Turnkey Companies
Los Angeles, CA · Member since 2014 · 18 posts · 7 votes
Turnkey Companies
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Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
12yBased on the ones that I've looked into in the past, you're going to essentially be paying retail for properties which limits your upside and actually creates some risk should you want to sell them since - with all the fees/closing costs - you'll have to come out of pocket to sell.
But the key is in their property management service. Thats what would really determine whether they're a good deal or not. And thats probably the toughest part of out of state investing in my eyes - finding good property management.
If it were me, I think I'd skip the turnkey places and find another investor or possibly a realtor and tell them what you're looking for. Maybe even a wholesaler. Buy the house from them as they know they typically need to sell a house to an investor at around 70 to 75% of the ARV.
So if the house is worth 160k, you should be able to get it for an all in price (i.e. purchase plus rehab costs) of about 120k. Thats much better than the 160k you're going to pay to one of these turnkey companies.
Then get your PM to lease it up and manage it. Its a lot easier to make money on houses that you're all in at 75% or even 80% than the ones you're all in at 100%.
Not to mention the fact that many of them tend to over estimate the actual rental amounts too.
58 Replies
- Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes12y
@Ravi Chaudhari spend some time searching on BP there are tons of forums on turnkey experiences, providers, etc. It has all been covered extensively, good luck!
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes12y
Based on the ones that I've looked into in the past, you're going to essentially be paying retail for properties which limits your upside and actually creates some risk should you want to sell them since - with all the fees/closing costs - you'll have to come out of pocket to sell.
But the key is in their property management service. Thats what would really determine whether they're a good deal or not. And thats probably the toughest part of out of state investing in my eyes - finding good property management.
If it were me, I think I'd skip the turnkey places and find another investor or possibly a realtor and tell them what you're looking for. Maybe even a wholesaler. Buy the house from them as they know they typically need to sell a house to an investor at around 70 to 75% of the ARV.
So if the house is worth 160k, you should be able to get it for an all in price (i.e. purchase plus rehab costs) of about 120k. Thats much better than the 160k you're going to pay to one of these turnkey companies.
Then get your PM to lease it up and manage it. Its a lot easier to make money on houses that you're all in at 75% or even 80% than the ones you're all in at 100%.
Not to mention the fact that many of them tend to over estimate the actual rental amounts too.
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes12y
I agree with everything Mike H. said, so you may want to read his post twice. However if you don't have the time or expertise to get your own team together you may want to consider a good turnkey to get your feet wet. However I would, at a minimum, decide which market I wanted to be in based on cash flow AND appreciation potential. Don't let a recommended turnkey seller choose you location for you.
- 12yBen G.Pro MemberInvestor · Indianapolis, IN · Member since 2013 · 647 posts · 196 votes
It really depends on your overall buy and hold investment goals. Turnkey companies do serve a purpose and they offer a valuable service, but only if their service meets your investment goals.
There are a number of reputable turnkey companies in Indianapolis where I live, and I would have no hesitations referring family or friends to these companies. However, before doing so I would make sure to determine their investment goals before referring them.
For example, if you're looking to invest for appreciation, then by no means should you be investing in any neighborhood in any market with any turnkey company. There are specific markets that are better than others for appreciation, and then within those markets, there are specifics neighborhoods that are more likely to appreciate faster than others. Some turnkey companies may not have inventory in these markets, but it's up to you to figure that out.
If you're not local to the area you are looking to invest in, then you need to build a relationship with someone who can be your boots on the ground in that market, and this should be someone you trust, and someone who is serving your best interest, not the turnkey providers best interest.
- Los Angeles, CA · Member since 2014 · 18 posts · 7 votes12y
I appreciate that advice. Honestly, I would love to have the know-how and network to pull that kind of a project off in the future. However, for now, I'm looking for a hands-off experience. I live in California, so even purchasing out of state at "retail" prices yields more of a return than what I can get in California. But I completely follow with the property management advice you're giving. That's the element I'm struggling the most to become comfortable with.
