The Downside to Turnkey Rental Properties No One Tells You

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I imagine if you are reading this article that you have probably been trolling BiggerPockets for a little while now, and you have probably seen the mention of “turnkey rental properties” quite a bit. They have become more and more popular over the last few years, and I’m definitely noticing a lot more talk about them.

If you’ve followed me at all on here, you know that I primarily deal with turnkey rental properties for my own investments. The reason I deal mostly with the turnkeys is because I prefer being as hands-off as possible with my investments. The “out of sight, out of mind” theory doesn’t intrigue me for many things in my life, but it does for my investments. I prefer to just get my checks every month and not have to do any work or exert any stress over my properties!

Despite my promotion of turnkeys, however, I have recently come to realize a downside to them that I don’t think everyone is aware of. This is not a downside to deter anyone from buying a turnkey, but rather it is one that just encourages a little extra due diligence on the part of the buyer before diving in.

Before we get to that though, I want to clarify what I mean by turnkeys in this particular case.

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Defining a Turnkey Rental Property

Most generally, a turnkey rental property just means that a property is ready to go as an investment property. It’s “rent-ready,” and in most cases would already have tenants in it. So no rehab required and tenants are in or coming in.

If you read about turnkey rental properties on this website or wherever else, most often “turnkey” refers to properties that are being sold specifically from a turnkey provider. Someone can certainly advertise a random property as being turnkey, so keep an eye out for that, but the place most people go to buy turnkey properties are from the turnkey providers.

These turnkey providers find the distressed inventory, rehab the property, place tenants, and set up property management to be ready to take it over as soon as you buy it. So, in theory, all you have to do is buy the property, and it is up and running to put cash in your pocket from day one. An entire business model has been built around this, and these turnkey providers sell these properties in mass quantity. They are essentially glorified flippers, if you will. They buy a ton of properties, rehab all of them in bulk supply, and sell them off to investors.

The properties I am referring for this article specifically are those properties from the turnkey providers.

turnkey-tips

The Downside to Working with the Turnkey Companies

If you decide to buy a turnkey property from these guys, what is advertised to you is that the process is about as hands-off as you can get — the property is already rehabbed for you, tenants are already placed, and they have property management set up and ready to take over as soon as you close on the property.

In terms of doing due diligence on the property and potentially on the provider themselves, you are likely to be guided towards doing the following checks (all recommended, none required, and this list is not inclusive of everything you can do):

  • Hiring a property inspector to verify the condition of the property. This is to make sure you are getting what you paid for. Not just to confirm the true condition of the property, but also to verify the quality of the rehab job.
  • Checking up on the location/neighborhood. If you work with a good turnkey provider, this part should be OK, but it can’t hurt to add it in as part of your due diligence. Checking on things like safety, rentability, and stability.
  • Ask any questions you feel necessary of the provider and the property managers. This is to make sure you know the terms of working with everyone, you like the feel of how things will be conducted, and you can verify rental income and tenant quality, etc.

Now, downside time. It in part has to do with that third bullet up there — interviewing all of the parties involved with your property. In this case, it is specifically with the property management.

With turnkey properties, and in working with turnkey providers, there is an inherent sense of trust instilled in the buyer that usually causes the buyer to forego doing the same level of due diligence that they would do if the property were not turnkey.

Related: 3 Crucial Areas to Vet When Choosing an Out-of-State Turnkey Provider

Why this is a downside is that it can get buyers in a pickle should the property management turn out to not be all that dandy. It can happen with any property management company, not just turnkey property managers, but when it happens, it can be quite costly (and frustrating).

Let’s break this down. Let’s pretend you are buying a non-turnkey property — just some random property in some random town (but one you plan to use property management on).

  1. You would certainly do some shopping around and get a detailed analysis of things just in buying the property. You’d shop several properties, likely with an agent, and eventually you would interview contractors and get quotes for the rehab. Boom. Cool.
  2. As you approached closing on the property, you would begin thinking about property management. You would research several property management companies and likely interview each one of them.
  3. Based on how the property management companies responded to your interview questions, and then assessing how you felt about them just by talking to them, you would choose a property management company to take over your property once you close.

