name, even if a lesser known fund has an identical portfolio.
All this is to say that looking at shady or misleading TK outfits and saying "look at those jerks, TK is a waste of money" is really throwing the baby out with the bath water. You wouldn't eschew all mutual fund investments because one fund charges absurd fees, you just wouldn't put your money in that fund. TK is the same. Yes you are giving up some of your returns in exchange for professional guidance and the ability to do literally nothing else but cut a check. But it is up to you to make sure that people who are taking a cut of your returns are on the level. Like Jay said, I think most of the top people in the industry are really fantastic professionals who will go out of their way to walk investors through the process. But if you are considering TK and find that a provider isn't providing all the information you need upfront - like actual figures for returns on properties they actually own, maintenance, occupancy, taxes, turnover, move out costs, lease terms etc - then you should question why they aren't being transparent. Just like a mutual fund, there are costs involved with passive real estate investing, but it is up to you to ensure that you work only with providers that will outline for you exactly what those costs are and how they impact your returns.
And, as has been mentioned, anyone that poses as an investor or tries to obscure the fact that they do, in fact, make money off of a TK business model is obviously not someone you should work with. It's pretty ludicrous to claim that someone is providing TK returns to investors out of the goodness of their own hearts. It is a business, and businesses are built to make money. But that doesn't mean that the provider and the investor can't both win. Investing doesn't have to be zero sum game - but the investor needs to educate themselves about what they want out of the investment and what questions should be answered by a provider they are considering. In turn, the provider needs to be upfront about where they butter their bread and how and why their model is better than others. These should be numbers conversations, not feelings conversations. If a TK provider can't outline specific numbers or isn't willing to sit down and answer all your questions, it's time to move on.
And of course, regarding the built-in equity holy grail, I once again agree with Jay and others here. It would be great to buy below market, but the post-crash years of rock bottom prices are behind us - which, believe me, hurts us just as much as it hurts you. And stories of forced appreciation or below-market purchases that turn into windfalls are great... but so are stories of people who invested at Amazon's IPO. Good for them, well done, kudos on the foresight. But betting on the likelihood that you will be equally lucky instead of focusing on strategies (not necessarily TK) that can bring in consistent and reliable income is a bit like scouring IPOs for what you, without decades of experience, think is going to be the next Google or Apple. You might get lucky, but more likely you'll dump all your money on 10,000 shares of the next Groupon. There's a reason Warren Buffett is a massive proponent of passive investing - better to grow wealth drip by consistent drip than to bet and lose it all on 'the next big thing'.
In the end it all comes down to your goals and how much work you are honestly willing to put in to achieve. For some people TK is absolutely not the right fit - they don't like giving up control to someone else, they want to maximize profit by doing it themselves etc - but if your goal is to create reliable income with a passive investment, then finding a TK provider that is open and upfront, with whom you can build a trusting business relationship, will be one of the best investments of your time you could possibly make.
- Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes10y
@Clayton Mobley So now the challenge is finding that reliable partner. I agree with your comparison between real estate and market investing. My interests may shift to doing all of the legwork myself as there is great satisfaction in finding a better than average deal, but for now I am looking to leverage the experience of a trusted partner to provide a solid long term investment.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Clayton Mobley and of course we don't want to over think this as well.
see house.. buy house get contractor rehab to company standards put on MLS and sell or put in your private inventory and sell...
Investor see house numbers make sense..
Investor out of state do research on local customs and areas to identify quality areas make sure they understand the dynamics that are in play in renter dominated cities like the mid west and north and deep south.. once they have a understanding of that..
put the pieces together most folks are now financing again.. so their are third party apprasials and one should hire a home inspector make sure the scope of work was adhered to.
close then make sure you have a very good PM if your out of state if you live there self manage is possible. then your off and running someone else is paying your mortgage
ONe very important point to all of this and I think the post 08 GFC creating a huge shift in thought process of what a good investment is and what a bad one is.
How many times do we hear folks say... appreciation is icing on the cake blah blah blah. and its all about cash flow.
and we forget about the power of your tenant paying your mortgage off and your tax write offs.. those that try to reach for the highest cash flow deals usually end up with the least over time and the worse asset..
those that understand that real estate is location location location and you want your tenants to pay off your house.. there is not enough velocity of positive cash flow to substantially affect someone's life unless they can buy 10 to 50.. what you want is a solid property that your tenant pays off so that in 20 or 30 years you own it free and clear that's when you cash flow and or you have an forced savings.
