Turnkey Investments in 2018

15 Replies

Good Day BP Community,

I'm looking to see if I can get some pointers from investors who are planning to be active in investing with Turnkey firms in 2018. These are the main points I'm seeking some guidance on:

  1. Has there been a noticeable decline in the quality of deals/offerings in the past 1-2 years as home values across the country have generally appreciated?
  2. I've heard from several out of state-focused investors recently, their experience has generally been that paying the "premium" for a Turnkey service comes out as a wash financially versus trying to go at it alone in an out of state market. Meaning that the economies of scale and efficiencies provided by the Turnkey operators are worth your while, not having the risk poor Property Management, high turnover tenants, vacancy loss, etc. Are you in agreement with this philosophy?
  3. Several Turnkey providers I've been investigating recently are pretty aggressive at addressing deferred maintenance upfront, often opting to replace HVAC and roof which technically may have a few more years of life left. This is stated as being beneficial to the home buyer, as it allows repairs to be financed in the initial purchase, as well as provides for predictable cash flows. Has this been the experience for your Turnkey investments?
  4. Which markets are you targeting in 2018, and do you have any Turnkey providers you'd highly recommend? 

Thank you in advance BP Community for your support!

I bought my first turnkey in August of last year and am buying my second this month. These are both in Memphis. The first one I bought appraised at purchase price and the second I’m buying appraised 4 percent over purchase price.

Both come with new furnace, roof, floors, kitchens, water heater, and the second one had a new AC unit too. There should be very little maintenance on either for the first 3ish Years (minus normal wear and tear at a tenant turnover)

Cash flow is 150-200 a month depending on how you account for maintenance, vacancy etc. CoC should be 8-11 percent.

@Caleb Heimsoth

Thank you for the info. I too am taking a look at Turnkey in the Memphis area, and your figures are in line with what I'm seeing as available currently. One of my goals in starting Turnkey would be to learn the ropes a bit, especially for out of state. Do you feel there's a decent amount of transparency in terms of upfront rehab cost breakdown and property mgmt fees? I would want this experience to bring me closer to being able to run this process independently. Otherwise I would opt for a REIT or RealtyShares. 

Also, how are your rental rates primarily handled for your turnkeys?

Thanks!

Keith: Rather than purchase a turnkey in which you still retain the same tenant risk as a local SFR investment, have you considered investing alongside an asset manager on larger deals?

An asset manager will source a deal, find a suitable property manager, and handle the day to day asset management tasks, so your investment becomes truly passive. In large multifamily purchases, you reduce your tenant risk by diversifying your tenant mix. Additionally, a good asset manager will reserve cash for use on future capital expenses, so you don't need to worry about setting aside a portion of your income for unplanned roof repairs. 

Hope this helps!

@Keith Meyer I think you're asking the right questions but, in your shoes, I'd find a market that you like first and *then* evaluate the turnkey vs. non-turnkey properties (as well as the specific providers in that area).  If you absolutely believe that Memphis is *the* market for you, then I'm sure you'll have an array of options.  If, however, you decide that Bozeman, MT is where it's at...then...I'll posit you'll have less options, less providers to choose from, etc.  I know that a lot of people here love the idea of "going with a great turnkey provider" and I don't think they are incorrect.  However, I wouldn't want to choose the metro market to invest it *because* there is a great turnkey provider there.  But that's just me...

Thank you @Tyler Kastelberg  and @Andrew Johnson for the great feedback!

Tyler, this is a phenomenal suggestion which I hadn't really considered up to this point (still going through education on all of the investment options available these days, though I know a lot more now than I did a month or two ago thanks to BP). 

Are you familiar enough with real estate-specific asset management options to provide some clarity on how these differ from purchasing shares in a multifamily project via a service like RealtyShares? Are the return rates mostly predetermined? Do you typically need to be an accredited investor to get involved?

@Keith Meyer Investing with an asset manager or "sponsor" can be done either privately through a firm like mine or on a crowdfunding platform like RealtyShares and Fundrise. Investing privately with an asset manager allows you to access deals with very little restriction, so long as you are a "sophisticated" investor. The SEC will require that you certify you are "sophisticated" and thus understand the risk associated with the investment. Sophistication is not associated with income or assets.

My understanding is that sites like RealtyShares and Fundrise limit their investor pool to "accredited" investors, which tends to bar many middle class folks from taking part in their offerings.

As a sponsor who raises private money, I'm typically able to structure deals with less risk and greater return than available on crowdfunding sites. However, crowdfunding sites have been great for both sponsors and investors as they allow easy access to capital and diversification.

In both structures, return rates are estimated but never promised. Like an equity position in a stock, you're susceptible to the ups and downs of the market.

I hope this helps! Feel free to message me if you'd like to find a time to discuss.

