One of the most popular topics being discussed here on BiggerPockets and in real estate investing circles is turnkey investments. Actually, when you type “turnkey” into the BP search bar, there are 6,433 forums related to the topic, and there are 629 people connected to the topic. Needless to say, there is a lot of discussion about this topic — the good, bad, positives, negatives, pros and cons.
Let me begin by stating that our company is not a “big time” turnkey provider by any means. We have two main focuses: investing in large multifamily buildings and flipping property. However, over the past year, many investors have come to us looking for turnkey investments. While it is not a huge part of our business, it is a growing part of our business. Therefore, we have received a ton of questions from investors about these types of investments. I thought I would turn these questions (and concerns) into a 7-point checklist for those considering buying a turnkey investment.
On one hand, turnkey investments are powerful investments for individuals who are looking for passive, more “hands off” investments. These types of investors might not have the energy to facilitate the projects themselves due to lack of time or interest. Therefore, they are more interested in paying closer to retail for an investment property that has been fully rehabbed and where inspections have been completed and tenants are in place.
On the other hand, these types of investments are not for everyone. Some investors have had very bad experiences with some turnkey providers. If you are an investor considering these types of investments, I would highly encourage you to do your due diligence and consider the following tips.
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7 Turnkey Investing Tips You Can’t Afford to Miss
1. Don’t over analyze the financial performance more than property management performance.
I want to start with this tip because quite honestly, it is the most overlooked area for many investors. Of course, you want to analyze the financial performance of any investment property. You want to ensure the turnkey provider has given you accurate and up-to-date income and expense numbers. However, you also want to assess their ability to effectively manage the property for you.
You can buy an investment property making a great ROI and cash flow. However, if the property is mis-managed, you will ultimately lose on this investment property. I would ask a ton of questions about the financial performance, along with asking about their property management.
You want to ask them about their vacancy rate, collection rate, etc. You also want to learn more about their property management staff, their billing process, eviction process, etc. Above all else, you want to have the confidence that you are dealing with an honest, reputable company. It is also imperative to be dealing with a company that has a track record and that is heavily invested in the market in which they are offering turnkeys.
2. Make sure the seller will allow you to get an appraisal on the property.
I would be leery if a turnkey provider only sells you investment property as a “cash purchase” and does not allow for an appraisal. I am not against “cash purchases”; however, you want to make sure you are buying the investment property at the right price.
If a turnkey provider deters you from getting an appraisal on the property, that would make me very nervous. Many of the turnkey investments we have sold have been financed, and the investors have always gotten an appraisal. We encourage they do so. We price our turnkeys very fairly, and other turnkey providers should do the same. The last thing you need is to overpay on a property and find this out 6 months later when you are trying to sell the property for some reason.
3. Research the market and run your own comps.
Yes, the turnkey provider should have a great working knowledge of the area where they are selling turnkeys. However, I would talk to other investors, real estate agents, and bankers from the local market to get an accurate sense of the area/market. As you research the local market, you also want to find your own comps and verify that the comps you received from the turnkey provider are accurate and justified.
4. Consider the pros and cons of investing out-of-state versus close to home.
There are a ton of articles and blog posts on BiggerPockets about the pros and cons of investing out-of-state. Everything we own and manage is within a two-hour radius. Now, that does not mean we would not consider investing outside that radius; however, for our current goals, our strategy is working for us.
I am not going to get into all the pros and cons here in this article, but many turnkey providers market to out-of-state investors since these types of investors are looking for “hands off” investments. If you are considering buying out-of-state turnkey investments, I would require the turnkey provider to send you a video walkthrough of the property regularly — at least once a quarter. If you can’t be there physically, this is another way to see your investment on a fairly consistent basis. And if the turnkey provider is not willing to do this, that’s simply another reason to not work with them.
5. Get a home inspection and clean certificate of occupancy (or something similar).
The whole idea of buying a turnkey investment is that you don’t have to deal with the rehab process, which includes making all the necessary repairs in the property to bring the property up to local code. You want to certainly get a list of all the improvements that the turnkey investor has made to the property prior to purchasing the turnkey. However, you may want to also consider conducting your own home inspection.
This would be especially helpful for an investor who is less savvy with construction and who is not local. You want to ensure this turnkey provider has done everything in their power to bring this property up to the highest standards. If the local community requires a certificate of occupancy (in order for tenants to live there), then you want to see a copy of this as well. For our local market here in Trenton, NJ, every property we are rehabbing requires a certificate of occupancy. Many areas also require the property to be registered with the city/town. Ensure that the turnkey provider has all the necessary registrations and certificates complete.
6. Hire a local attorney.
This one might seem obvious, but don’t skip this step. Hiring a local attorney in the area you are looking to buy a turnkey will help you tremendously. You want this attorney to look over the sales contract, leases, etc. It is also very helpful to hire a local attorney for these types of deals because they also have a presence in the community where you are buying. They can be a great resource for recommendations and suggestions for other team members and vendors you might need down the road.
7. Get references from the turnkey provider and do your own research on the company.
Be sure to ask the turnkey provider for references (other investors who have bought turnkeys from this provider). Please remember, you always have to be cautious with references, as most companies give you the references that will speak very favorably about them.
Regardless, I still find speaking with references a good use of our time. While speaking with them, you can ask them about the company’s strengths and weaknesses. Most people will be honest with you. I would also do your own research. I would find one or two very active real estate investors in the same community where this turnkey provider resides, and set up a time with them on the phone. Ask them everything they know about this turnkey provider.
I hope these 7 tips were helpful to consider. Let’s get some discussion going! I am sure there are many other tips to consider as you evaluate turnkey investments and providers.
Please share in the comment section anything that I have missed!