Now, with the turnkey process, the first step of those isn’t required more than just choosing which property you want because all of the hard stuff is already done. But it’s the next two steps — researching and interviewing property management companies and selecting the one you like the best — that get missed with turnkey properties (I think).

Why does this matter? Isn’t the point of the turnkey process so that you don’t have to do any of this work and your property should just come neatly packaged with a pretty bow on it — which includes property managers? Yes, that is the point. However, there’s this small thing called “reality.”

The reality is this. First of all, nobody is perfect. And very often, one of the least perfect types of companies out there are property management companies. Second of all, for every one person I’ve seen despise a turnkey property management company, there are about 10 who love the same company. I’ve yet find rhyme or reason for this, but some people just really jive with their managers, and some completely butt heads — and all hell breaks loose.

turnkey

Every turnkey property management company has a different level and style of communication, so it’s all a matter of who gets along with each other. Yes, every manager should get along with every owner, but life just doesn’t work that way. I have heard of way fewer bad experiences with the turnkey property management companies than good ones (yay), but that doesn’t matter for those who end up not liking their managers.

This is really no different than with any general property management company, regardless of whether it’s one specific to the turnkeys or not.

A Break in Trust

Now, where the downside of this really plays in is — if someone buys a turnkey and just trusts the process and everyone who comes along with it (which is what is advertised and what is completely within reason to think that you should do), and then when their property management experience is horrible, they blame (and have every reason to blame) everyone who was involved in the process. Yes, “trust” was indirectly advertised, and then that trust is broken, so the investor feels duped. Or more blatant than just feeling duped is feeling like they bought into a scam. Then they go from being mad at that turnkey provider and feeling duped and scammed to distrusting turnkeys.

A quick clarification on this — I don’t know of any turnkey property managers who have scammed anyone or have tricked them in any way. What I’ve primarily seen is poor communication by the managers. Even if the money is coming in swimmingly, a break in communication often triggers these negative thoughts by the owner. It even does for me! In the old days, “bad” property managers that came with turnkeys were really bad, far beyond just poor communication. But I haven’t seen that in a few years now.

Let’s go back real quick to the scenario of you buying a property on your own and choosing all of the people on your team, including the property managers. If you interviewed all of those property managers and picked a company you liked and then they suck later on, who do you blame? At most, just that property management company. But remember too, you chose that company so — not to say you are completely responsible, but it was your choosing. Of course, the company didn’t let you know ahead of time they were going to screw you, but it was only you who chose to work with that company. So the blame isn’t far spread — it’s really just the property management company themselves, which you chose.

If that happens, it’s unlikely you suddenly distrust the entire rental property concept. You also, at that point, just fire that property manager and hire a new one.

But with the turnkeys, it was more or less advertised to you that the property management company that came with the property was going to be excellent. I will say that in my experience, all of the companies do seem to try for excellence, but they don’t all quite hit it. With all of the turnkeys I work with, the only part where sometimes things go wrong is with communication. Communication, or a lack thereof, can be extremely frustrating and disconcerting for an owner.

My point is, I encourage all turnkey buyers to keep this situation in mind and adjust accordingly.

invest-turnkey

Solution to the Problem

The good news is there is an easy way to get around this situation of potentially being disappointed with the property manager that comes with the turnkey property.

Vet and interview property managers for your turnkey property, just as you would if it weren’t turnkey.

Of course, one of the property managers you want to include in this is the one that comes with the property and through that turnkey provider, but talk to some others as well.

Note: You are not required to use the property manager that comes with the turnkey property! Once you buy the property, it’s yours to manage as you wish.

This way, you have a much better feel regarding the property management you will be dealing with on your property. There is still a chance things could go wrong with any manager, but at least you have more diligently vetted the options and gone with whoever you feel most comfortable with.

