Turnkey Real Estate and ARV

4 Replies

Hey biggerpockets community,

I am a new member and was hoping to get some advice when it comes to turnkey REI investing. Unfortunately I live in the bay area (CA) and am priced out of investing here so I am looking out of state (Tennessee, Georgia, Florida, Indiana).

One of the things I have been thinking is turnkey RE investing too good to be true? I mean, they have to make money off of you somehow right? I keep reading all these posts about how they will try to mark up their houses to out of state buyers, not fix up CapX items in the reno, etc).

I have narrowed my thinking down to the $ they make with their renovation and ARV %. I don't have a huge budget, so doing the renovations myself is out of scope...

Technically, if you get an appraisal and the house is not overpriced, and there are no majors issues via an inspection, wouldn’t it still be a good deal? (Assuming you cash on cash, location, market, etc all check out). 

I know that I will not be able to make money on the flip (it takes $ to make $), but wouldn’t you guys agree that as long as your not getting ripped on the purchase turnkey is still a viable investing option? Is there anything else that I’m missing here?

The real issue with investing in "low cost" housing markets - whether turnkey or not - is whether your cash flow over time is going to exceed your regular carrying costs and capital expenditures.  The key phrase here is "over time."  Too many investors look at first year cash flow and extrapolate that number forward to base their decisions.  With direct ownership of real estate, there are inevitably unhappy events - roof or furnace failure, rodent infestation, etc - that will cut into your projected cash flow and sometimes make you negative.  Moreover, many "low cost" markets have terrible weather that takes a toll on the housing stock.   One failed roof can eradicate 5-10 years of "cash flow."  

An appraisal is not going to protect you from this phenomenon.  You need to learn to evaluate markets and various housing systems (electrical, plumbing, etc) to make good investments (IMHO) in this space.  Depending wholly on others is a recipe for disaster.

You want to factor in a realistic CapEx number for sure. What exactly that number should be should properly be based mostly on property-specific characteristics. Do you have a 25 year old roof or a 5 year old roof? In the former case 5% is probably too little and in the latter 5% may be too much. Same for furnace, etc.

Hi @Cole Perry ! Full disclosure I have not done turnkeys myself, yet I've found turnkeys have come up in several recent conversations with other investors. One person, a seasoned investor, said she's experienced how turnkey providers can change from being fabulous to not great quickly. Apparently consistency is an issue. Another person they ran into the challenges you note- CapEx stuff not done, as well as unrealistic rental rate projections.

I'd note that it is possible to buy a move-in ready rental property that isn't from a turnkey provider.  That may be something to consider!

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