I have been in the real estate investing space, either as an investor or as a service provider, for the past 11 years. Never in that time have I seen a hot button issue that illicit such strong sentiment as the term Turnkey Real Estate.
- Not the issue of education.
- Not the issue of ‘do-it-yourself’ learn at home study courses.
- Not even the issue of the legality and tightrope you walk when buying homes Subject To.
Each of these has their spot on this list of top hot button issues in real estate, but none compare to the issue of buying Turnkey Real Estate.
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What Is Turnkey Real Estate Investing?
I can’t even begin to write the definition…because there is not one!
The word Turnkey is nothing more than a marketing term that has stuck. It has a great deal of stickiness to it and everyone seems to love it. Somehow, it has seeped into the conversation and the meaning of the term has become even murkier – almost to the point of having no meaning at all.
As a marketing term it conveys to the buyer that there is very little work to do with the investment. Originally, I believe the word was meant to describe a business dealing where the buyer is purchasing a property from a seller who has used their local knowledge to find a property, perform a renovation, place a tenant with a long-term lease and then manage that rental process going forward. The term mailbox money was soon introduced as a means of communicating that with Turnkey, you simply open the mailbox and collect your check. Nothing is ever quite that simple and problems for this particular niche in real estate investing followed almost as quickly as it was really formed.
The problem is that many, many companies advertise a Turnkey service and Turnkey properties only to have their own definition as to what the marketing term Turnkey should mean. Companies have popped up all over the country offering all sorts of varieties of service and product. Cheap properties, expensive properties, single-family units and multi-family units. Some companies offer all of the services from locating, renovating and managing, while still other companies only offer to find the properties and sell them to you with a list of contacts they have for all of the other services. In some cases, companies will sell you a renovated property for you to find the management yourself, but they will manage the manager for you (not sure how that is going to work).
Today there are companies that will provide you a Turnkey solution to finding a good Turnkey provider. Yes, you read that correctly. Several have popped up that rate the Turnkey companies and will make recommendations based on what you tell them you want. Good, bad or indifferent, the word Turnkey is now over-used and under-defined and has pretty much come to stand for…well, nothing. It seems to be a pretty good “shiny object” word that attracts a lot of attention, which is why its’ popularity can be so dangerous for investors.
Why Is Turnkey Real Estate So Popular?
It is very interesting how often new, first-time posters go on the BiggerPockets.com forums and introduce themselves as looking to get started in real estate and strongly considering the Turnkey option. There is no need to go into the on-site reaction or the back and forth that follows. I think a better use of the rest of this article is to explain why it is such a popular investment strategy and share some tips of how some investors are finding this to be a perfect strategy to find success as a real estate investor.
The effect of marketing the term, including on a site like BiggerPockets.com has certainly helped this form of passive investing grow. Passive real estate investing went from a late-night infomercial type of idea and came straight into the mainstream public. The very idea of being able to purchase a property and have it perform without having to actively find, renovate and manage exploded based in part on the advertising that companies began. The more companies began to share who they were and what they were doing, the more investors began to be exposed to this as a strategy. Articles, ads, direct mailings and forum posts all helped to push the topic into the mainstream.
REIA Clubs and Investor Gatherings
The cycle of do-it-yourself education and the circuit of different real estate investment associations, is one that ebbs and flows and when it started ebbing sometime in the mid 2000’s, REIA owners began to look for other revenue generators. In stepped companies promoting Turnkey investments and the REIA’s had a new product and new speakers (sometimes the same old speakers just with a new angle) to promote to their attendees. I would say that this had a smaller impact on actual sales and a bigger impact on the term being introduced to the market.
What had a bigger impact on sales of these types of investments, in my opinion, were the events held around the country where multiple companies could present on stage and talk about their company followed by meetings with interested investors. These types of events not only led to sales of Turnkey properties, but also the introduction to a lot of interested investors who may have never heard the term before. Promoters found a new revenue stream by charging companies large fees to sponsor and speak, which encouraged them to continue to build and develop larger events.
The cycle had now started and the term Turnkey investing really hit the mainstream. It began to be discussed more and more online and more articles began to appear (again, some by me) talking about Turnkey investing. At the end of the day, passive investments have always been a strategy that investors have used to own real estate, build monthly incomes and in many cases develop wealth. I think the real issue with Turnkey has always been the lack of a true definition to what it means and the ability for shenanigans to creep into the process. No matter how good an idea or even a process, when on-term is being used so loosely to define so many, it becomes very easy for companies or individuals simply looking for quick bucks to get in and take advantage of all the hoopla.
Just like many other investments that are plagued by companies and people acting in bad-faith, Turnkey investing has had its’ share of trouble caused by several companies. That has absolutely led to part of the popularity of the term and the almost instant backlash that questions about it can create on-line. Many have been hurt by bad companies and their stories are shared much more often than those of success. The sharing and re-telling of the miscues, mistakes and out-right fraud perpetuated on some investors by some of these companies is another big reason why the term has become so widely known recently.
Some Buyers Want An Easier Path
This is the reason that seems hardest for many commentators on online blogs and forums to grasp. There is a Demand from a certain percentage of the population for this type of real estate investing. They are not interested in owning shares of a REIT. It is too impersonal and can include rigid rules. They are not interested in actively doing any of the work associated with finding, fixing, renting and managing an investment property. And yet, they want to be in the real estate investment game. So this is a great path for them and they are absolutely a driving force behind the demand for passive investments and the popularity of Turnkey investments.
Protecting Yourself When Buying Turnkey Properties
This seems to be a little redundant or possibly over-used piece of advice on all of the forums to do your “Due Diligence“. Someone, somewhere will take that out of context and claim that I am saying to do your due diligence. Actually, I am saying just the opposite. It does not matter if you are buying across the country, in another country, one state over, down the street or next door…you always have to do your own due diligence. For passive investments, there are multiple different levels that you will encounter as far as the amount work being provided to you and the service you receive after the transaction.
Make sure you understand exactly what you are getting when you purchase the property and what you are getting after you purchase the property. Long before you start looking at properties, you should have already defined your reasoning for going the passive investment route. So be clear on your goals and what you expect. When investments go wrong, it almost always comes down to little things we should have seen before we purchased. Little things such as not clearly defining our purpose for buying the investment property or failing to fully vet the company we are buying from. The internet makes it very easy to find not only the good but also the bad and the questionable about any company. Do not be afraid to ask before you buy a property.
And finally, have a good idea about the numbers on a deal. There is nothing wrong with buying a deal and being completely satisfied even if 10 knuckleheads want to tell you how you could have done better. There is however something wrong with buying a deal and not being able to clearly explain your thought process and defend your decision-making. I just thought it was a good deal is not good enough when you are responsible for your wins and losses.
To sum it up, there is nothing inherently good or bad about the word Turnkey or with buying a passive investment. When it comes to investing, everyone has an opinion and most have strong opinions about one thing…other peoples deals! For today’s investment buyer, it is important to remember that the term Turnkey is nothing more than a marketing buzzword. Do not buy into what you think it means and what a company could mean by using it to describe their business. This is a copycat world and everyone is copying everything. So be patient and use your brain when buying passive investments and especially those being marketed as Turnkey. Remembering that you need to be able to explain exactly why you are taking action and buying is an important step in the process and if you can’t do it, you are not far enough along in your process!
This topic usually gets all kinds of comments. I really have no problem with anyone sharing a personal success or failure when using a Turnkey company to buy a property. I would also love to read any other advice that would be helpful to the readers.