@Ben G. , what makes you say that turnkey property don't typically work in areas that appreciate? Also, I agree about the advantage having someone local can offer you. I have a friend who live in Philadelphia and I've noticed some turnkey companies offering properties there. I was going to start looking into that market more to see if it makes a good fit for my needs.
Thanks all for the feedback.
- 12yBen G.Pro MemberInvestor · Indianapolis, IN · Member since 2013 · 647 posts · 196 votes
@Ravi Chaudhari by no means am I saying that turnkey companies don't work any areas that I appreciate. What I was saying that it's important not to work with just any turnkey company. If you're looking for appreciation as an investment goal then you need to look for a turnkey company that can offer you properties based on their prospects at appreciating rather than cash flow. Not all turnkey companies are alike. That's why it's important to vet the turnkey companies you are thinking about working with. That's easier said than done when you live out of state.
- Real Estate Investor · Los Angeles, CA · Member since 2014 · 143 posts · 29 votes12y
Hi Ravi -
You can find good deals with turnkey companies, you'll just have to look for the good ones. And find out who's managing the property, since that's a huge part of the process. You can get better returns by building a team, doing the renovations, etc yourself -- just depends on how much time you have to spend, and what your appetite is for that side of the business.
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes12y
One thing I would add is that I agree with your comment that your returns are probably still going to be better using a turnkey company than certain areas in the country (likely california) based on some of the numbers I've heard people mention before.
The one thing I truly believe is that there is absolutely no better investment than real estate. You get more than just cash on cash return from rent. There's principal paydown, appreciation, and tax benefits (i.e. most if not all your profits tend to be tax free).
Here's an example of one that I just looked at with one of the turnkey companies in dallas.
Purchase 115k. Rent 1100, Taxes, insurance and Property management fee - $370/mo.
If you put down 30%, that would be about 35k. Your mortgage on 80k would likely be about 450 a month or so. Thats 820 a month. You'd make $300 a month gross profit. $200 a month net profit or 2,400 a year. Add in principal paydown of another 100 a month or so (1,200 a year). And 2% appreciation (2,200/yr). Thats roughly 5,800 a year in return - most if not all should be tax free. So what is that really worth? 7k a year? Thats a 20% return.
And thats just from day 1. Where really estate really starts to show its value is over time.
In 5 years, your payments are going to be the same. But your rent is likely to be $50 to 100 a month more. Your principal paydown will also increase some as well. So your returns on that same 35k investment will continue to get larger.
And at some point in a 20 or 30 yr timeframe, that house gets paid off - and then whats your cash flow? Granted, you lose your tax benefits by then as well (no mortg interest deduction and depreciation is gone at yr 27 or sooner if you accelerated dep).
So in 25 years, lets say, that 35k is going to become a 220k house that is owned free and clear and will be making about 1,400 to 1,500 a month in income (assuming houses double every 20 to 25 years and rents double about every 30).
And thats if you pay retail and finance with the standard 30% down. Just think what it would look like if you're getting the houses at 75% or 80% of the ARV. :-)
But still consider coming up with your own turnkey deals. Pick an area like that you want to invest in and reach out to some BP investors and see if they want to do the deals for you and add a 10% fee for themselves. I bet they could get you into deals a lot cheaper that way.
- Los Angeles, CA · Member since 2014 · 18 posts · 7 votes12y
@Ben G. I see what you're saying now.
@Account Closed I definitely see your point about trying to buy turnkey properties on my own rather than through the turnkey companies. What do you mean by "reach out to some BP investors and see if they want to do the deals for you and add a 10% fee for themselves"? Is this a typical partnership that people do? What work would be involved for them and what is the 10% fee calculated off of (is it a management fee going forward or an upfront finder's fee)?
