Turn-Key Rentals- Good or bad idea? What are your opinions?

56 Replies

I want to get into rentals for some passive income, but I travel 6-10 months out of the year and cant manage them myself. I am intrigued by Turn Key rentals. Can anyone give me some of your personal opinions on whether turn key rentals are good or bad idea? I can see the upsides for my lifestyle, but what are the negatives or downsides that I might be missing. Thanks, Nick

Originally posted by @Nick Troutman :

I want to get into rentals for some passive income, but I travel 6-10 months out of the year and cant manage them myself. I am intrigued by Turn Key rentals. Can anyone give me some of your personal opinions on whether turn key rentals are good or bad idea? I can see the upsides for my lifestyle, but what are the negatives or downsides that I might be missing. Thanks, Nick

 There are good Turnkeys and there are bad Turnkeys as you might imagine. You can easily overpay and not make any money. You should visit the property before you buy it. You have to know your numbers and your neighborhood. I sell Turnkeys that are self-managed but it isn't for everyone. The biggest problem I have is my investors not following good advice and then trying to do something they think is better even though I've been at it for 25 years and they are brand new. ;-)

Bad .. 

they are too “sanitized “

All the meat has been stripped 

If they were that killer the company selling them would just keep those cash cows themselves ! Think about it 

Your going to pay top dollar 

Your going to have marginal cashflow 

Your going get whatever PM they have 

It depends on the company. I've heard nothing but good things about Memphis Invest. They are in 8 different markets and seem to have great systems in place and are reputable. It's my understanding that they buy the properties, fully renovate them, put tenants in them, and then sell it to you has an investment under their management with a paying tenant.

Many turn-key companies buy the property cheap, sell it to you for a big markup, charge you for renovations and include another markup, then make you use them for management before they even put a tenant in the property. It's incestuous and has a high likelihood of dishonesty.

Turnkey dad buys a property at market value, makes nothing on the buy, pays someone to PM and turns an ongoing ROI of 10% with some good luck.

Cat urine dad buys a stinker, makes 25% on the buy and rehab, self manages and turns an ongoing ROI of 20%.

Best, Terrell

Originally posted by @Nick Troutman :

I want to get into rentals for some passive income, but I travel 6-10 months out of the year and cant manage them myself. I am intrigued by Turn Key rentals. Can anyone give me some of your personal opinions on whether turn key rentals are good or bad idea? I can see the upsides for my lifestyle, but what are the negatives or downsides that I might be missing. Thanks, Nick

 They are great for investors looking to invest OOS and do not want to take on a second full-time job. Ideally, everything is done for you by the provider and they should be cash-flowing from day one If you want to be passive and invest in a different market, I think they are a good way to go. 

I am also happy to discuss. It's mainly a matter of your goals and expectations. I am an out of state investor and could not do the work myself.

Conceptually I see a good turnkey company this way: When you are good at property management in a market and want to increase your portfolio and revenue stream while keeping repairs on managed properties in house, you create a great turnkey company so that you make some money on the sale of the properties, and on the management of the properties while maintaining a team for repairs that will always have work and grow as your portfolio grows.

That's why I look for turnkey providers who purchase, renovate, sell, manage, and maintain the properties all under one organizational roof.

I think some TK buyers might be better off getting a REIT like OHI. They do the assisted living facilities and pay 7%. Let's say they did this 3-5 years ago. They would be nearing double in appreciation plus dividends. That is turn key without the debt and evictions. I would not say TK is necessarily a bad idea, just perhaps there could be better ideas for some of those TKers. Another example is goto the MLS and buy a turnkey condition house. On the MLS you might find 100X the inventory and likely a better price than what a TK company can offer. Then just add the PM yourself. Good luck!

Turnkey rentals can be good for just collecting the check, and if you are busy with a job or business it will alleviate a lot of the work required.  However in most cases you will be paying a premium and could over pay for the property. It also depends on the company you are using, look at their reputation and talk to other investors who have used them. 

Hey Nick. Most TK providers don't include true turnover costs in their projections... plus you're investing in one door at a time. Think bigger!

Why not spread your same capital across hundreds of doors with less downside risk and more tax shelter?

@Nick Troutman I want to get into turn-key rentals myself. From what I've been advised, especially if you're planning to invest out of state, good property management is key. I looked into Memphis Invest, as mentioned above, a few weeks back from an email. They are called REI Nation now. Also researched others' experiences with them here on BP, they do seem to have a pretty solid reputation. With your lifestyle, you want to have a safe, hands-off experience. Nothing is guaranteed obviously to ever flow perfectly, you would still be facing potential challenges like maintenance and vacancies while you travel, but you might up your odds for success if you try it out with a strong company, definitely visit the properties you plan to invest in, and calculate everything correctly. Good luck!

TK in my opinion is essentially lazy investing. Do a deal in the amount of time you have while you aren't traveling and hire a property manager instead. That way you keep your equity, gain experience, and withhold the profit margin for yourself.

