What is a fair margin for a turnkey provider to make?

26 Replies

Hi all,

Seems like there are a few turnkey providers that look to sell to out-of-state investors. What is a fair margin you can expect to pay for this service?

These providers use local knowledge and networks to find bargain properties, then renovate & find a tenant before selling. That is a service that folks out-of-state should be expected to pay for. The question is how much is fair versus getting fleeced?

Thanks in advance

@Nathan J. that is a great question and as HML who specialized in funding turn key companies in the day... I have seen well over 2000 huds.. and in the day the TK company made their profit the day the investor bought the property pre rehab with the HML I provided so I saw exactly how much they made per deal... The answer is 5 to 10k back in the day... Now a days depending on market the guys I fund will make that and or much better.. Its the same thing as if your buying a rehab to sell to a home owner.. You can watch BP here and when someone hits a home run they post HEY I JUST MADE 150k on a FLIP then the BP followers start in with post after post of congratulating the rehabber for hitting home run.. YOu do not have Turn Key operators or any of the people that sit on the west coast marketing the product coming on BP and disclosing what they make... They make as much as they can like any other investor.. YOu need to work it backwards in a market to figure out profit margins for TK flippers... You can get much of this information on MLS.... take a market look at the cheapest properties in a neighborhood your interested in in my 20 plus years of funding SFR TK homes average rehabs are 5k for fluff and buff to 25k for replacing most major items and roof etc.. So add in that in.. you come to say all in in many markets is 50 to 60k and if the Tk operator has the same home for 79k or less probably pretty standard if its above that then there is a pretty big hit being made. Its Caveat Emptor ... ONe thing you should get is a scope of work on any turn key home and you can price that out.. Then get a third party inspection when the home is done to confirm that the work on the scope was actually done... And if you buying for long term rentals make sure the mechanicals and major components are either new or less than 10 years old . A 25 year old Hvac system that is serviced and working when you buy could crap out any day and cost you 3 to 5k to replace there by taking 2 to 3 years of your so called positive cash flow.

I wrote a book on the do's and don'ts of Tk for Australians. if your new to TK you may want to give it a read its basic but there are some pearls in there to get you thinking of what questions to ask.

As like with anything there are great TK companies and there are one's that are not good at all.. 

Hi Nathan,

Welcome to BP. You will love it here. Jay covered most of it in his (as always) very comprehensive way ;-)

Basically if the numbers work for you it doesn't matter what the TK Provider is making. Everyone has their target roi%, rent amount and areas they prefer. Just decide on yours and then start shopping. It is as important to like the people you are buying from, IMHO, as it is to like the property.

Best of success!

@Jay Hinrichs  has tons of experience in TK field and he is right on point with his post.

The profit margin can vary a lot depending on the area. In my experience, the profit margin is inversely proportional to the quality of neighborhood. D area will generally give the TK company the highest margin and A would give the lowest.

IMO, it is better to first figure out who you feel comfortable working with than what kind of property you want to buy, because when things go wrong you want someone to stand beside you than make a quick buck and move on to the next client.

Originally posted by @Nathan J.:

Hi all,

Seems like there are a few turnkey providers that look to sell to out-of-state investors. What is a fair margin you can expect to pay for this service?

These providers use local knowledge and networks to find bargain properties, then renovate & find a tenant before selling. That is a service that folks out-of-state should be expected to pay for. The question is how much is fair versus getting fleeced?

Thanks in advance

Hi Nathan,

It shouldn't matter who is making how much as long as its a win/win for everyone.

If your buying turnkey, you should be buying at market or slightly below market for the property.

If your buying lower class and the turnkey company is selling fir slightly more than whats its worth, I think this is fine as long as they have great PM in place that will make the numbers work for and you get your initial investment back in 4,5 or 6 years.

Just a few of my opinions.

Thanks and have a great day.

@Engelo Rumora  

If your buying lower class and the turnkey company is selling fir slightly more than whats its worth, I think this is fine as long as they have great PM in place that will make the numbers work for and you get your initial investment back in 4,5 or 6 years.

Are you talking about getting money back on a cash deal or financed deal? Getting money back in 4, 5 or 6 years would mean 25%, 20% and 17% Cash on Cash return, respectively in a cash deal.

