Turnkey real estate seems like a dream come true in terms of investment opportunities. It looks like an amazing opportunity that’ll start paying off almost immediately. If that doesn’t sound like a great opportunity, I don’t know what does.
And yes, that’s exactly what turnkey is all about. But no, it isn’t as easy as it sounds. Speaking from personal experience, I’ve been through the tough bit, and it gave me hell. I have bought properties in upstate New York, paying way more than what they were worth. “Partners” I worked with directed me to hopeless property management companies that weren’t in the least bit interested in my own goals. And as a result, having made a huge investment, my cash was trapped, and I was stuck learning my lessons in turnkey real estate the hard way.
Turnkey real estate can get tricky, to say the least, especially if you are new to the market. There are so many instances of investors getting duped when doing a new deal, and there are so many turnkey horror stories out there that, in fact, many real estate investors are reluctant to get into turnkey investing. The stigma that surrounds investments like these is based on facts, and that’s why, if you don’t watch out, turnkey investing just plain sucks. Just ask the folks on BiggerPockets, and I’m sure many will happily crucify anything and everything relating to turnkey real estate investing.
The opportunity is still there, though. In fact, turnkey can actually be very lucrative and can still be a “dream come true” if you overcome common issues the smart way. Here’s the breakdown.
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4 Common Stigmas Surrounding Turnkey Real Estate — Debunked
Stigma #1: All turnkey is the 666/devil!
If you too have been cash trapped and caught up in a turnkey real estate situation like I was, then you’d say this too. Turnkey real estate is the devil that lures you with riches and then takes away all you have. For me, the wrong moves and the wrong turnkey providers landed me the wrong deals. I went to a pathetic excuse of a property management company that wasn’t professional at all and ended up investing in bad deals, which resulted in lost opportunities because my funds were tied up.
The facts: It is not the devil. It is, in fact, the way you deal with this kind of real estate investing that makes all the difference. All you have to do is be informed and get as much information as you can up front. Make sure turnkey is your cup of tea and suits your needs. Knowing where to invest and with whom to invest can make a huge difference to the end result.
Never forget that team work will make your dream work, so I can’t stress enough how important it is to find the right people who will always have your best interest at heart. These folks must have the bigger picture in mind and heavily practice delayed gratification.
Stigma #2: Turnkey always involves bad properties in terrible areas.
A lot of turnkey providers will sell you bad properties in bad locations. This means that you end up buying properties in C and D-class areas. These properties are usually risky, which means that these homes will be older and often show visible signs of age and bad maintenance. This also usually means that the property is located in a region with a higher than average crime rate. Properties like this are often occupied by tenants from the lower socio-economic strata. And they can be a lucrative option if you know what you’re getting yourself into and how to handle it.
If you don’t, however, you better walk away. Real estate investors who are just starting out often get lured into buying these properties well above market value. What’s more, the high level of volatility in these markets makes it difficult to find out the real market value. With the additional issues these areas and properties bring with them, investors end up paying way more than what they’re worth and losing money to constant tenant turnover.
The facts: Make sure to educate yourself on the different classes of property. Once you’ve done that, you’ll know when to walk away. If you can’t find out the right market value of a property, don’t touch it — it’s a sure sign of trouble. When you decide to invest in turnkey real estate, ensure that it’s a B-class property, and invest in it without taking on too much debt.
Also, as you’re looking into a market or region for investment, focus on the quality of the investment rather than the quantity. Instead of buying many D-class properties, go for a smaller number of B-class properties. It’ll be safer and easier to manage. Limit your inventory and choose to work with a proper selection of turnkey companies in predefined areas. Surprises are your enemy here.
Stigma #3: Turnkeys are always sold over market value.
This is a pretty common scenario that many investors face today. When you go to a turnkey company to buy a property, you often end up spending much more than what the property is worth. This happens for a couple of reasons. Investors often believe in a lot of the company’s propaganda, they don’t do enough research or they fall for the high prices hoping that they’ll get a higher rent and thus a higher cap rate.
The facts: This one seems justified. After all, all businesses are into real estate for the profit. So, if someone is selling you at market rate or under the market rate, you need to be wary about how they are making money, right?
While it is true that these companies need to make money, a lot of them are run by very experienced people who know when a house is undervalued. It’s very feasible for someone with experience to sniff out a good opportunity. For example, our company waits for the right deal, in the right area, that can be bought for the right price and that needs the right amount of work. Once renovated, we sell at or below market value, hitting our profit margins but also delivering a great product to the investor.
Instead of worrying about being overcharged, though, worry about the quality of your property and the property management. This means that you need to make sure the property is in the right area, is in good condition and the property management doesn’t have hidden fees or a tendency to nickel and dime its investors.
Look at the company you’re going to do business with, make sure they are the real deal, and ensure that they will execute your project the right way and most importantly, that they will they get you the results you’re looking for. A good company will also advise you on what to expect from a certain property and give you details on the neighborhood as well. If they don’t, be careful — they might be holding back on some crucial information. Something to take note of is mentioning that you would like to visit the area. If they hint against this in any way, I would be EXTREMELY cautious moving forward.
This brings us to the next one.
Stigma #4: There are no good property management companies.
While buying a property through a turnkey real estate company is easy, it is what comes after it that is tougher. Many turnkey operators aren’t always looking to maintain a long-term relationship. It’s usually the quick buck they’re going after. This means they pass you on to a property management company that will be charging you wherever it can, and before you know it, you’re paying for endless repairs, maintenance and whatever else. A lot of property management companies will make unnecessary costs, and you’ll wish you’d never started with turnkey property investing.
The facts: These companies exist, but there are a lot of decent alternatives. Opt for a real estate turnkey solution with offices that are in order. Visit them, ask them for details and talk to their personnel. This will give you a pretty good feeling of what to expect and how professional they are.
If a company isn’t quick to return your call or write you back or if their staff is unavailable most of the time, then perhaps this company is a bad choice. The best property management companies today are turnkey real estate companies that have in-house property management teams. So, if you have a choice, look for one of those. Do make sure to ask for references and get confirmation that the team is indeed in-house and not outsourced.
Turnkey real estate is terrible — if you’re unprepared. By its very nature, you’re going to be depending on a lot of different people and might end up with less control than you’re used to. Make sure that you’re well-informed, and things will be alright. And if you’re lucky, things will be more than alright because turnkey real estate is one of the few things you can invest in that has few risks, is completely hands-off and has an almost immediate payoff.
Do you believe turnkey investments are a solid place to put your money?
Let me know what you think with a comment!