@Keith Meyer I would say the rental rates are in line with the market, maybe a tad below (25-50 dollars) with non turnkey options.

Being that bit below market isn’t bad as it keeps vacancies smaller. The lease terms are also typically longer at 18 months to two years depending on the provider.

I went turnkey for several reasons. First a good provider will simply the process greatly, which as a total newbie at the time was important to me (I can get anxious and they helped with this). Also I was okay with paying a bit of a premium if I knew there would be less “surprise costs” down the road in deferred maintenance. Secondly, they’re experts in their market and can help me understand it better (on a street by street level), then I ever could on my own.

Also my personal situation is different than others and that played a roll in it too. I’m young (early 20s) and therefore have a long time horizon. I also want and can scale fairly quickly. If you only buy one every 1-2 years I wouldn’t go with turnkey. If you can buy 5-6 in that same time frame, you get the same diversification as other talk about.

I eventually want to do multifamily and commercial and I will, but not before I get lots of their properties under my belt.

Last year I visited all the big turnkey providers in Memphis and will happily give you the pros and cons of each if you PM me.

@Keith Meyer to answer your other questions most reputable companies will give you a scope of work and tell you what was replaced and what not and provide photos of before and after.

Beyond that, get an inspection done (250-300 dollars in Memphis) and they’ll find anything else that still needs to be fixed. These issues are then fixed prior to closing.

All PM fees are clear and up front. Typically it’s 8-10 percent gross rent, one month rent on new tenant and 200-300 dollars for resigning tenants. Some PMs charge a mark up maintanence fee of 10-15 percent.

Lastly, I have also bought a non turnkey property rental (not in Memphis) and can talk to you about that over message if you want.

If you message me I can give you a step by step process on the turnkey process that I’ve experienced over the last 9 months or so.

Happy investing !

I own Rentals in Memphis and there are all types of investment options in Memphis. Make sure you source your properties well and make sure you explore all the available options 

Dean Harris, Real Estate Agent in MS (#s-40616) and TN (#00286759)
(901) 619-6170

@Keith Meyer 100-300 of cashflow per property is typical. Usually what’s going to happen is the provider is going to try and size you up and see how we you know your stuff. Just know too that they have a lot of other unsophisticated buyers lining up to buy limited investor grade properties. I just makes more sense to flip to retail these days. Let me know if you need any help.

Daniel F. Harb turnkeys are a great way to get started. Invest for cashflow not appreciation when starting out.

@Keith Meyer I started my OOS REI over 5 years ago with turnkey company investments. Here are my answers to your questions:

1) Yes, but it isn't just due to home values at retail prices appreciating, it is also due to the shrinking shadow inventory of REOs and other distressed property deals - especially in the better areas for rental properties.  These shrinking inventories combined with increased demand are driving wholesale prices up and making it much harder to find deals.

2) Like some many things in REI, my level of agreement with this assessment depends. Yes, assuming you work with a turnkey team that is truly well run and ethical, while offering nicely rehabbed properties in good neighborhoods with strong rental demand. If you don't have the time and/or inclination to build your own team then I would agree with this assessment. Often, turnkey can be a way to enter a market. Many, like myself turn to other strategies as we go along.

3) Yes

4) I am not buying turnkey these days myself, but do assist other investors in doing so.  As above it is getting much more difficult to find the right combination of market and provider, but they are still out there.  Expectations for returns should be lowered from what was obtainable even a year or two ago.

Larry Fried, Real Estate Agent in OR (#201211636)

Hey Keith! I started investing in turnkeys in 2011 and have been involved with them in depth ever since...on all sides of the equation. My answers to your questions:

  1. Has there been a noticeable decline in the quality of deals/offerings in the past 1-2 years as home values across the country have generally appreciated?

Yes and no. Overall, the offerings are much less abundant and crazy cash flow heavy as they were in say 2011-2012. When the entire RE economy was tanked, you could buy up so many amazingly nice properties for cheap and rent them for quite a bit, the price-to-rent ratios in general were super desirable. It's much less so now and the properties aren't at the same level of abundance and bang for the buck, but there are still good deals out there. The one reason why I say "yes and no"- I just gave you the yes part- is because even with those dynamics controlling a lot of it, I've started working with turnkey opportunities that are amazing and weren't around back in the day. For example, I work with a turnkey provider who lets you fund it, they do all the work, and then you get the forced appreciation and cash flow. It's basically combining BRRRR+turnkey so you get the best of both worlds- financial gain of the BRRRR but you don't have to do all the work. Normally I wouldn't promote that kind of buying model because you, as the investor, hold the risk but this TK provider in particular offers guarantees for each of the risk points so you are covered. So like that is an insanely awesome deal, and it didn't exist a few years ago when properties were at their prime. Long-winded answer, sorry!