Related: 4 Common Stigmas Surrounding Turnkey Real Estate — Debunked

In no way am I saying that you should expect horrible property management with turnkey rental properties. Like I said, I hear more good stories than bad. But the rough stories have a level of frustration and disappointment that I hate seeing. Mostly because the disappointed investor was willing to trust someone to take great care of them and for whatever reason, it may not have worked out.

Being more thorough in your due diligence, despite the advertisement of trust and hands-free, is really the message I want to get across. Doing this can help lessen your chance of getting stuck in a frustrating situation. You might just sleep better at night knowing you chose your property manager, even if it is the one that comes with the turnkey property, yourself!

I will say, the only trouble I’ve ever had with turnkeys (and this was back in the day, not so much recently) has been with bad property managers! I could have easily mitigated every one of these problems had I known to vet more than one property manager and not necessarily trust the one who came with the property.

For everyone who has dealt with property managers, what interview questions do you recommend investors ask during interviews with the various companies (turnkey or not)?

Leave your suggestions below!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

33 Comments

  1. Chris Billington

    Very helpful Alli. We’re in the middle of our first turnkey deal in KC, MO and every bit of knowledge helps. We’ll be monitoring this one closely to determine if it make sense to rinse and repeat! We have rental properties in the Denver area, but the opportunities for cash flow are very limited with an overheated market here. Turnkey seems to be the most sensible way to start in a different market – at least for our purposes. You have also been a big help with responses to some of my forum questions so again – much appreciated.

    Chris

  2. Ankith Chandra

    Great article. I don’t remember the podcast # but one of the guests mentioned that having a good property manager can make/break your deal irrespective of the property/location. I am interested in turnkey investing and have been doing my due diligence. This article certainly brings to light the extra due diligence one must perform before investing. Thanks for sharing.

    • Ali Boone

      Hey Ankith! It’s absolutely true about your PM. I have first hand experience that they can make or break your investment. The good news is that for the most part all of the turnkey PMs I know of right now sometimes just lack on the communication side, versus sides that can cost you (the owner) a lot of money. It’s also unfortunately hard to know exactly how the customer service side will be with the PMs because of course they will tell you it’s great. 🙂 The best thing I recommend is asking for references and specifically asking those people how their experience has been on the communication front.

  3. Michael Sedillo

    I always thought the idea of turnkey properties was interesting. You go into a property with a long-term solution in mind, but then hire a turnkey provider that only has incentives to provide you good service for the short-term, does that make sense to you?

    Most of the investors I work with, have found they prefer to have a partner that has a long-term interest in the property. Being hands off on a long-term real estate investment should be hands off during the acquisition, and for the long term.

    Wouldn’t you agree?

      • Michael Sedillo

        I’ve never hired a property manager because I could never understand how they were a partner. There’s no reason for property managers to keep capital expenditures/rehabs/repairs low, and in fact many receive paybacks for higher prices. There’s no reason for a PM to treat the tenant badly, so they leave every year, and charge you with another set of marketing fees.

        I learned from a smart business coach that owned over 1600 properties without a PM, if you don’t understand how the PM can run the business, and make a profit, and take care of your property…. then they’re either going out of business, hiding fees, or not taking care of my asset.

        I don’t understand how a PM can run a business from $100 and take good care of my house, do you?

    • Ali Boone

      I do agree Michael, for sure, but I do think there is another side to the argument with the turnkey providers. I believe they do have a longer-term interest than might be obvious right off the bat. The reality is that investors average two property purchases per year (versus primary homebuyers which average one purchase every 7 years). The turnkey providers want that repeat business, and most I know thrive primarily off of that repeat business. But the only way to get repeat business is to keep everyone happy. That is part of why I often argue that turnkey PMs have more incentive to perform than normal PMs because they are part of a larger, longer-term, business model. Individual PMs don’t have that same incentive.

      See what I mean?