For bay area investors.. how many would have liked to buy in Cupertino or Palo Alto or any other peninsula area when homes were 100k ( 1980 and just let the tenant pay off the mortgage ) even if you had to feed it a little over the years. what would you have in 2010 when your 30 year mortgage was done.. ????? you could at that point ACTUALLY and really Retire on ONE property.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
Spot on @Chris Gerenser, finding a partner you trust is really the number one issue with TK or any other investment that involves another party. Even finding a hot market isn't as important as there are properties that cash flow all over the place, so a good provider makes more a of a difference than whether or not you invest in the current city-of-the-moment.
And you absolutely can do both types of investment! So many people get very caught up in one niche that they fail to remember that they can dabble in as many as they like. It is best to start with one area to get your feet wet, learn the ropes etc, but there's no rule about having to do everything one way. Many people start with TK because it is straightforward and easy to get into. But, once you build a portfolio that flows nicely, you'll have both the experience and the capital to allow you to branch out into self-managed investment properties as well. Jumping into self-managed rentals with no experience and/or limited capital is very much a sink-or-swim wager, but that wager becomes a lot less risky a few years down the line with a little more financial leeway and a lot more experience behind you.
If you have any questions about the Birmingham market or what we do at Spartan, or just TK in general, I am more than happy to chat via PM.
All the best,
Clayton
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes10y
From what I've read, turnkey providers charge 10-20% above market prices. I would think it would be cheaper to just take a flight or drive and buy on your own, find your own PM. It's not that hard, and you'd come out way ahead. I plan on doing this in a few years when I sell my existing properties to relocate. Trip to Florida where I post up for a month and buy replacement properties.
You can line up PM's, inspectors, etc. based on research, reviews, and email/phone conversations with them then cinch up the deal when you are there in person.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Jay Hinrichs Good lord, if only we could have all invested in the Bay Area 30 years ago.... hahaha
And I totally agree, when people focus purely on the highest ROI numbers without considering what the asset is behind those numbers, we get into trouble. This is why, and we've both been commenting on this lately, we see people jumping after these C and D properties with 'huge' cash flow and not seeing the rug being pulled out from under them. All this talk about putting money in to build equity in a property that, because of its neighborhood and the condition/tenancy of the surrounding properties, will NEVER sell for what you put into it. A 10k property is a 10k property because of the neighborhood it is in, no matter what you do to it. If you find a distressed prop for 10k in an A or B neighborhood (good luck) then you're a lucky lucky guy (or gal) and you've got a money maker on your hands. But we all know most of these cheapies are in the war zone where no one with enough money to choose otherwise would pay the price these cash-in-a-flash 'TK' outfits are saying the property is worth. I think I'm going to start calling this Ghost Equity, because a lot of people believe in it but it doesn't actually exist.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Jack B. If a TK provider is charging that much over market they are gouging you. We provide appraisals for all our properties that show they are worth what you pay or more. In addition to backing up everything we do with a 100% money back guarantee. Of course you can do it all yourself, as I pointed out, but not everyone wants or has the time to, just like they don't want/know how to build their own fully diversified stock portfolio, so they invest in a mutual fund. But if you enjoy that type of work, then self-managing can definitely be a lucrative strategy.
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes10y
Originally posted by @Clayton Mobley:
@Jack B. If a TK provider is charging that much over market they are gouging you. We provide appraisals for all our properties that show they are worth what you pay or more. In addition to backing up everything we do with a 100% money back guarantee. Of course you can do it all yourself, as I pointed out, but not everyone wants or has the time to, just like they don't want/know how to build their own fully diversified stock portfolio, so they invest in a mutual fund. But if you enjoy that type of work, then self-managing can definitely be a lucrative strategy.
Building a fully diversified stock portfolio is as easy as buying an index fund such as VTSAX. If you want to get creative with this low fee, superior return fund you can also buy their bond and REIT funds.
- 10yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
thanks @Jack B., you're exactly right! Creating a diversified investment portfolio is very easy if you invest in a security that is built and managed by professionals. No need to buy each component stock of the S&P 500 yourself, when you can invest in an index fund that tracks it, give a small portion of the returns to the fund for their costs and profit margin, and reap the majority of the returns with little to no effort! Turnkey is the mutual fund (or ETF) of RE investments, and self-managed rentals are the more labor intensive, do-it-yourself option.
- Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes10y
Hey @Chris Gerenser
You'll get a bigger return on your money doing it yourself, but your return on time will be far lower if you don't have the network to get things done.
If you want to make money doing relatively little work turnkey is probably a good option for you.
- Lender/Investor · Glenwood Springs, CO · Member since 2013 · 218 posts · 103 votes10y
I had looked at the turnkey model several years ago as a way to invest. My experience was more like @David Faulkner. There are so many middle men needing to make their margin (seller, wholesaler, flipper, deal broker, finally TK salesman), that I couldn't find one property that was less than 10% over market value. The TK folks will sell you on the "but there is property mangement and a tenant in place - that is worth a lot!" We no, actually it isn't. If they are a crappy TK provider (and I know a few - especially in KC), then you don't want them to find you crappy tenants or to do a crappy job managing your property.
