The Top 4 Reasons to Never Invest in Turnkey Real Estate

by | BiggerPockets.com

Today I’m talking about the four top reasons why you should never—and I mean never with a capital “N”— invest in turnkey real estate.

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The Top 4 Reasons to Never Invest in Turnkey Real Estate

1. Someone else does the work—and takes the profit.

So, the first one—and the biggest reason in my opinion why you should never invest in turnkey real estate—is that you are going to be paying someone else an absolute fortune to do all of the work for you. Meaning, instead of you going out and finding the property yourself, buying it distressed, renovating it, getting it tenanted, and managing it all by yourself, you’re going to have to pay for a turnkey company to do that. And then they’re going to put a big, fat margin for their labor so they can make the biggest possible profit, and then they’re going to sell you the property. So that is the first reason why you should never buy a turnkey property—it comes with a big, fat margin in place that you can just avoid by doing all of the work yourself.

2. You might land a crappy property in a crappy location.

The second reason—and the likelihood of this happening is huge,—is that you will most likely be buying a crappy property in a crappy neighborhood. And the workmanship that is being conducted on this property is not going to allow it to be self-sufficient and self-sustainable for the long haul. A lot of turnkey real estate companies out there just put lipstick on the pig. And I mean literally they just paint it, and that is all. No mechanical work is done; no electrical work is done. There are turnkey companies out there that are known for taking a photo of a house next to yours that looks prettier and sending you the photo of that house but selling you another house. I mean, I’ve heard horror stories in the past where a turnkey company would send you a photo of a house, but they would sell you an empty lot. It is an absolute nightmare, so you really, really have to look out for these things.

3. You may overpay.

And that brings me to the third thing you need to guard against: You will be buying these crappy properties for way more than what they’re worth. Now, a lot of turnkey companies out there will justify selling for more than what they are worth with these grand overheads. They’ll say, “I’ve got to pay all of these people, and I offer this amazing service,” even though they don’t. And they’ll justify selling the property for more than what they’re worth by calculating huge overheads. Do not buy into that. Do not buy these properties. You are set for disaster from day one. We all know that you make money in real estate when you buy, not when you sell. And if you are buying a property for way more than it’s worth, you’re not going to have an exit strategy. If you need to sell this property quickly, you’re not going to get what you paid for it. What I want to say is do not invest in a turnkey property unless you can park that money and forget about it.

Now, there are some turnkey properties out there that are selling properties for more than what they are worth, offering a good product and a good service. But if you need to cash out of that investment, you’re not going to get your money back. So make sure you are buying and holding for the long haul.

4. Property management may not care about your investment.

Last, but not least—and this one is one of my favorites—is the subject or outsourced property management companies. So, the first thing they have done is absolutely made a fat profit by selling you a turnkey property. Now, unfortunately, they’ve sold you that property in a crappy area with a crappy renovation done to it, then you’ve paid more than what it’s worth. And now you get the cherry on top, guys. The cherry on top is that you get passed onto an outsourced property management company that doesn’t care about you, that doesn’t care about the turnkey company. All they care is about their own pockets. They turn tenants over so they can charge you one-and-a-half months’ rent for new tenant placement. They rack up those maintenance bills so they can up-charge the maintenance bills. They charge you $20 in administration fees every time they scratch their head and a huge $400-$500 annual leasing renewal fee for literally signing one document.

There you have it—it’s coming from a turnkey provider. Am I talking myself out of business? Probably, but it doesn’t really matter; I just want to educate all of you guys out there. I want you to understand all the pitfalls and that it’s not for everyone. It’s not supposed to be for everyone. There are a lot of strategies in real estate that you can utilize to make a lot of money. Many of the most profitable strategies require you to be involved with your time—your blood, sweat, and tears. You need to involve a lot of time in it; that’s when you will make the most profit. Now, if you do not have the time or you do not have the knowledge or just don’t want to do it, there are other strategies for you guys out there that you can get to do it for you, but you have to understand the returns are going to be much lower.

If you take anything away from this article, please remember this—teamwork makes the dream work.

What do you think—would you consider investing in turnkey real estate? Why or why not?

Let me know with a comment!

About Author

Engelo Rumora

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will “Decentralize The Real Estate Industry.” He’s also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

56 Comments

  1. Mike McKinzie

    WOW, do I ever AGREE with this blog. I have had some success with “Turnkey’s” until this last debacle. Currently, I am under contract to sell a ‘turnkey’ I bought just last year because of the TURKEY (that is TURNKEY minus the N) property it actually was! Shoddy workmanship, bad tenants, poor management are just some of the problems I have experienced. I will be writing a review on YELP after the sale closes!

    • Engelo Rumora

      Hi Mike,

      Sorry to hear about your issues.

      Don’t let that one setback turn you off when it comes to investing in turnkey.

      I also lost a tonne of money investing in turnkey properties from Australia but now all is going well 🙂

      I wish you much success

    • Ali Boone

      Hey Mike, how much due diligence did you do on the property before you bought it? Certainly shoddy workmanship should’ve been identified in the inspection, tenants can end up bad randomly for sure but you should’ve been able to go through all their documentation, and management can certainly suck at will but you should’ve been able to interview them prior to agreeing on anything. If it was all bad, I wonder about your due diligence. Bad turnkey companies can exist for sure, but the nice thing about turnkeys is you don’t have to close unless everything is verified as good and running.

  2. Joshua Fulenwider

    I got sucked into one through a partnership once. The turnkey company was highly unethical and not only did they take all the profit. They sold the property to my partner at about 200% of market price. It was a terrible location and the property manager was just as unethical as the turnkey company. I’ll never invest in another and totally agree with your points.

