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?
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
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 Even what was meant for good can often be taken out of context or is now outdated.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.
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.
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:
- Market value based on close by recently sold homes
- Value according to the income approach
- What it sold for at the height of the 2008 bubble
- Build cost
- A random number
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:
- What it is worth to you
- Having the flexibility not to get stuck
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!