Turnkey Provider Standards

8 Replies

BP real estate investors, what are you looking for as a standard for turnkey homes for passive investment?  

You want specific standards, such as no less than 5 years left for a roof life, 3 years of HVAC left, etc.  Less than $500 in repairs needed, 1 year warranty for most mechanical components, quality renters and PM in place are critical.  

What else is a MUST that would give you 100% confidence that you will be safe in a turnkey investment?

@Mark Woodling

If it’s true Turnkey, then you should have no deferred maintenance issues for at least 5 years, ideally 5-7 years. Also no major appliance issues. Major appliances should be fairly new, in very good condition.

There will always be minor maintenance repairs, but they should be just that - minor. No more than 5% of your gross rent per year in years 1-5.

Also, when I purchase Turnkey, I expect property management and leasing already in place. I know that’s not the standard with all Providers. But it makes it so much easier when you know there is a good property manager/leasing agent already working to keep the tenants happy and the property leased, or else they don’t get paid.

Originally posted by @Mark Woodling :

BP real estate investors, what are you looking for as a standard for turnkey homes for passive investment?  

You want specific standards, such as no less than 5 years left for a roof life, 3 years of HVAC left, etc.  Less than $500 in repairs needed, 1 year warranty for most mechanical components, quality renters and PM in place are critical.  

What else is a MUST that would give you 100% confidence that you will be safe in a turnkey investment?

My definition of turnkey includes everything being fully rehabbed for you, so the roof is brand new, HVAC is new, plumbing and electrical are updated as needed, etc.  

I have 4 turnkeys from 2 different providers (3 with one provider, 1 with the other provider).  I can tell you their rehab standards seem to vary quite a bit as I’ve had more issues and  repairs with the 1 in five months than I’ve had with all 3 combined.

As others have stated, make sure you do your due diligence on the providers, their standards, and understand what will and will not be completed/replaced/updated/etc. 

Originally posted by @Mark Woodling :

BP real estate investors, what are you looking for as a standard for turnkey homes for passive investment?  

You want specific standards, such as no less than 5 years left for a roof life, 3 years of HVAC left, etc.  Less than $500 in repairs needed, 1 year warranty for most mechanical components, quality renters and PM in place are critical.  

What else is a MUST that would give you 100% confidence that you will be safe in a turnkey investment?

 A turnkey house is simple a house. Every deal is different. There shouldn't be "universal" standards at all. Investors need to look at the house as an individual property and obtain a 3rd party inspection to assess the exact condition of what it is that they are buying.

@Mark S.   in general I agree with you about all major components being new. And some turn key's do this.. 

but each house as @James Wise is different.. and if there is a 5 year old HVAC system your not going to rip it out so you can say its new.. 

However obviously having new components is going to add more value than things that have less useful life.. and 5 years on a roof can really only be 1 or 2. 

So for most companies that are in the house flipping business and choose to sell their houses to investors instead of owner occ. they will look at each house and try to determine what can be salvaged and what should be replaced.

Keep in mind if your in an area were the values might only be 50 to 70k for a rental there is only so much you can do to it. and this is what Sunk most of the MOrris people..  trying to shoe horn a rehabbed rental into a 50k total all in. 

the house had to be bought for 5k  if you were going to do a reasonable rehab .. and have profit for the flipper and contractors and the marketing company.. all three make profit.. so this in itself put the buyer of those homes squarely in the HOOD>. And even if the homes were all rehabbed they would fail over time.. as the tenants would beat the crap out of them .. not pay  etc etc.. 

Originally posted by @Account Closed :

In addition to the above mentioned fully rehabbed condition, what also needs to be mentioned is ROI.

It must cashflow, and it must be for sale a price that will give me the LTV necessary for good leverage with a conventional loan.

If the NOI is not solid, I don't care if the condition of it is brand new. You can keep it.

It should really be you as the buyer who is doing the numbers to determine the ROI. There isn't any secret to what the expenses are. Simply take the rent and deduct the fixed expenses along with the average of the variable expenses. Relying on a Pro forma number alone is not prudent buying.

Originally posted by @Mark Woodling :

BP real estate investors, what are you looking for as a standard for turnkey homes for passive investment?  

You want specific standards, such as no less than 5 years left for a roof life, 3 years of HVAC left, etc.  Less than $500 in repairs needed, 1 year warranty for most mechanical components, quality renters and PM in place are critical.  

What else is a MUST that would give you 100% confidence that you will be safe in a turnkey investment?

Interesting question.  We'll see if it gets any traction with viewers and comments.  

I am actually giving a talk at the BiggerPockets Conference in Nashville Monday on the topic.  I have a short amount of time, but I am essentially giving a brief breakdown of what most of the industry leaders would characterize as the basics.  The smart decisions and the things that reduce the risk of the investor the most.  Funny thing is, the word Turnkey does not matter a ton.  There are a few specifics to turnkey, but the rest is just basic good real estate and how we reduce risk when investing passively. 

I'll post the points from my talk after I give it on Monday. 

Not all TK's are created equal.  They operate in different markets, in different property classes, and rehab to different standards.  In our business, we've found transparency to be the most important thing we can do.  As example, we order two inspections during our rehabs...one up front for our rehab crews, another at the end to make sure we didn't miss anything.  These, along with full rent analyses of the area, help our investors understand exactly what they're getting, and have a reasonable assessment/expectation of how that property should perform.  

Where investors get hurt:

1.  By being lazy and not doing enough due diligence.

2. By relying solely on ROI projections from a TK provider (see #1).

No matter what their benchmarks (which may vary by property class, area, etc), if a provider is not willing to provide hard evidence of the condition of the property, it will be difficult for an investor to make a smart decision.  

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