I am sure there are good ones out there as @Jay Hinrichs says, but I just had the poor fortune to run across some very fly-by-night slick talking salespeople that really turned me off from the whole model.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jonathan Godes that was the driving force of Brie and I creating turnkey-reviews.com with the hopes that the cream of the crop would rise and the pretenders and slick companies would have to clean up their act or get shunned ...
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes10yI've bought several turnkey properties and while they do have issues they have also been consistently profitable as a portfolio for 4 years now. Each one appraised at or slightly above the price I paid when I got them. They would probably be 15 to 20% more now. It's not been without challenges and some work but I can't say it's been a bad investment.
- Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes10yAnish Tolia who do you use and what markets in the mid west? I see you also do BA- are those current or properties you bought years ago?
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes10y
They are in Indy. Yes I also own some BA properties but those are bought earlier.
- Boca Raton, FL · Member since 2015 · 135 posts · 132 votes10y
FYI many turnkey investors say they are getting great returns, but they say that when they have only been invested for a few years....that is nothing, hasn't been long enough for anything to wrong.
That is like saying, "Hey I bought a bunch of tech companies and I am making a killing, I have been invested for only a few years from the years of 1997 to 1999, but things are going great."
Turnkey investors don't know they got a bad deal until something goes wrong (just like a new car, doesn't seem to happen for several years down the line). There will be some costly expense that you didn't account for and because you have no margin of safety in turnkey since the margins are so narrow and the turnkey provider took all the profit out, you will be stuck with what you thought was a 30k profit and maybe a 10% return get slammed down to maybe 3k profit and 2% return for example.
Turnkey isn't terrible, but there are only like 5% of the providers that are actually respectable and a fraction of what they sell you are good deals. You have to find the best providers with numbers that make sense to you. Many turnkey providers today are where we were with mutual funds 20 years ago. People paid massive fees/commissions/front and back loaded fees etc because that was all they knew. They didn't know better. Now we know lower cost index funds is better. As the market gets more competitive, more turnkey providers will up their game and start turning their "loaded mutual fund product" into a "passive index fund."
You can't be so lazy. If you don't want to do the work of real estate on your own, don't be naive and expect to make a killing when you don't do anything and hire someone else to do everything for you. Nothing wrong with that, but just be realistic.
JUST USE COMMON SENSE! What do you think you will get for a 40k property in the middle of no where with a rent of $650?? you will get a crappy tenant that will destroy your house. Who else would rent such garbage? You have to pay for quality. If you want to buy a nice $150 house in a good area with a good tenant, that is awesome, but don't expect huge returns, expect market returns of around 7-9% if that assuming everything goes right. You are paying market value, stop expecting such a deal! Deals only come if you do it yourself.
If you want value, here is a simple formula: Save up some money every year and wait patiently...wait...wait...keep saving...etc....finally when another 2008 happens and properties are dirt cheap, buy them up them. Key is patience and discipline and it will pay off.
- Investor · Scottsdale, AZ · Member since 2015 · 130 posts · 102 votes10y
Originally posted by @Chris Gerenser:
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.
Be very careful who you work with. Next thing you know, you're out an appraisal and inspection so you come out of pocket almost $2K above appraised value to buy the property to save your other $1K to find out that the HVAC doesn't work and the Fridge door fell off on move in. Oh yeah and that the rent is $100 lower per month than expected because the person moving in had evictions so they pulled a swap after buying the property, and oh yeah they are section 8. And you get left high and dry with them offering minimal help. Vet extensively, see the property in person, look at the statement of work, don't pay above appraised value, and if it seems fishy, walk away.
- 10yJustin SumulongPro MemberInvestor · Chicago, IL · Member since 2015 · 38 posts · 15 votes
For the people who had or are having bad experiences with their respective TK companies, I'm wondering if you guys can share details (up to you how much) of your due diligence throughout your experience; either on here or through PM w/ me directly. Additionally, what would you have done differently that might have made your experience better?
With only one TK under my belt, I already feel the due diligence is the MOST important part of the process and is something I'm looking to really detail for my own future purchases.
- Investor · Napa, CA · Member since 2016 · 19 posts · 5 votes10yThanks Lance for the caution. Justin, any info you can share on market/price/rent and TK Provider you used would be appreciated. I'm still in that due diligence stage myself. Have asked for referrals, had multiple phone conversations with TK providers, reviewed properties, looked up market/neighborhood info online, and compared deals/rents to what's being currently offered for sale/rent (Zillow).
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