Also, I have a question about turnkey property pricing. Let's say I have two options: 1) paying retail to a turnkey company or 2) finding a turnkey property myself through a local realtor and then figuring out my own management company. The property is the exact same. Will the turnkey company charge more for that same property?
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes12y
For PM'ing, you might have to check. But I think the turnkey companies would charge the same fee regardless if it was a deal they gave you or you found yourself. Some may only do ones they find for investors though so that one is tough for me to answer.
As for my other suggestion and finding a BP investor, thats just a suggesting that I think would make sense. Its basically a built in wholesale deal for an investor.
Lets say an investor can find a house with an ARV of 130k that costs 80k to buy and 15k to fix up - all in at 95k. And then they sell that to you for a 9k fee. You're all in at 104k or roughly 80% LTV. Thats a decent deal for you and a good deal for them.They're taking zero risk since you'd be providing the financing for the purchase and the rehab. They'd have to manage the rehab (which isn't as difficult as you'd think) and then they'd collect their fee.
I have to think you'd have no problem finding an investor willing to do that. Its a great way for an investor to build up reserves and a good way for you to get the discount you need to improve your returns.
And maybe there are some more experienced investors that would say there's no way they would do that because it wouldn't be worth their time. But I can say that I have 29 houses and I would do it in a heartbest for somebody even if it was for 5k a house.
One, because I love doing it. And 2 because I could feed my contractor more work and possibly start doing PM'ing for other people as well for even more income - that I can then use to put back into more houses. :-)
With the taxes here in Illinois, I wouldn't recommend this area for out of state investing. I think where I"m at is a relatively good environment for investing. But if I was to pick any area at all, I would look at one of two places - either Texas or Indiana. But thats just me.....And maybe there are some other ways around paying retail. Maybe a realtor would offer the same service. Then they could get paid on your purchase and on the rehab to rent ready portion as well. But I just hate the idea of somebody paying retail for deals - even if the numbers are still really impressive when you take everything into account in a buy and hold strategy.
A 130k at 20% off is a savings of 26k. That equates out to a savings on your payment of roughly 150 a month or so - or $1,800 a year. Also lowers your down payment from 39k to 32k, all of which make a huge difference in terms of your actual cash on cash return and your overall returns. - 12yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Some quick advice to you. If I were in Southern California and starting out, I would look up @Aaron Mazzrillo and talk to him about the inland empire before you assume that California is too high or that you have to go out of state and area to buy long-term buy & holds. The prices may not be right for you, but at a minimum get some feedback from a local guy who buys a lot for quick turn and buy & hold in both California and out of area.
When you talk to local guys, be sure and ask if they have some time to spend with you either on email or over a cup of coffee or something. That way they know you're not looking to waste their time. After you get done talking to guys like Aaron, then you will have a good foundation for making your decision about how and where to go and if you should buy turn key or look for building your own team to be a little more hands on.
Good luck -
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
It's hard to say any pitfalls because there is literally nothing about a turnkey property that you can't do due diligence on and verify. Where I would be leery is if a company requires using your money for the rehabbing and such or if they give you some guarantees for financing or income that expire, as you can get really hosed that way.
I've always only bought turnkeys and I've had to learn some lessons, but for the most part it is pretty straight-up these days and easy to handle.
- Real Estate Investor · Los Angeles, CA · Member since 2014 · 143 posts · 29 votes12y
@Ravi Chaudhari I've purchased quite a few SF homes in Dallas Ft Worth, Memphis and Atlanta. It's all about the team on the ground! Easier said than done, but totally possible to do.
Andrew - 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
your description of potential return of 20% on a rental turn key is Flawed and very misleading to a newbie buy and hold investor.
You have no vacancy factor NO maintenance factor.. No Opps factor. NO factor for turn over and re renting the property and paying 1st months rent as commission.
And the biggest is assuming appreciation.. there are only a very few markets in the US that appreciation is REAL...
