How to consider a property as turn key

Question

Me and my wife invest SFH rental locally. Most of the properties we purchased have an age within 20 years. In order to diversify our portfolio, we are thinking to invest out of state. We search so called turn-key properties and had spoken several turn-key providers. However, we do have some concerns on turn-key properties and hope sophisticated investors can provide some insights:

1. Normally turn-key properties providers provide have an age range of at least 50 years. However, when talking about the renovation done in the property, seems no plumbing or wiring replacement has been done. Basically, the turn-key properties just are done with the replacement of roof, water-heater, and/or kitchen/bath reno/resurface. This would concern me a lot that issues with plumbing and wiring would definitely happen down the road.

2. Normally the turn-key companies collaborate with local providers and contractors. when talking about signing the purchasing contract, the parties on the contract would be only the investors and local provider, rather than the turn-key companies. This concerns me a lot if something bad happens in the future.

3. Since the contract is only between investors and providers, what is the role of turn-key company plays in the business? Referral benefits?

4. Management company also is local and turn-key companies have no control with the local management, why investors need to have turn-key companies as their contact and let turn-key companies to deal with local management? No guaranteed at all since turn-key company cannot control over the local management/providers

5. What about the appreciation of so called turn-key properties compared to the properties with the age of 10-20 year?

Jeff Schechter · Answer

@James Li As someone who has intimate knowledge of the TK industry, it is apparent to me that you have not yet found any true Turnkey providers.  Let me address your concerns individually...

1.  A true TK company will have rehab systems and checklists in place.  The age of the property is not that meaningful, as long as their processes address anything old that does not have a long lifespan remaining.  The good TK's will even give a warranty on their work, and show you a scope of repairs.  Once the rehab is complete, a 3rd party inspection will reveal any issues that may not have been addressed.  From there, you can fully assess the condition, and whether or not you want to buy the property.

2.  When buying from a true TK, their name should be on the contracts.  If you are buying from one of their referral sources, they have to get paid too.  You should be buying direct to get the best pricing.

3.  Many TK's are not that good at marketing, and have to rely on referral sources.  Again, find one that doesn't sell this way, and skip the extra markup.

4. A true TK will have their own PM team.... full skin in the game.  They will be motivated to earn your business, and to KEEP your business with good management every month.

5. As @Mike D'Arrigo has pointed out, age has little to do with appreciation.  Increased values come from increased demand.  That said, when you are buying from a TK, you are buying with the intent of buy and hold.  You are going for CASH FLOW.  If you are buying for appreciation, that is a completely different strategy.  Further, appreciation is only meaningful upon sale or refinance.  Look for properties that have excellent cash flow, and buy in bigger growing cities where the demand is increasing, so that you can maybe see some appreciation, but don't factor it into your calculations.

James Li · Answer

@Jeff Schechter

Thanks Jeff for the responses. That makes more sense to me for what you pointed out.

Mike D'Arrigo · Answer

@James Li Age of a property isn't as important as the renovation that has been done. In fact, a 15 or 20 year old property could very easily have more deferred maintenance and CAP Ex than one that is 50 years old. That's because it's very likely that a 20 y/o property is going to have the original AC, furnace, water heater and roof, all of which are at the end of their useful. The turn key property on the other hand may have had the HVAC and roof replaced in the renovation. In most cases, this will be true of a good turn key. Personally, I would take a well renovated 50 year old house over a 20 year old house that hasn't had anything done to it. It's rare that even a 50 year old house would need to be rewired. It wouldn't have old knob and tube so all you need to check for is whether it is aluminum wiring which was more common in the mid 1970's. Other than that, your wiring should be fine. The panel might need to be upgraded if it isn't 200 amps but that's an easy replacement. Plumbing is only going to be a problem if it's old galvanized steel which hasn't already been replaced, so just because the turn key company isn't rewiring or re plumbing, doesn't mean you'll have problems. It probably means it doesn't need to be done.

You're confusing turn key companies with promoters. Promoters work with local turn key companies in their markets and as you said, the purchase contract will be with the local turn key company. There's nothing wrong with that. Reputable turn key companies stand by their product and will offer some kind of warranty. You need to be realistic though and understand that things go wrong with properties no matter how well they are renovated and the turn key company is not responsible for whatever might go wrong in the future. That is why you have an independent property inspection and have anything that would effect the integrity of the property or be a potential hazard addressed by the turn key company before closing.

As far as appreciation, it's a fallacy that older homes don't appreciate as much as newer homes. Appreciation is based on the desirability of the neighborhood. There are many older homes in desirable, upscale A class neighborhoods that have good appreciation potential. It's in the lower class. predominantly rental neighborhoods that don't have much in appreciation.