Turnkey Properties: Should You Invest in a Turnkey Real Estate Investment?

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(This post updated July 27th, 2016)

How would you like to have your cake and eat it too?

No, I’m not talking about baking. I’m talking about real estate investing!

You see, many people want to invest in real estate, but they also want to live in a great location where rental properties don’t make a lot of sense. They want to enjoy the sun, the city, the lights — but they want cash flow from rental properties that they’ll never find in their backyard. They want to own rental properties but don’t want to actively manage anything. They want their cake… and they want to eat it, too.

Is this possible?

Well, in recent years a number of “turnkey” providers have emerged that claim they can help investors do just this. But is turnkey real estate investing really all it’s cracked up to be?

Let’s find out.

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What are Turnkey Properties?

Turnkey real estate investing is a loosely defined investment strategy in which the investor buys, rehabs, and has a property managed through a third-party, usually from a long distance away. Their goal is to make the entire real estate investment process as simple as possible, so all you need to do it “turn the key.” (Get it!?)

Related: Turnkey Investing 101: What to Avoid & How to Know if It’s Right for You

There are hundreds of turnkey real estate providers in America (and across the world), and no two companies are exactly alike. Some will buy, rehab, rent and THEN sell a property to you, the investor. Others will simply help you find the property and let you do most of the heavy lifting on the rehab side (if there is any rehab to do), then manage the property for you. Again, each company runs their operation a little differently, so if you decide to go with a turnkey company, it’s important that you do some in-depth research on exactly what that turnkey company will and will not do.

Benefits of Buying Turnkey Properties

Turnkey investing has several distinct advantages over doing it all yourself:

  • Service at a Distance: The first (and most obvious) benefit to turnkey real estate investing is the ability to invest in a good real estate market without you needing to live there. Being a landlord is not always easy, and trying to be one from thousands of miles away can be even more tough. Many people who live on the East or West coast of the United States, as well as many who live outside the country, rely on turnkey companies (usually in the Midwest, where cash flow tends to be higher) to invest in great markets.
  • Market Insight: A good turnkey company knows their market with far more precision than an outsider would. You might be able to do some research on a particular area and check out the school ratings, crime reports, and price ranges, but a turnkey provider will know the heart of an area. They will know why people prefer one area over another. They’ll know why this block is worse than that block. They’ll know the reputations behind certain neighborhoods, properties, and businesses. They’ll have an ear to the ground about societal changes that could affect the local economy. It is very difficult for an outside to gain this perspective, as it is normally reserved only for long time locals, which a good turnkey provider should be.
  • Professional Staff: Turnkey providers, because they are property management companies, will generally have either in-house staff or work closely with vendors to make sure your property is taken care of. They have someone who will answer the phone, someone who will fix a running toilet, someone who can sign a lease with a new tenant. When you invest on your own, you either have to do all these roles yourself, OR you’ll need to find them in a market you may not know.
  • Marketing Machine: Many turnkey providers buy, sell, and rent dozens or even hundreds of homes per month. For this reason, they are required to consistently drive leads into all the parts of their marketing funnel. They might use billboards, radio ads, newspaper ads, and more to drive both motivated sellers and tenants to their business. For this reason, they may find better deals than you could, as well as get tenants faster.
  • Management Experience: Let’s face it, most people are not good managers. Turnkey providers, on the other hand, are usually experienced in dealing with tenants and contractors. Their experience helps them make the right decision more often.
  • Simplicity: Finally, although each turnkey company operates a little differently, they all have the same goal: to make the investment property easier for you. When you invest in real estate by yourself, you are forced to handle all the moving parts yourself, which can be overwhelming. A turnkey real estate investment company attempts to simplify the process, so you ideally will only need to write and receive checks.

Related: 4 Most Common Mistakes When Buying Turnkey Real Estate

The Downside of Turnkey Properties

Now at this point, you are probably thinking to yourself, “Wow, turnkey sounds pretty ideal. Why wouldn’t everyone do this?” There are some potential downsides to turnkey investing you should be aware of before you jump into that kind of investing, so let me walk you through the two big ones:

  • Financial: A turnkey company is a business that needs to make money, and they do this through several methods. First, turnkey companies often buy the property at a discount and sell it to you, the out-of-state owner, for a higher amount, essentially “flipping” the property to you for a hefty amount. Then, the turnkey provider makes a monthly income by managing the property for you. Therefore, it would make sense that you will be paying a “premium” for the ease of service you are getting. You generally can’t have your cake and eat it, too! That said, remember that turnkey companies DO have a marketing machine running 24-7, and as such, are generally able to find incredible deals in their market, so even if they do make a profit when they sell to you, you might still be buying “below average” and getting a great deal.
  • Trust Needed: Perhaps the greatest risk when choosing to invest in real estate through a turnkey company is the level of trust you must place in this provider. After all, you are relying on their knowledge and expertise to choose a location, choose a property, choose a tenant, and manage that tenant. That’s a lot of trust you are placing in someone else who gets paid whether or not you make a good investment. It would be fairly easy for a turnkey provider to take advantage of out-of-state investors by encouraging them to buy bad properties in bad locations. In fact, I’ve heard many horror stories of investors who buy a property through a turnkey provider only to discover soon after that it was a “pig with lipstick” that immediately began costing the investor a lot of money in repairs.

