How many of us, especially as we first start getting into real estate investing, are concerned we are getting duped? I’d venture to say quite a few! I know I did when I started out. I was certain every dude in a suit was out to take me for everything I was worth. Luckily, I happened to meet people I really valued and ended up being able to trust, and life has been a lot easier since. But not everyone has met that kind of crew yet!
Here’s some good news about REI. You don’t necessarily have to trust a soul. Sure, it makes it a lot more enjoyable and you have more backing to help you make safer decisions if you trust who you are working with, but even if you haven’t found your “crew” yet like I have, you can get into REI just fine because there is very little you can’t verify about an REI purchase!
So if you can verify a purchase/investment, you don’t have to take anyone’s word for anything. Bingo!
As most of you know if you’ve read many of my articles, turnkey rental properties have been my jam for quite a while. I love them, they love me, and we get along great (most of the time). A question I get quite often is, “How do I know I’m not being taken by one of these turnkey companies?”
How do you know? Well, as with REI in general, there is very little you can’t verify about a turnkey purchase. In fact, with a turnkey, I’d go as far as saying that there is nothing you can’t verify about the purchase! The only thing that will always be an unknown is simply the unknown. Like a crazy freak tenant, or a freak storm that hits the house, or some other kind of incident that you could not have predicted. But that’s possible with any rental property.
So in thinking of a possible turnkey purchase (I’m specifically referring to turnkeys sold by turnkey companies in this case), what kinds of things can you incorporate into your due diligence to ensure you are actually buying what is being advertised and you aren’t being taken?
4 Steps to Ensure You’re NOT Getting Duped by a Turnkey Provider
Check out the reputation/quality of the turnkey provider.
Now, I do want to be specific about this one. On one hand, the turnkey provider itself absolutely does not matter for your purchase — technically. I say this because you could buy a turnkey property from a company who doesn’t know their hind side from their elbow, they are raging jerks, they are former felons, or they are completely dysfunctional. The reason that technically doesn’t matter is because all that matters is the property. If you get a bangin’ good property that gives great returns and all functions well, then who cares who you bought it through?
Now, on the flip side, while technically it doesn’t matter who you buy from, the quality of the turnkey provider is likely to drastically affect your buying experience. Furthermore, if you are working with a low-quality provider, it’s unlikely you can expect a high-quality property, although not impossible. Especially if this turnkey is your first purchase, turnkey or in REI in general, working with a solid turnkey provider will literally change your whole buying experience for the positive. When you work with a good provider, you are more likely to get a high-quality property, have easier communication, be able to close on your property in a decent amount of time, and go to sleep at night with warm fuzzies in your belly because of how good your property makes you feel.
If you work with a rougher company, you are more likely to have to fight to get the property quality up to standards, experience communication stress, have continued delays on construction and closing, not see the returns that were originally advertised, and go to bed thinking you have been (or are being) had. But all of that doesn’t matter if you do get a good property, so just make sure you know the difference. I’ll hit due diligence items about ensuring the property, but I wanted to throw this out about the quality of the turnkey provider. I won’t send people to bad turnkey providers, mostly because the people I work with are new investors, and I don’t want them scared off or in positions to need to do levels of due diligence on a property that are way past their knowledge levels. There’s just no reason for it when there are good providers out there. So, the key points here are: All the matters is the quality of the property you are buying; however, who you work with will likely determine the likelihood of that property being up to standards and the ease of your experience in buying a property.
Determine the quality of the rehab.
Now to the property! One of the absolute keys in buying a turnkey property — and in fact this goes for ANY property you buy, no matter what — is hiring a good property inspector to check everything out for you. This is not required, but frankly you are crazy if you don’t have an inspection done. I might even judge you. The main role of a property inspector is to let you know of any problem areas they see in a property. This is key for you so that you aren’t hit with an unexpected expense for some kind of repair later.
With the turnkeys, they are advertised as being fully rehabbed, and part of the perk of a turnkey is not having to do any major repairs or replacements for several years or more, so a property inspector should ensure that this is actually the case. When I hire a property inspector for my properties, I also whisper some sweet words to them about how nice it would be if they would relay back to me how the quality of the rehab looks. I’m telling you, be nice to a property inspector because they can be your best friend. Especially if you are buying sight unseen, they can be your eyes and ears.