Originally posted by @Sharad M.:

@Engelo Rumora 

If your buying lower class and the turnkey company is selling fir slightly more than whats its worth, I think this is fine as long as they have great PM in place that will make the numbers work for and you get your initial investment back in 4,5 or 6 years.

Are you talking about getting money back on a cash deal or financed deal? Getting money back in 4, 5 or 6 years would mean 25%, 20% and 17% Cash on Cash return, respectively in a cash deal.

Thanks Sharad,

C and D class properties should only be bought with cash IMO.

So yes, I was referring to cash deals.

Thanks

@Engelo Rumora  

Why do you say that C and D properties should be bought with cash only? Is it because they don't appraise close to the selling price or is there a different reason?

So you are able to give 17-25% to the end TK buyer? What are your average operating expenses over the 4-6 year term that you are using? Can you provide some examples of these properties?

Hi Sharad,

Thanks for your comment.

They don't necessarily need to be bought with cash only, but I consider it to be a less riskier option. Please see link to a blog I wrote for Bigger Pockets. I hope you will find an answer and more clarity to your first question under the conclusion section.

http://www.biggerpockets.com/renewsblog/2014/06/28/abcs-real-estate-asset-classes/

Although our company is a turnkey provider I contribute to the forum with my perceptions, opinions and experiences and not to sell any of my properties. Feel free to browse through all of my 1,000 comments and let me know if you find a sales spiel in any of my comments.

So I can't answer your last 3 questions as I have nothing to sell and didn't post on this thread with the intentions of selling.

Thanks for your time.

Originally posted by @Sharad M.:

@Engelo Rumora 

I never said you were trying to sell anything to anyone here. I appreciate the vast experience you bring to BP, but I was trying to ask you a very simple question that are you able to provide 17-25% COC deals to your buyers? But if you don't feel comfortable answering, I understand.

Sharad

Hi Sharad,

Thanks for your comment.

Nothing is guaranteed.

I could guarantee tho that I wouldn't lie, cheat or steal and would do my best and so would the entire team to hit whatever numbers where promised on paper.

The 17%-25% is very doable in the C and D class markets IMO. As long as the end sale price is not over pumped.

Some years would be better than others.

Thanks.

@Nathan J.  - You ask a great question and several on here have already given you very good answers and as usual most of the answers revolve around due diligence and protecting yourself - as they should.  I want ed to add one point.

Turnkey is nothing more than a marketing term.  It is meant to convey that the buyer is buying an investment property where it has been identified, renovated and rented as well as having management in place. You as a buyer are provided with all of the necessary data and information to make an informed buying decision on each property.

Unfortunately, there is no clear definition of what Turnkey really means in the real estate investment world.  It is WAY over used today and all too often it is only used a a great way to attract buyers.  It is used as a SHINY OBJECT that is going to catch the attention of a buyer.

So when buying, as many have said here, the amount of money a company is making is well down the list (if on the list at all) behind much more important factors like the length of time a company has been in business, the verifiable data on a company including the work they do, the processes they go through and most importantly whether or not the person you are speaking with actually owns all pieces of the process.  Are they just tacking a fee onto a property to find it for you while passing you onto other companies for renovation and management?  These are important distinctions and you really have to continue to study on sites this this as well as talk to other experienced investors who have purchased turnkey properties before to know exactly what to look for in a quality company.  

There are no rules for what it means to call yourself a turnkey company and many investors get hurt when they are not aware of the qualities they should look for in a good company.

Last point, as a buyer who is purchasing a property in another city and possibly far from home, you should place a high premium on the profitability of that company you are going to be working with.  In my opinion, you are going to be married to this company for the long haul, so buying cheap or being attracted to "cheaper than everyone else" is not always a good thing.  You want to be in business with people who are going to be around in good times and bad times.  That does not mean simply pay a high price for nothing...the value you receive should absolutely match the price you are paying for the property.

There are many new companies popping up every month and unfortunately many that have disappeared the last couple of years.  They are gone and their investors are left trying to figure things out on their own. They have not been able to survive the changing housing market and many popping up today will not survive either.   They simply don;t have the business experience or acumen to survive over time.  So, it is important that whomever you choose, they value what they do for you and charge accordingly so they are in business with you 10 years from now....