So, should you invest in real estate at a distance through a turnkey company? That’s a decision only you can make after careful investigation into a particular company.

I’ve personally never invested in a turnkey company because I have both deals and the hustle needed to make greater profits in my own backyard. However, if my area did not present the same kind of opportunities, I would seriously consider it.

There are both benefits and disadvantages, so I would weigh those against the possibility of investing in your own market. If you live in an expensive area and want to invest in lower-priced properties, turnkey can be a great alternative to being a local landlord. Just be sure to do your research and know what, and who, you are investing in.

Have you invested in turnkey real estate? What would you add to my list of benefits and downsides?

Don’t forget to leave a comment below!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

27 Comments

  1. Stephen S.

    I used to have a client who seemed to have carved out a little niche for herself doing that. Her MO was that she bought distressed properties, got the rehab taken care of, and then rented the properties to tenants. After a while of ‘track record time’ – a few months maybe – she would sell them to somebody who wanted an investment property. She also kept some so I don’t know how she chose between them. My guess would be that she probably sold the real winners and kept the marginally cash flowing units. But that’s just a guess.

    But apparently there is a market for that kind of thing.

  2. Thanks for the informative article Brandon!! This brought flashbacks to My very first transactions in Real Estate which were turn key properties. Looking back their were a few key mistakes I think I made and I would like to share with anyone else that may read this and considering a turn key property. I was super green to real estate at the time but looking back now, I would have done things a bit differently

    What I did not do ( that will seem really crazy) is that I did not order a property inspection ( nor did the employees of the company selling to me/teaching me about RE advise me to get one). Do yourself a favor…..Always get a property inspection from a neutral third party before purchasing a turn key property…..esp if it’s out of your area. I would even advise visiting the area and the property at least one time. I did actually see the properties in person but one of them fell out of escrow because it wouldn’t appraise so I was assigned another that I didn’t get to visually see in person but agreed to purchase regardless. Had I gotten the inspection report I would have identified a few of the problems that have since come up (like completely worn out roofs) that I may have been able to negotiate in order to bring down the sale price (and save thousands on later repairs and insurance claims that came up….in addition to a further rise in my insurance rates ).

    Next, I strongly advise against buying a property at a price that has 0 or negative equity, unless maybe you are buying in a non-linear market where their is strong historical appreciation potential. I was totally sold on the sales pitch that it’s ok to buy in a linear market, and that I should focus on the long term steady rental income as long as it is 8% -12% ROI after expenses. This along with the “turnkey ” convenience was worth buying at market value or even below. At the time I was totally and completely sold on this concept but looking back I now believe that was unbalanced advice and had I known then what I know now, I personally would have done things much differently. But I do give myself credit for taking action.

    Also, double check ALL #’s presented to you. Those first turn keys were presented with erroneous #*’s. For example, the Property taxes were quoted as 1% (and I took that at face value without researching it) but later I was hit with a huge back tax bill because commercial properties in that state actually are taxed @ 2%. 1% property taxes are for owner occupied property taxes. Whether it was intentional or not I was presented with over inflated ROI #’s.

    One last extra tidbit (but not least)….check out what is going on with property insurance rates. The area I was in had been experiencing a plethora of storms so my rates went up 30% after one year even though I had no claims. Then when I had to make a claim ( due to storm damage and a roof that was end of its poor life when I bought the house….although I didn’t know it at the time… because I did not get an inspection), my rates went up again.

    Kind of frustrating but I learned these (and many other valuable lessons) from it. Mostly whenever you are transacting money…..and especially in real estate when you are naive and green……..their is no such thing as blind trust ( especially when the sales pitch sounds really convincing)…… Do your own due diligence and double check ALL of the facts presented!!!!!!!!! Biggerpockets is one of many great resources to help you accomplish this.

    • Daniel Ryu

      Hi Lisa!

      Thanks for your informative comment. That was very detailed and helpful.
      I’m wondering what you meant by 0 or negative equity?

      “This along with the “turnkey ” convenience was worth buying at market value or even below.”

      Does buying at ‘below market value’ mean buying for more than what other people are paying?
      (ie. Market value = 100K but you pay 105K)
      (I thought that was buying ‘over market value’?)

      Just checking to make sure I have my terms right. Thanks!

      • Hi Daniel!!

        You are so welcome!!

        To Clarify:

        Basically I purchased the single family properties at full Retail/Fair Market value (however values went down the next two years) so I ended up with Negative equity.