Quite honestly, inspections aren’t that expensive so you could even hire two different inspectors if you really wanted to go crazy with assurance! I think that is a great idea. You can also pick your inspector’s brain a little about the area the property is in, what the neighborhood’s look/feel is like, and the kinds of residents.
Fully gauge the location.
Speaking of location, there are a few things about this. I’ll start at the highest level. The highest level of location is the general market that you are buying in. Make sure you know the fundamentals associated with the market you are looking in. If you aren’t sure exactly what to look for, check out “The Turnkey Investor’s Guide to Choosing a Profitable Real Estate Market.” A quick note that ties getting market information into the turnkey providers themselves — if you ask a direct turnkey provider what they think about the market they are selling in, of course they are going to tell you it’s fantastic. Duh, it’s where they sell. I caution you to do your own market due diligence and/or speak with people who are more “market agnostic” so they can give you a less biased opinion on a particular market.
Now the market is set, the next issue is the particular neighborhoods. More neighborhoods/areas than not within a market are not good places to buy. It may be because the numbers don’t work, or it’s not safe, or it’s only renter-occupied (affects property value), or it’s just a hard area to get renters in. How can you double-check where you are buying, outside of what the turnkey provider tells you? My vote is to call a third-party property management company in the area and mention you are thinking of buying in a particular area (don’t mention you are buying turnkey or who you are buying through, just so you get a completely unbiased answer), and ask their experience with that neighborhood/area. How rentability is, how the tenant pool is, how properties are there, etc. Get an outside opinion. You could even call a real estate agent who deals a lot with rentals. Call a couple different folks if you want, and see what the general consensus is. That should paint a fairly accurate picture about where you are buying this property and how likely it is to perform in the way that is being sold to you.
Lastly, and I do recommend this whenever possible, go visit it yourself. Not only can you get a feel for the turnkey provider, but you can go check out the areas and see for yourself what you think. It may not always be convenient to fly out to see things, and you certainly don’t have to, but it never hurts. But if you can’t, you can make plenty of calls to get outside opinions. Ultimately, why the location matters is because if you buy in a bad area or a bad market, the returns on your property could be drastically affected. Advertised returns in those cases can end up just that — advertised. You actually want them to pan out, so location matters and is worth verifying.
Run the numbers.
Yay, numbers! These are ultimately all that matter, right? (Say “right.”) The whole purpose for an investment is to make money, so if numbers don’t pan out, you could be a creek without a paddle. So going into a purchase, and in attempt to verify you are getting a legit property, you want to confirm the numbers that are presented to you. Never, ever take someone’s word for numbers! They are way too easy to check, and there is way too much risk in not verifying them.
There are lots of ways to verify the numbers. The two most important numbers you want to verify are the rental income and the expenses. For the rental income, either have a real estate agent run a comparative market analysis (CMA) for you, or ask a third party property manager their take on what the property could/should rent for, as we discussed earlier. Never take a turnkey company’s word for rental income. This bit me one time. Then for expenses, you can verify actual numbers. Don’t rely on estimates, except when it comes to vacancy and repairs, since you obviously can’t know those exactly. Everything else, you can get actuals. Look up taxes on the county’s tax assessor website, get an actual insurance quote from an insurance company, confirm with the property manager their fee, confirm if there is an HOA/condo fee and if it’s adjustable, and find out for sure if there are any utilities or other monthly expenses the owner is on the hook for. Once you have all of the numbers known, rerun them with your own calculations and see how they compare to what is advertised. If you need help on the numbers, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”
If you get verification on those four things (really just three because if those three check out completely, the turnkey provider doesn’t matter), it’s probably safe to say you aren’t getting taken. But if in doubt at all, I definitely recommend solving that by going to visit the provider and property! Even if you just do it once to get you going, then you can easily buy sight unseen afterwards.
Lastly, it never hurts to ask for recommendations on what turnkey providers people like and are having good experiences with. Take everyone’s word, good or bad, with a grain of salt because everyone can have different experiences, but it’s a good place to start. If you identify a particular provider you are interested in, post in the forums and see if anyone has had experience with them. But outside of referrals, make sure you are still doing your own due diligence!
Have any of you experienced investors gotten bitten by insufficient due diligence, on turnkey properties or something else?
Let me know with a comment!