Are Turnkey Properties Too Expensive to Be Viable Investments?

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Do turnkey investment property services eat up too much profit to be viable as a sound investment strategy?

Can turnkey real estate investing really be profitable? If so, what buying guidelines and criteria should investors have?

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Myths & Misconceptions About Investing

Living in the information age can be both a gift and curse if not utilized efficiently. Misinformation is one of the biggest roadblocks and risks to real estate investors. As good as the internet is for accessing more knowledge and data, it has also spawned infinite volumes of misinformation. Even what was meant for good can often be taken out of context or is now outdated.

The perfect example is this recent thread on BiggerPockets asking, “Does turnkey eat up too much to be a viable strategy?” It also questions the suggestion to always buy properties at no more than 80% of their value.

To bust through these myths to success, investors must do the complete math for themselves and understand that markets, regulations, and trends are constantly in motion.

turnkey-tips

Discounts Hardly Exist

Everyone wants a steal. Of course, in reality most of the time real estate sells for what it is worth in the moment and in the individual scenario. This is true of foreclosures, probate and auction properties, and more. You might find cheaper properties at auctions or if they are in essentially a distressed condition. The tradeoff is needing hefty amounts of cash, being able to complete major rehabs in weeks, and finding the demand for these properties that the previous owner couldn’t.

Related: The One Piece of Advice You NEED to Read Before Buying a Turnkey Property

Turnkey real estate investors are buying into an investment for which someone else (the operator) has put in all the time, work, and upfront cash. They have more than likely invested tens if not hundreds of thousands in learning/education, plus weeks of marketing, organizing, and paying construction crews, finding and screening tenants, and more.

You could do all this yourself. Add up the costs and the hourly cost on your time and see how much that comes out to, including an amount for risk of loss if you aren’t an expert in all of these areas yet.

Now take those numbers and compare buying the raw materials to investing in turnkey properties. It’s like the difference between buying a seed and a plot of land, growing the crop, protecting it, harvesting it, and then finally getting to eat a bowl of cereal rather than ordering Amazon delivery to your door. Which do you prefer? Which offers the best value for you?

Pricing Turnkey Properties

One of BiggerPockets’ most active and respected contributors Jay Hinrichs states that finding a true turnkey property at 80% of its current value is not an easy mission in today’s market. But knowing the value and how these types of investments are priced is critical to success.

The first thing you want to know about turnkey is what the price is based on. This could include:

  1. Market value based on close by recently sold homes
  2. Value according to the income approach
  3. What it sold for at the height of the 2008 bubble
  4. Build cost
  5. ROI
  6. A random number

Related: The Downside to Turnkey Rental Properties No One Tells You

You might run into all of these scenarios. Some may give you a small amount of equity going in. Others might be priced over the market for the benefit of the turnkey service.

What’s really important is:

  1. What it is worth to you
  2. Having the flexibility not to get stuck

turnkey-cons

4 Deciding Questions to Ask

  • What’s my time worth?
  • Will I be able to sell if I need to?
  • How well managed are the turnkey properties I am looking at?
  • Is turnkey a fit for my financial plan?

It’s not my position to decide whether turnkey real estate is or isn’t right for you. But I do believe we have a responsibility to ensure that the right information and perspectives are being shared so that each individual can make a fully educated decision for themselves. Do your due diligence and decide if there is a place in your portfolio for turnkey. How will you invest?

Investors: What do you think? Are turnkeys too pricey to be good investments?

Weigh in below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

11 Comments

  1. Jared Garfield

    Sterling,

    This is a great blog, and you ask some very good questions and make excellent points. Just as there are foreclosures that are fabulous deals, and foreclosures that an inexperienced buyer could lose their shirt on, there are fantastic turn key providers and there are those that are scam artists. Yesterday a mortgage lender called me to say that one of the clients he had just done a $300,000 reverse mortgage for had bought a huge amount of turn key properties from a nationwide turn key provider with a bad reputation. This company had sold her properties that had supposedly been renovated to a high level (much of the renovation had not been done), and they sold them to her at a huge mark up (above retail). Now I will be coaching her at no charge trying to help her get out of the situation.

    On the other hand, you make a lot of great points, and if someone can find a turn key provider that is reputable, they may have many advantages:

    1) If the Turn Key Provider has done hundreds or thousands of deals, they may be buying the properties cheaper than the new investor could. They likely have relationships with the top REO, Fannie Mae, Freddie Mac, VA and HUD agents. They may see many deals before they hit the market. Sometimes asset managers will give them properties even when they are the lower bid because they know that they will close on time without hassle.

    2) They likely know the types of neighborhoods that need to be avoided, and they likely avoid homes with structural obsolescence. This may make their property a safer investment than one that a beginner would do on their own.