I don't have anything against turn-key investing. It's a great fit for some people. The big thing to be aware of is that in order to provide full turn-key services and the overhead that comes with those services, the turn-key providers have to make a decent profit. This usually means that the houses you buy are full retail value if not over retail value. Honestly, I don't have anything against paying retail prices for homes as long as you are 100% sure you want to stay in the buy and hold rental game for the long game. If not, you will probably end up loosing money if you try to sell within a few years of purchase. 

Also, make sure their pro-forma numbers are legit. I've seen pro-forma reports that only have 5-8% repair budgets with no separate cap-ex budget. A 5% budget doesn't go very far towards the actual cap-ex expenses or make-ready expenses that you will definitely incur at some point. I personally budget closer to 20% of gross rent towards repairs/cap-ex. 

@Nick Troutman

As a higher paid ex-engineer... turnkeys was a good way that I got started with less time on my hand and having some cash.

Let me know if you have any specific questions.

It fits a need for a certain type of buyer and can work out well for people who want to be less hands on. Some good operators are out there and if you are going to do it, you need to go through one of them.

But, no I’d never touch one. Mainly Bc I don’t want to invest in flyover country. No offense, but not for me. Also, I can make better returns in the stock market, my private businesses, and real estate close to me. **** I can beat their returns by buying a 4-5 cap in NYC and have a lot less headache. 

@nick troutman Turn key is simply a method of acquiring a rental property. It isn't a strategy. One of the biggest complaints you'll hear is that you over pay for a turn key. That might be the case with turn key companies that only sell to cash investors so be sure to work only with a company that allows financing and an appraisal contingency. Companies that do that can't sell above market value. Also, look closely at the class of properties and neighborhoods they operate in. Make sure that whoever you are working with is aligned with the type of asset that you are interested in. Personally, I wouldn't recommend buying cheap, low end assets in rough neighborhoods, especially as an out of state investor. If that's primarily what a turn key company sells, then they may not be a fit for you. Here are some of the key things to look for and avoid in a turn key company:
* Don't allow financing or a financing contingency
* Don't allow for an independent inspection
* Are not realistic with their pro forma projections
* Require you to pay for renovation upfront
* Sell only in cheap, D class neighborhoods
* Don't accurately represent the neighborhood & property classification
* Don't have consistent rehab standards
Don't provide a scope of work for the renovation
* Require you to close before a tenant is in place.

@Nick Troutman

Hi! I’ve used turnkey investment companies since 2016 and purchased a few. I get decent cash flow for the least amount of work, HOWEVER - I had to evict two tenants last year, deal with legal fees and the costs to fix the place. The hands off approach goes both ways, so although I don’t have a say in most things, that’s bad also, such as the costs to renovate and to be able to approve and qualify a tenant. One turnkey company is St. Louis told me they don’t want to share the details of a new tenant to the OWNER of the property because that goes beyond their process and if they did it to one, they would have to do it to all. I was gobsmacked. And I pay them!

I guess what I’m trying to say is, do your due diligence on the turnkey providers, see what other folks on here have to say about them. Good luck

@Nick Troutman

Definitely possible any one who says all turn keys are bad is just being close minded.

I just closed on my 4th basically turnkey and they rent at 2-4%, depreciation and management cover my taxes as well. All out of state and managed professionally. Doesn’t need to be rented out if it’s in rentable condition your PM should be able to get a tenant in there in 1-2 months.

Downside is the area is not known for its appreciation but I’m in the game for cashflow first, and appreciation after I’ve built up solid passive income streams.

Best of luck on your journey brother!

@Nick Troutman As an agent I get this question all the time.  The best way I've found to think about it is the level of involvement you want to have and then that typically correlates with higher risk and potential for return with the more involvement you want.  If you think about it as concentric circles then the highest level of involvement would be managing the property yourself in a market you also live in, the second would be using 3rd party manager but sourcing your own deals in another market, 3rd circle would be paying others to source your deals and do the work to repair and mange, this is generally the turnkey model and you are naturally experiencing less of the upside yourself as you are hiring out the other parts.  But even turnkey is not totally hands off as you are still responsible for anything that happens to the house whether or not you are paying someone else to deal with it.  A 4th circle for totally hands off would be investing as an LP in other peoples deals that way you can leverage the expertise of the sponsor find and do good deals.  This mitigates some of the risk but also takes away any control you would otherwise have with owning your own house.  A good option might be to talk with a group who can help you with any of the options.  I know @Sean Tagge sells a lot of turnkey properties in Memphis and they also provide 3rd party management for properties all over the Memphis area.  

I started with turnkey a little over a year ago, and it's been wonderful. It gave me both an education and an inspiration for more investing. The best thing about it is that you get properties that make sense from the day you but them. To this end, the best learning I found on turnkey was from @Jason Hartman and his podcast. 

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