        One example:
        –PP $85,000, Market Value: $85,000 (market values dropped the next 2-3 years)
        -PLUS: $5000 Turnkey Rental Fee per property-Non-refundable
        -20% down per property + appraisal and closing costs

        And actually one of the properties appraised $10k below value. And because I utilized a bank loan I had to actually come up with an additional $10,000 (on top of the 20% down, and $5000 non-refundable fee) to make up for difference between the appraised value and the Purchase price. So, YES, your correction is accurate…..I paid MORE than Market value on that particular property. It feels bit painful writing this but It’s all good! It was a total rookie move on my part.

        I have listened to a few companies who sell Turnkey rental properties make their sales presentation (including the one I purchased from). The ones I have seen tend to sell their properties at Full Retail value/Fair Market value (buyers get none of the equity at time of purchase). The value to us as buyers is that we get a hassle-free, ready to perform Buy and hold property. Essentially it’s a speculative purchase of a TurnKey property because you are depending on future performance: rental income, future appreciation etc. etc).

        So if you have a solid performing property year after year you could make a decent return AND possibly future appreciation (depending on the Market stats, vacancy rates etc. etc. etc). But if some emergency comes up and you need to sell in 60 days you are likely to have big losses. Also, you can’t capitalize on a Home Equity line of Credit that is a nice safety net as an investor but not available if you buy at full retail value.

        I am not discouraging the purchase of Turnkey Buy and Holds. They are probably a perfect investment for some individuals, but considering I have already had experience with it, I couldn’t help but comment on my mistakes and some of the things I would have been more thorough about if I could go back and do it again. I know investments are very individual but I personally would never buy another Turnkey property at Fair Market Value (and definitely not OVER Fair Market Value!).

        Let me know if you would like me to clarify anything futher. Thanks again Daniel!! 🙂

    • Liam Barnes

      Really appreciate the detailed notes Lisa.
      Are there a few key things you would suggest looking for when evaluating different turnkey operators (perhaps in addition to all the things would pointed out in your comments)? Thank you

  3. Jay Helms

    Under no circumstance, absolutely none what-so-ever, should anyone ever attempt, on this day or tomorrow, ever, never ever, should anyone even think about it, never, no where in the history of your life or mine, try to serve me a piece of cake and not expect me to eat it.

  4. Similar product call TIC tenant-in-common was easy to get for 1031 exchange 7 yrs back. Now real manager is cleaning us out, some of them cook books etc, and we lose the property. Example 250 unitsstudent housing with 25 owners, all of them need to agree for sale, refinance etc, tough situation.

    • Keith Anderson

      It’s largely a function of rent-to-own ratios, appreciation rates on home prices, and average rents. Property on the coasts is expensive, and rents relative to the purchase price often don’t cash flow. In the MidWest, rents equal to 1-2% of a property’s purchase price are not unusual and leave enough margin to cover vacancy, repairs, and operating expenses.

    • Daniel Ryu

      Just a guess… but property prices on the coasts are higher, so assuming your financing the deal, your mortgage will be higher and you’ll be paying more of your rental income to pay off debt services than you would buying cheaper properties in the midwest.

  5. New reader here. We’ve just started real estate investing about a year ago, so I think I’ll get lots of good info from your blog. I think I would do ‘turn-key’ investing if there were great deal out there, far from where we live, but for now, there are deals right in our backyard, and I’m happy with that situation.

  6. Gaurav M.

    Another excellent post as always. This is topic is debater many times in the forums whether to buy out of state turnkey or not.
    In my opinion, for a person like myself who has a full time day job and cash flowing opportunities are non-existent close to home, turnkey offers a good alternative to buy cash flowing properties out of state. It obviously does not offer the best ROI. If I had the time, network and resources like you or Ben Leybovich to find amazing deals and invest with no or low money down, I would do it in a heart beat. But doing what you guys do is time consuming. It is a business rather than investing.
    That being said turnkey is not truly passive either. An investor still needs to due to do his due diligence and make sure that is the best place to put their money.
    I’v bought non turnkey investments out of state and rehabbed them and rented it out. But at the end of the day I probably get the same returns as a turnkey investment. So it probably wasn’t worth the hassle after all. I would not recommend anyone, especially a beginner, to try an manage rehabs out of state. I did have a good team in place and luck was probably on my side too. But there are many things that could go wrong.

  7. Jason A.

    Brandon,

    Of course you can have your cake and eat it too. Someone gave me a cake. I have it. Now I will eat it. I think the idea is: you can’t EAT your cake and HAVE it, too. Once you’ve eaten it, it’s gone.

    Anyway, with regard to turnkey investing, it’s a wonderful thought, but the big question that an investor needs to ask (and you alluded to it above) is: “How much am I going to have to pay someone for this pretty package with the nice red ribbon around it?” And is it truly “turnkey”?Management in particular is very dicey. Who will manage the managers? How will you be able to determine whether or not they are doing their job properly? Not only cost, but what liability are you incurring by placing these responsibilities into someone else’s hands while you attend to other matters?

    Definitely a great concept. I would love to see some specific examples of the ROI obtainable from these kinds of investments in the real world.

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