Best of luck to you!  -  Chris

@Chris Clothier  

  Chris good points... I just cringe when I think back of the days when I was fielding calls from Aussies about this company and that and they were just quick buck artist's..

I do think its a little ironic though how on BP the houses flippers like to make posts about what they made on a flip.. Like they just did something wonderful... And then People buying long term like this poster want to know how much is being made by those that are flippers of rentals.. you have flippers of homes to homeowners and you have flippers for those that are for rental purposes. I have not seen one post of a flipper for rental purposes that has a sustained company who does volume post anything about their profitability or profit per deal like I have seen from as I mentioned those flipping to home owners or what you see on Reality shows... Or in my case how much we make on new construction. Although I have mentioned it a few times we look for 10 to 15% of gross and some in other markets do much better.. and many times we do 8 to 10% and well that's the best we can do.

The other thing is, depending on the company, there is over head and  cost associated with the Turn Key product past just the two components of purchase price and rehab. The larger TK operators that I fund have staff and some have lots of staff.. I have seen pictures of your staff and I am sure there is a fairly large fixed over head for your company as well as the other larger TK companies in the US that are setup like your company were you have everything in house or at least PM in house /.... I don't know of any TK companies personally that also have employees that do rehab.. I do believe most sub that work out to GC's and other subs.

And of course I am the last one to comment on what someone makes I spent years making 3k a file while my borrower was flipping the properties making 8 to 20k a file and I was PUTTING UP 100% of the money but I had 15 or more TK guys and I funded 60 files a month so it was not all bad...   LOL... But there is a crap load of work being a TK company that's for sure.. Much harder than what I do building new homes.. We have a target that is not moving and by and large our sub base is much more dependable and professional than RESI rehabbers especially in the MId west based on my experience.

I mean I pay my subs once a month.. Their billing comes in on the first and their check is in the mail on the 10th.. If they don't have their bill to me on the first its the next month before they get paid.. Most rehabbers in the sub 125k rental house market are week to week as in if they don't get a check every Friday they can't pay rent or buy food or beer that weekend. :) 

@Jay Hinrich 

"Chris good points... I just cringe when I think back of the days when I was fielding calls from Aussies about this company and that and they were just quick buck artist's.."

I have heard the Aussies are the new Nigerians....

PS "Just send your routing and account #s so I can deposit this big check you'll hold for me";-)

I've always bought turnkeys and what the company is making has never been my focus. I've really never cared. What I do care about is what kind of deal I am getting on the property.

With that said, since I'm now on the 'other side' of turnkeys (as in I work with them not just as a buyer), a lot of them don't make as much as people assume they do. I'm sure some exist, but I don't know any who totally gouge the buyer.

"Chris Clothier

Are they just tacking a fee onto a property to find it for you while passing you onto other companies for renovation and management?"

This comment was interesting to me. I am sure there are buyers out there who buy properties cheap for cash and want to resale and say " here it is being sold as-is ". The seller re-sales after closing to an end cash buyer and makes the spread. I am talking buying the property with cash and closing it and reselling it and not all that double close and simultaneous stuff etc.

Some people with cash just want to make the spread on resale. They do not want to deal with renovation and management with post closing headaches.

This has what has kept me from buying houses cash and then just reselling them to buyers. My commercial  RE business keeps me busy. I can't even imagine the paperwork Chris goes through on that type of company being TK.

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Jay how many houses can you build at once with construction loans and what is the typical spread??

For instance the difference between the developing side of a 100 unit subdivision and selling off the lots versus buying a few lots at a time to build houses on?? 

@Joel Owens  

  currently in PDX my limits are 12 specs up and unlimited amount of presales.. WE don't have 100 lot subdivisions here in our neck of the woods that's very rare.. typical is 5 ro maybe 50... There is no sprawl here we are basically all infill.  The competition for lots is so intense that most of the time there is no spread between what a lot is worth and what it cost to buy the land and develop the lots.. The national builders and the acute shortage has run dirt prices up again.  ON the one I posted about  we have a nice 20k spread on the lots but again that is rare.. profit for new construction is 10 to 15%  and some times more I just closed a high end ( high end for me 600k plus) and I did better than 20% Net. but that is once in a blue moon that I do that well.