- 12ySharad M.Pro MemberCarlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
@Mike H. I agree with @Jay Hinrichs that 20% number is very aggressive. That will be your absolutely best case scenario if nothing goes wrong at all, which is never the case. There will always be some operating expenses.
- Rental Property Investor · Tampa, FL · Member since 2013 · 404 posts · 421 votes12y
If anyone is truly getting 20% returns after prop mgmt, taxes, insurance, vacancy, maint. etc let me know because I am ready to purchase. In the world as I have seen it, and it is limited, I haven't seen anything turnkey getting anywhere near 20%. I have purchased turnkey in Memphis and looked in many other markets.
The best advice, and it is given in this thread, is to look at all of the numbers and not just what a company, person, agent or anyone else tells you. You will have all of those over time.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes12y
Originally posted by @David Hutson:
If anyone is truly getting 20% returns after prop mgmt, taxes, insurance, vacancy, maint. etc let me know because I am ready to purchase. In the world as I have seen it, and it is limited, I haven't seen anything turnkey getting anywhere near 20%. I have purchased turnkey in Memphis and looked in many other markets.
The best advice, and it is given in this thread, is to look at all of the numbers and not just what a company, person, agent or anyone else tells you. You will have all of those over time.
Definitely possible to get 20% returns. Just not normally through turnkey retail priced stuff as you noted. To get 20% it will be a buy low 50% arv, fix and hold scenario. It will take some searching and you have to work for it. I am not talking war zones either or crazy high taxed markets where it takes 3 months rent to pay the taxes. Most likely self managed. As someone who can do that above can manage.
thanks,
Matt
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes12y
Actually I did allow for some vacancy and repairs. I probably didn't do a good enough job of showing it. But the gross profit in my example was $320 a month and then I figured net profit of $200 a month. The 120 was vacancy (95% occupancy rate which is what I see here) so $660 a year or $50 a month and then about $70 a month for maintenance.
But you're right, I did leave out a couple of items - like charging for re-renting the property. I'm guessing most PMs charge for that but since I don't use a PM on my stuff, I don't really have a number for that.Again, I'm definitely one to steer people away from the turnkey stuff because I don't think they're a good investment.
But keep in mind. Even if they make 10% in the beginning, thats going to continue to grow over time as rents go up and principal paydown goes up and your payments stay the same.
And while I understand that every area doesn't have appreciation. Bottom line is that if you're buying out of state, aren't you going to pick one of the areas that does? And while I never buy anything assuming appreciation over a 1 or 2 year period. I always assume that over that 20 year period, I'm going to get that historical appreciation provided its a house in an area that fits that model (i.e. low end houses in renter areas don't fit - they're cash flow with little to no appreciation).
At some point, you do have to expect real estate to behave historically. Thats like saying that you don't think rents are going up over a 20 year period either. If you actually believe that, then I'd suggest you don't invest anything in real estate.......
Every year you may not have appreciation. But historical average are indisputable. Homes in most areas double every 20 years. And now that our crazy wave of clearing out the foreclosures is over, I don't see that changing to anything other than back to that average - especially when you figure you can cherry pick the area you're investing in someplace like texas.
And I still believe that real estate is still the best investment you're ever going to make - even with it being turnkey - if you do it right. My only problem with turnkey companies is that I'm also a believer that you make your money when you buy and how can you be getting a deal if you're paying retail???
- 12yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
@Mike H. - I looked back at your profile and it is apparent that you are very knowledgable and an experienced investor. You've been doing this for almost 10 years now and I think people in our positions sometimes over-simplify the lessons we have learned.
I do agree with what you are saying. But all of the points you lay out about real estate investing boil down to the averages. And the averages are factored in over huge swaths of data and historical figures that most people cite are almost always on a national scale.