  1. I've heard from several out of state-focused investors recently, their experience has generally been that paying the "premium" for a Turnkey service comes out as a wash financially versus trying to go at it alone in an out of state market. Meaning that the economies of scale and efficiencies provided by the Turnkey operators are worth your while, not having the risk poor Property Management, high turnover tenants, vacancy loss, etc. Are you in agreement with this philosophy?

Yes, sort of. I agree with the premise but not the specifics of what it creates for you that you mentioned- poor PM, high turnover, etc. Those things are still possible and PMs will still need to get dealt with and turnover depends on the PM and where the property is, etc. But I do believe the premium is 100% worth it, depending on your personal situation. Here's why-

https://www.biggerpockets.com/renewsblog/2013/02/1...

  1. Several Turnkey providers I've been investigating recently are pretty aggressive at addressing deferred maintenance upfront, often opting to replace HVAC and roof which technically may have a few more years of life left. This is stated as being beneficial to the home buyer, as it allows repairs to be financed in the initial purchase, as well as provides for predictable cash flows. Has this been the experience for your Turnkey investments?

Yes. Helps avoid CapEx for quite a while, keeps your maintenance expenses minimal, and saves headaches. The nicer the property too, the nicer the tenant quality you can attract.

  1. Which markets are you targeting in 2018, and do you have any Turnkey providers you'd highly recommend?

The BRRRR+turnkey model is buy for the one I'm working with people on the most, and that one is in Philly and Baltimore. But that one requires higher capital to start. Chicago and St. Louis are my big ones for 2018 for the standard TK model.

(I couldn't make the numbers on the bullets not change themselves and now I can't scroll up to clean it all up. So ignore that...)

Hope that helps! Reach out anytime if I can be of any help.

Originally posted by @Keith Meyer :

@Caleb Heimsoth

Thank you for the info. I too am taking a look at Turnkey in the Memphis area, and your figures are in line with what I'm seeing as available currently. One of my goals in starting Turnkey would be to learn the ropes a bit, especially for out of state. Do you feel there's a decent amount of transparency in terms of upfront rehab cost breakdown and property mgmt fees? I would want this experience to bring me closer to being able to run this process independently. Otherwise I would opt for a REIT or RealtyShares. 

Also, how are your rental rates primarily handled for your turnkeys?

Thanks!

Just a couple of two cents on what you said here... ultimately, while checking on rehab cost breakdowns is okay to know and certainly knowing the PM fees will be relevant for your numbers-running, these two things are far from the main things that should tell you the legit-ness of a TK provider or their offering. The most important thing, I think, to think about first is the market itself. You mentioned Memphis... I am a huge fan of a particular TK company there and trust them with everything I have, but I don't like the market so I've never invested with them. Or on the contrary, maybe a market is great but there aren't any good TK providers there. Then for the TK providers, things like consistence, communication, and quality are key. Way before fees or rehab breakdowns.

Maybe you didn't say all this in terms of them being the main things you are focusing on, but saw it and wanted to throw that out there (for you or anyone else reading).

Originally posted by @Keith Meyer :

Good Day BP Community,

I'm looking to see if I can get some pointers from investors who are planning to be active in investing with Turnkey firms in 2018. These are the main points I'm seeking some guidance on:

  1. Has there been a noticeable decline in the quality of deals/offerings in the past 1-2 years as home values across the country have generally appreciated?
  2. I've heard from several out of state-focused investors recently, their experience has generally been that paying the "premium" for a Turnkey service comes out as a wash financially versus trying to go at it alone in an out of state market. Meaning that the economies of scale and efficiencies provided by the Turnkey operators are worth your while, not having the risk poor Property Management, high turnover tenants, vacancy loss, etc. Are you in agreement with this philosophy?
  3. Several Turnkey providers I've been investigating recently are pretty aggressive at addressing deferred maintenance upfront, often opting to replace HVAC and roof which technically may have a few more years of life left. This is stated as being beneficial to the home buyer, as it allows repairs to be financed in the initial purchase, as well as provides for predictable cash flows. Has this been the experience for your Turnkey investments?
  4. Which markets are you targeting in 2018, and do you have any Turnkey providers you'd highly recommend? 

Thank you in advance BP Community for your support!

It is not that you are paying a "premium" as much as you are paying for what you get. Ideally, a true Turnkey provider will own, renovate, and manage the property all in house. You are paying for a property that will not need a lot of work in the near future and should cash flow from day one. 

I would suggest taking a look at:

The Best Types of Markets for Profitable Turnkey Properties

and

What to Ask When Working With a Turnkey Provider

Tom Ott, Real Estate Agent in OH (#2016003865)
440-749-4043

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