@Shiloh Lundahl,
This is an interesting question after your post yesterday. Our company started precisely the way you stated your idea came to you. From someone asking for help based on the success they saw us having. They had $ but did not have the knowledge or the time. Neither your idea nor turnkey real estate is bad. They both are reactions to opportunity. Both may be viable to a particular investor group and have no value at all to another. I'll answer as best as I can.
First, the word "turnkey" does not have a meaning. Today, companies with many structures use the word turnkey to describe their services. You might use the word in the future to explain your idea.
To answer your question, I will use your description as it most closely relates to my definition of what an actual turnkey real estate transaction should be. Again, that is my opinion, and I'm sure others will claim they are truly turnkey.
A turnkey operator finds or builds a property. Then after the rehab or building is done, they put a tenant into the property and they sell the property at market value to an investor. The investor either gets a loan or buys the property in cash. The turnkey company then manages the property for the investor owner until the property gets sold eventually.
There are very few fully integrated turnkey operators in the business today. Most companies marketing with the word outsource some of the pieces you described above - in particular, the management on the back end. Most investors who take this route are not short-term investors and do not enter the investment with a timeline for sale. So, an IRR rarely gets taken into account during due diligence, although like most real estate transactions, the exit has the highest potential for return.
I'd love to know some average numbers for a turn key. From what I gather, the turkey operator will by a property at around 100k that needs 50k to get it fixed up. Then the turnkey operator sells the property at the market value to the investor who pays market price of around $200,000. So the turnkey company has made 50k on their flip without needing to pay realtor fees of 6%.
These are just example numbers that are very assumptive, but I understand the basis of the question. The answer is I have no idea about other companies. I'll give you the basics at REI. We are in 11 unique markets, and each has slightly different numbers. Roll them all up and the averages are:
purchase $154k
renovate $47K
sell $232k
These are gross numbers, not including closing costs, borrowing costs, holding costs, licensing and permit costs, G&A, overhead, commissions, forward rate buy-downs, and lease-up fees, to name a few of the many expenses incurred. We are lucky to earn a 9-10% cap on our outlay.
The turnkey company then manages the property and gets paid the management fee and all the extra fees associated with the management, such as turnovers and lease-ups, repairs, and sometimes sales costs.
At REI Nation, the owner can hire our management company. That is by design, but we are fully integrated. The owner has purchased a property like any other real estate transaction, and they own the physical property. They can now make the best decision for them on a management company to hire. If they hire our management company, Premier Property Management, we have a very traditional fee structure similar to other management companies. I wouldn't call any of the fees you listed above as extra. I would use the word necessary based on the value we deliver.
Correct me where I am wrong with my perception and walk me through the benefits of going with a turnkey company, where the profit is for the investor, and if the benefits outweigh the costs.
I'll give an over-arching view since I am only answering for my own company and don't want to use this as advertising. For investors who lack knowledge and/or time, want to own physical real estate as part of their portfolio, and want to be as passive as possible on the real estate side of the investment, we've created a great route.
For REI, the unique value we bring is on the service side. We have a dedicated team whose purpose is to ensure that our passive investors never feel disconnected from their properties. We want to ensure we meet their expectations.
This is still real estate. There are no magic pills that make the word "turnkey" mean something special. The reason to purchase a property through this process is the same today as when we started two decades ago. Holding a piece of real estate over time that a resident provides every dollar you will need to cover the holding, maintenance costs, and financing costs, all while it goes up in value, is the same with a property marketed "turnkey" as it is with any piece of real estate. If you have a high level of faith in the company you are working with, then time will do what it is supposed to do and increase your IRR.
The real value gets added by who you are working with. I tell investors to ask the question, "How". How will the company I am working with deliver my expected return? How are they going to hold down my maintenance costs? How are they going to prevent move-outs and extend my occupancy? How will they grow the revenue I earn each year on this property?
So, the value is that an investor has zero financial risk on the front end and spends zero time creating the opportunity. Their risk is the same as any other real estate purchase. The difference is that with us, the unknowns are answered. They can now decide based on the return they will earn against their dollar using little of their time and their trust in our company's ability to deliver it.