I don't always agree with all the points of other commentators on BP when it comes to investing away from home. (I think @Jay Hinrichs lays it on thick sometimes - I can say that since we know each other right jay :-)!) Jay's point for being so ardent in his warnings (I'm speaking for you now Jay!) is that most buyers are not buying average from Turnkey companies or big, production sales companies selling from stage. They are buying well below average. The potential for getting burned is high and that is why he is so against going out of state and buying turnkey - JUST FOR THE SAKE OF DOING IT.
If we really, really dig into the data we will see that averaging in dollars does not take into account the volume of homes and what price points they are sold in. Many houses being sold are low-cost houses that are sold for the same price (or lower) today than they were sold for in the 60's and again in the 70's and again in the 80's, the 90's and maybe twice in the 2,000's. The same houses sold for the same prices. In some cases, you can see where the houses have gone into foreclosure multiple times in those previous sales. I would venture to say from experience, that a house that fits that description probably outnumbers nicer homes by a margin of 2-1 in the Turnkey industry.
You note that you like to buy newer and bigger to hold down your maintenance and move out costs. Unfortunately, the averages of properties being sold for long-term investment are going to be much older and the properties are often left with a high level of deferred maintenance. In these areas and in these conditions, not only do the properties not go up in value, but the rents do not go up as predictably as the national averages would have us believe.
I understand and agree with your posts from a 30,000 foot view and I respect your experience and background. I just think we experienced investors have to be careful telling someone new to this investment the standard national average selling points based on national and historical arguments for buying real estate.
So, @Ravi Chaudhari , I go back to your original post and you have not had a ton of feedback specifically to buying Turnkey and none on any actual expereinces. But, I can tell you that you really need to get with some local investors. Try to meet up or speak with @Ali Boone and I would try to hook up with as many other local investors as possible including @Aaron Mazzrillo . Your posts show that you are new to this and probably have a lot of questions. DO NOT BE IN A HURRY. Reach out to Jay Hinrichs - he is a super nice guy that I am sure will take a little time to talk to you about Turnkey and he can give you the warning signs. It is easy to get burned by numbers on paper and guarantees meant to sell property not necessarily protect the buyer. Asking on BP is great, but I would also try to reach out and have some conversations with on the phone or in person with some of the people on here.
Good luck to you!
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Well said... And yes I probably do lay it on A Little thick... I certainly am not opposed to investing out of state 60% of what I do is out of state.. However having foreclosed on well over 100 people living in SoCAL that bought TK in the mid west I have a bunch of first hand experience at how these deals can go wrong and how the Socal investor was really in over their heads.. And it was in every market I worked in ATL Bham JAX Memph. INdy CHC Ohio.. I became the proud owner of 200 of these houses that investors walked from and when I was trying to do work outs with them and figure out what the heck went wrong that's were I got a PHD in Mid west investing the tenant base, the buying in the wrong part of town buying from bad TK folks and getting sold too hard by West coast sales people that had no skin in the game and No real estate license to be selling this stuff in the first place..
What folks need to know to get a fair and balance look at investing is the points you make in this post about the Assets they think they are buying.
So while its important to have the good team on the ground and PM as we all know.. Choosing the market and Asset class is just as important.
And I think so many folks get lulled into the idea of getting started in RE and hey I can do that for very low amount of dollars OUT of state ( speaking of West coast or East Coast investors) they get blinded by the sales pitch. Only to learn about the reality of the asset class, And the Demographic of the tenant base etc etc way down the road.
So if one is going to go into this type of investment its good that they get both sides.
Which leads me back to the comment I originally made about the post that these assets throw off 20% NET cash flow ...And of course they do if you do not count all the expenses :)
Ok off to take another NMLS test have a good one.
- 12yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
@Jay Hinrichs - good stuff. You're a class act so don't stop telling the truth. Just wanted to point out the "thick" warnings are for a reason and not so much because you are against it.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Chris Clothier last comment on this thread
I was at a NMLS CE class last Friday.... and the instructor was raising the bubble issue.