    3) These providers should have their own rehab crews where their costs of renovation, due to huge material and labor discounts allow them to get needed work done much cheaper than the beginning investor could.

    4) As they are most likely market experts, they have a strategic advantage over beginner investors, and usually they are pretty good at sales or they wouldn’t continue to be in business. However, a good one will be win-win, because they stand to make a lot more money if you succeed and continue to come back regularly. So ask to talk to clients that have repeatedly bought properties from them on an ongoing basis.

    5) I think a credible turn key provider should provide all of the foreclosure comps, and the resale comps, not just highlighted ones that substantiate their pitch. If the cash on cash return is 17% or higher and it meets your objectives, it doesn’t matter if it has huge equity, but it should be worth what you are paying. At times it may appraise for $2,000-$4,000 less than purchase price, and if this is because the renovation level is so much higher than comparable sales (all new roof, condensing unit, furnace, electrical, plumbing etc) then that is probably ok. A good provider will make sure that you will not have deferred maintenance and in many cash flow markets the retail sales are not renovated to this standard.

    6) When comparing properties ALWAYS ASK FOR THE REHAB SCOPES to make sure you are comparing apples to apples. I like to make sure that I even know what the property was purchased for so that I know exactly how much profit the turn key provider is making. It’s fair that they get compensation for their time, but it shouldn’t be more than $10,000-$15,000 in most cases.

    7) Make sure that the rents are not way above market rents, if it’s $100 higher due to a fabulous renovation, that’s fine, but if it’s $300, if that tenant moves out you might not get those rents.

  2. Earl minnis

    Well what do you know. Somebody spitting out some common sense. I’ve seen numerous so called turnkey operators. They are only retailing these properties and think they have discovered a new way to sell retail with no commissions and retain the management. Most of these guys have little time in the business. Buyer be ware. If it sounds to good to be true than usually it is. Earl Minnis

  3. Sean Cole

    Jared, you had me there until you mentioned wanting to determine how much a fair profit is for someone else to make. Don’t get caught up in what the other guy is getting – if it’s a good deal for you, it doesn’t matter whether the other guy is losing money or making money.

  4. Cliff Vieira

    Having the financials work out based on my calculations is my first step, but after that, evaluating the turnkey is key. I want a long term partner, and so there needs to be an incentive to treat me fairly and give me a good chance for a decent return. To me, the best turnkey profile is one that buys, renovates using consistent materials and style, places tenants, and offers property management themselves. That way there is incentive to provide me good property management, so I purchase from them again. If they are simply selling to you, and the relationship on that property ends at closing, there’s simply less incentive to be fair. In addition, I prefer to work with someone that maintains their own rental portfolio in the same area, which gives me the confidence that if its worth having their own money invested long term in the area, its probably good for me. Again, those only selling without long term investments in the same area could pick up and leave town anytime.

    • Earl minnis

      Hey Cliff, in my opinion your living in la la land. If your not prepared to be 100 percent “IN” then you are really subject to nasty thing that you will not like happening. This is not a business done remotely or you can be disconnected from and expect good things to happen. I speak from 40 plus years and well over 2,000 houses purchased. Good luck, Earl Minnis

      • Cliff Vieira

        Earl, are you voicing commenting on my strategy for selecting turnkey companies, owning properties remotely vs locally, or that you dont recommend turnkey investing, at all? Do you mind elaborating on what you mean by “all in?”

        Of course there is much more due diligence to selecting and area and particular properties to be done, I was simply sharing my turnkey company selection criteria. But still new to it, so learning from those with more experience, like yourself. Our local market is too highly priced compared to the rental income to make sense. Thanks.

  5. Earl minnis

    Cliff,by 100 percent “in” I mean aquiring and managing your own properties. Again, allowing somebody else to manage your properties or money Is allowing others to manage your financial future. Most people in the end do not think those things worked out well. Then it’s to late. If you don’t watch American Greed you may try 10 episodes or so . Remember the great returns Bernie Madoff gave for years until he didn’t any longer. And he was really good at the disguise.
    If the companies doing the turn keys did all this work to acquire and rehab the properties and they were ANY sort of positive cash flow deals, why would they sell them?
    I’ve never bought a turnkey property. Never needed to . This is a relative new phenomenon. I was taught to be hands on and I am by nature a controll freak. I have seen what happens when people are not like this with residential rentals.
    Yours or anybody’s other option can be to purchase enough in another area ( 15 or more) and set up your own manager who only works and answers to you. I have always been content to be in my own area when I was buying. I now live elsewhere and have a person who works for me. I live 2 hours from most of the houses I own and drive by them on occasion when I’m in the area. I could go on and on about all this stuff but I an somewhat of a slow typist. Take care, Earl Minnis

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