Were we do well is with leverage.. My bank will loan me 90% of all in costs ( land and build plus interest reserves) So my average all in is 200 to 250k so 20k to say 30k is all the cash I need for any of my builds.. So If I can make 10% on average 300k home in 6 to 9 months that's double the money COC ... and again sometimes we do better.. I do have a leg up on many of the smaller builders here who have to use private and HML and are not bank able like I am.. I am getting the best possible rates and the least amount of cash into the deals compared to my competition.. so even though I am not be as efficient as some my carrying costs are lower by and large.

In Charleston were I have 6 going currently 350 to 450 price point we have done that with internal cash and some private money.. I am in the process right now for shopping for vertical financing.

Thanks Jay.

Seems like a boom building cycle for the houses now. Better cash in before they go bust again..... : )

Yes infill sounds like your area is really tight. Most counties here unless right next to the city of Atlanta you have sprawl.

We have subdivisions of thousands of houses down to the hundreds. The larger ones are considered master planned communities. The community I live in which located in Canton, GA has around 3,000 houses. It was built late 90's to early 2000's. So our landscaping is really nice for the area and grown out. I love the houses here because they were all built by different builders so each house is unique but in  a good way with controls in place. I can't personally can't stand subdivisions in a box with cookie cutter house all the same almost touching with no yards or landscaping. You bake in the sun as well. I love character, lush landscaping, walkability with park and trails with the lake and golf course. The design of out front entrance is amazing as well.

I looked at buying pipe farms here back 3 to 4 years ago. They were either half of a subdivision with pipes sticking out. So 50 built and sold and 50 lots left OR they were completely vacant subdivision with streets in and pipes and nothing else.

I decided not to due to the holding costs. I would have had to hold for years paying taxes and fees waiting for the market to turn around. Back then you could buy foreclosures cheaper than what it cost to build so couldn't compete for the homebuyers to buy your new house when one bank owned was selling for less that was built 3 years ago. All of these lots are bought up here and residential development is moving again.

The existing sub. lots with houses already sold in the front I didn't want those because of the HOA fees of hundreds of dollars per empty lot a month. If I had 20 lots that's about 50k a year in fees not including property taxes. if I bought the lots at 5k each and held for years to sell even double the price I would likely break even to losing money.

@Joel Owens  

  I bought a bunch of houses in the southern Atlanta area Henry county .. in 2011.. and sold last year... so I spent a fair amount of time there and yes you have sprawl. Most of our subdivisions prior to the big box builders coming in were exactly like you state .

what you had was a lot developer... I was one once... who then sold to builders. So take one of my PDX subs I built in the 90's it had 41 lots and I think we sold those to 8 to 10 different builders and each home is unique and different like you state.. the project I am doing now will have maybe 5 floor plans.

I wanted to raise money to buy those pipe lots in Atlanta 3 years ago when you could buy them for 1 to 3k each. I ended up buying 7 1/2 acre lots in a really nice little development in Henry county for 21k total and that was a nice deal.

From what I know the bigger builders stepped in and bought most of the pipe lots so they are building again and have no real cost for the dirt so they are in a good position to build again.

Oregon has Urban Growth boundaries and the land outside the boundaries depending on zoning may not be touched for 50 years and some of it never... When your inside the boundary development is pretty straight forward. Its not like CA where you need huge environmental impact reports etc and it can take years to get a project entitled. I went into contract oct of 13 on the 27 lot sub and had all entitlements in Place in April of 14. So one of the reason builders in this market did not tie up a bunch of land for the future they were used to buying it in the fall and building it the next summer.. Now its a little slower than that 18 months start to finish.

Many/most turnkey companies are by definition marketing companies who use affiliates to find buyers.

Often they have to pay out 5 to 10K to the lead provider. I know one company that pays 17K per house sold to their clients.

So the actual margin to the turnkey provider can be quite small.

Having said that I know one turnkey in my city who drop their price by 10K to anybody who asks so they must have at least 20K in their asking price.

As everybody has said the bottom line is are you happy with  what you are paying, not how much is everybody making.

One of my most profitable deals was an assignment from a newbie finder. Paid him 9K for half an hours work for him. :-)  He thought he had died and gone to heaven!

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