I personally don't think we have a big bubble coming again anytime soon.. The events that led up to the last one were once in a Century type events.
So how I wrap that back into this TK thread is simply the environment that led to the GFC and how investors bought property and how they are buying them today is very different.
Pre 08 it was all the rage to use a HML to put the TK buyer into title then do a rate and term refi with many folks not only getting into the deals with no money down but cash back at close.. We did many deals were investors would close on 4 homes simultaneously and get 5 to 8k cash back on each through refi proceeds.. Now the WEst coast marketing guys had a field day with this... Hey buy a home it cash flow 100 a month and get cash back.
I was the HML that put those folks into title I did this over 2000 times from 2002 till the crash.
At that point our underwriting criteria was simply a pre approval from a lender and we closed 99% of the deals we did.. until the crash.
So it was the whole scenario of getting into these deals with cash back.. The banks thought hey they will put the cash back into reserves and properties will continue to go up.
Well reality was they went and took the cash out and bought a car a boat a jet ski a trip you know all the things they deserve as good consumers. And the banks just did not require enough experience or reserves to be making these kinds of loans.
So what happens is in credit tight and constricting job market.. The cash flow was never materialized these group of investors blew there reserves on stuff.. And then when the houses needed 2500 dollars for a turn over they did not have it and the house goes vacant and a default occurred. So in essence these investors that had plus 700 cred score but no reserves got wiped out en mass.
NOw today you don't have that scenario.. you have a huge amount of RE being bought for Cash.. The banks actually require in most cases and if they have half a brain the investors need 20 to 30% down PLUS and 6 months reserves verifiable.. Along with the reset in values. I think we have a much stronger play for buy and hold...As the investors that are buying today have skin in the game and are smarter than they were 10 years ago with all the public information. But you still have people buying in Hoods and Ghettos thinking it will work and its those that do that that live out of state that are going to end up not doing well as we all know... Locals can work those areas just fine and run it like a bizz.. sitting at home in LA with that asset class will drive you nuts.
- 12yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by @Jay Hinrichs:
@Chris Clothier last comment on this thread
NOw today you don't have that scenario.. you have a huge amount of RE being bought for Cash.. The banks actually require in most cases and if they have half a brain the investors need 20 to 30% down PLUS and 6 months reserves verifiable.. Along with the reset in values. I think we have a much stronger play for buy and hold...As the investors that are buying today have skin in the game and are smarter than they were 10 years ago with all the public information. But you still have people buying in Hoods and Ghettos thinking it will work and its those that do that that live out of state that are going to end up not doing well as we all know... Locals can work those areas just fine and run it like a bizz.. sitting at home in LA with that asset class will drive you nuts.
This is the most significant part of your post IMO. I agree that a nationwide bubble is hard to imagine unless it is brought on entirely by a meltdown in the national economy. A national bubble brought on by a overheated RE market I think is a real stretch in the foreseeable future.
But you are correct on the cash buyers and the reserves and the pullback by banks forcing investors who are better equipped from a cash standpoint to buy. And I agree with you that the problem still remains that way, way, way too many investors are buying in very seedy areas based simply on "cheap" prices. It will lead to some crashed dreams and some frustrated headaches and probably some re-sold properties where no on e made any money. I have lived that frustration in my past and learned both personally and as a company to stay away from that crap.
- Crawfordsville, IN · Member since 2013 · 11 posts · 2 votes12yThanks for the thread. I didn't know what I didn't know!
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Ravi Chaudhari 20% is a great target. I hit the pavement hard, and I find 20% or more sometimes. However, when I find it, I'm either keeping it, or marking it up to a 15% ROI to another investor. I'm yet to see a turnkey company offering a TRUE 20% ROI over several years.
You really need to consider the time available to you personally. If you have very little time, a reputable turn-key company may be the right answer for you. If you have more time, making good contacts and putting together a better deal may be your best option. The worst option is to do nothing.
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