  4. Shannon Bae

    Great article Ali! This is definitely advice people buying their first turnkey property should heed. You were such a rockstar in helping me with my situation, which was largely a communication issue, and you always made the point that there is a difference between a PM with terrible communication skills and a PM that is actually shady. I think it’s important to recognize this distinction. Although I had a very frustrating experience with my PM because he didn’t communicate with me, I was able to see that he wasn’t trying to scam me or pull the wool over my eyes. It definitely helps to have someone like you in their corner, that’s for sure! Weirdly, I’m actually grateful for that experience and that “seasoning,” because it’s actually made the whole turnkey strategy more realistic to me and not just something that initially seems way too good to be true!

    • Ali Boone

      There you go Shannon! 🙂 I’m glad I got to help you out through that, and I’m glad you weren’t mad at me since I’m the one who referred you. Haha. But it was even a good experience for me, because it did alert me to make sure I am very forward with people about the potentials. There are excellent turnkey PMs out there, and even non-turnkey PMs have a tendency to…suck…with communication, but it’s all part of REI. If it were that easy, everyone would do it! AND, super glad you are banking the bucks every month 🙂

  5. Gary Hall

    YES!! I tell all potential owners, that my first job is to convince them NOT to choose us. Using an out of area PM takes a huge amount of trust. You have to be on the same page not just with communication but with investment and management philosophy.

  6. Rob Delco

    Thanks for the article Ali,
    We invest from out of the country using turnkey rental providers and have always checked the quality of their rehabs because guess who will be paying PM to re-apply patches to poor work. Also confirm that any necessary permits were obtained (In Saint Louis, we came across one who did not do that, leaving new owners to sort out mess if ever caught out by the city years later during a make-ready rehab done by a contractor doing the right thing and applying for permits).

    We also asked for their portfolio typical time to lease out & average leasing stays of tenants … shorter stays = more costs to renew home for next tenant + more lease charges + less income/year + indication that a tenant who cannot afford to stay was placed in your house.

    • Ali Boone

      Hey Rob, that due diligence sounds excellent. Do you think it made a difference in the outcome? Did it sway you away from any PMs initially and directed you towards the one you went with?

      How are your turnkeys doing in St. Louis? I don’t have any affiliations there so am curious what is out there.

  7. Gianni Laverde

    Ali, Definitely no matter how good a deal is, if a property manager is not selected carefully, the investment will be affected and will bring lots of headache to the investor.
    Thanks for highlighting the importance of not overlooking vetting a PM even when ‘included’ when purchasing TK properties.
    Gianni

  8. Brian Skinner

    Going into it with the right mindset helps. If the investor expects absolutely everything to be done for them, they will be disappointed. If they view the turnkey provider as their team and still put in the research / work, it will go much better.

    • Ali Boone

      I think that is perfectly stated Brian! That’s even a good clarification for me in even thinking about it and mentoring people on it….not to consider everything being done ‘for you’ but rather see them as your team. Excellent!

  9. Brian Kehoe

    Great article Ali! I appreciate your knowledge and honesty of the turnkey business. A lot of posts I see people are against turnkeys especially out of state ones but the facts are that not every market makes sense to every investor. I’ll be making my first turnkey purchase sometime this year and thank you for sharing your experiences and knowledge on the subject.

    • Ali Boone

      Hi Brian! Thanks for the comment! You’re right, a lot of people knock the turnkeys, but the reality is they just aren’t what everyone wants. That, and people expect them to be perfect and get peeved when they aren’t 🙂 If you need any help when you’re ready to start buying, don’t hesitate to reach out!

  10. Hello Ali,

    We are just about ready to contract two more turnkey properties. I now ask my PM and turnkey providers “if they would buy in this same area or if they already own in this same neighborhood?”

    These types of questions helps uncover the PM or provider honesty.

  11. Julie Rogers

    Nice article, Ali
    My problem is I like to remove the middle man, cash is tight.
    Sounds like a lot of middle people in turnkey properties.
    Still, if you buy and rehab, a lot of cash is tied up there. You can’t get a loan on bad properties, It is surprising what people want for bad properties, so not a lot of room for profit when rehabbed. With that, it would cost about the same to buy and rehab, as just buying a rent ready property.
    No matter which way you go, a good PM is nice.

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