    • it’s easier to dupe out-of-towners than locals. also, they save on the 4-6% real estate agent commission. sometimes they get a kick back from the property management company they promote.

    • Ali Boone

      Hey David. The points other folks make are valid, but the more specific reason is because selling to investors is part of their business models. On average, investors buy 2 properties/year whereas primary homebuyers buy on average once every 7 years. Even if the companies have to sell at lower prices to investors, they can sell more and at a much higher pace when people are buying in bulk. And there’s a lot less emotional mud to swim through with investors than primaries.

  3. There is risk with everything we do. If you do your due diligence and find a company who only does turnkey rentals, you can succeed. I have purchased 8 homes, in two different cities with the same company who has over 400 customers and 1500 homes under management. On those 8 homes, I’ve made an average of 7.2% return over a 3 year period. Not as high a return if i do it myself, but consistent and better than most 401k’s.

  4. Larry Malone

    Dingo,

    Thanks for putting this out there. One thing I would expect is that good companies should get paid for the work they do. I mean look at all the leg work doing a turnkey investment saves the investor. That being said, I also expect that there are good and bad turnkey providers. Would you have any suggestions of checklist or way to vet turnkey providers?

    As always, I enjoy your stuff.
    Larry

    • Engelo Rumora

      Thanks Larry,

      Agreed with getting paid well.

      We look at making as much money as we can on every deal 🙂

      It’s important to have a profitable business because it will allow you to offer the best to your investors.

      I like this advice below from Leonid on how to do your due diligence when looking at turnkey

      ” go visit, see the properties with your own eyes and meet the entire team. And then talk to three independently-found clients of that company and ask them if they have any regrets.”

      Thanks again for reading and your kind words 😉

    • Engelo Rumora

      How does Bigger Pockets endorse turnkey companies?

      I actually think that the forum is full of folks absolutely smashing all turnkey providers.

      Also, what is wrong the article?

      Not every article needs to be positive and constructive.

      There are too many ignorant investors, doing stupid S#$% and loosing a tonne of money.

      I hope that my article open their eyes up a bit.

      Thanks

  5. Pat Bournes

    Yep – I could not agree with this post more. There is a reason someone is selling the property. And there is a reason why out-of-towners are the target buyers. Why is this ? Because , like me, out-of -towners are , well, ignorant of local market conditions.

    Word to the wise – do not buy turn-key real estate ! It has been, by far, the worst investment I have ever made.

    • Engelo Rumora

      Sorry to hear about your troubles Pat.

      When investing in turnkey, you always need to focus on the people first rather than the stats/demographics of an area.

      It’s the team on the ground that will either make or brake your investment.

      Much success

  6. Leonid Sapronov

    Hehe, a little tongue-in-cheek there, Engelo? Reading this published by anyone else and published by you – two very different impressions. I like the fact that you, as a turnkey provider, are not afraid to honestly talk about all the shady things that go on with turnkey providers. Just the acknowledgement of these problems alone implies that a) you are aware of them and b) you yourself don’t engage in these shady tactics. A while ago I put together a list of reputable providers I would be willing to do business with (if I ever were to go the turnkey route) and you are on that list precisely because you are not afraid to talk about these aspects of the turnkey business. Plus, from the reviews I heard, it sounds like your clients are happy. Keep up the good work.

    One more word of advice to anyone considering turnkey – go visit, see the properties with your own eyes and meet the entire team. And then talk to three independently-found clients of that company and ask them if they have any regrets.

    • Engelo Rumora

      Thanks for your kind words Leonid,

      We strive to do our best for every investors but the truth is that turnkey real estate has the biggest stigma surrounding it over any other real estate strategy.

      There are very few legitimate operators around.

      Thanks again and much success

  7. Scott Everhart

    Interesting article and certainly some good advice on what to look out for. But, my personal experience to date has been different. I do find my own properties and rehab for rental. I make good money clearly on properties I do myself, but I also invest a lot of my time to find them, rehab them, and then rent them.

    I got turned on to a Turnkey provider by a mutual investment friend who had many properties with this Turnkey provider. So, I decided to give them a try. Did my first one and they had it rented before I even closed! They do a standard rehab process on every one of their properties they sell you. New roof, new HVAC, new water heater, gut kitchen and all baths, update to code all electrical and plumbing, new paint, exterior fix/painted, etc. It’s a repeatable Turnkey process they do on every property….so, you know exactly the standard every property you buy from them you’re getting.

    I’m just about ready to close on my second Memphis house and it too is already rented.

    If I pay all cash my cash on cash runs at about 10%. If I finance with a 30yr conventional I run about 18% cash on cash. I feel this is not bad for a completely redone Turnkey property and the same company does the property mgt for 10% of the rent. They locate and run the checks on the tenants and have a waiting list typically of people waiting to rent the properties they redo/rent. Been a good experience thus far.

    Sure, I can do even better and have lots more equity in properties I find and redo myself and then rent. But, I have a day job and have to use what little free time I have to redo several of the properties I’ve done to date.

    There is a trade off for Turnkey. Yes, I give up some control of the rehab. I don’t have the large amount of equity built in, as you’re typically buying a redone Turnkey property at market. But, I can accept doing some of this in my portfolio, as I can’t scale fast enough doing all these on my own. So, Turnkey done right saves me time, gets me a ‘reasonable’ return with cash on cash, and I can spread my real estate location risk out away from my local area.

    I would like to find a few more locations that operate and give similar returns as my current Memphis Turnkey provider, as location risk is another key factor for me.

    Sorry for the long note here. Just wanted to share the whole experience I’ve had as a balance to the message of this original post.

    • Agreed with this post. I have done local and long distance turnkey and rehab. Both have their ups and downs. Often times, a turnkey provider can give me a fully renovated house at a fraction of the cost I could do it. They have the teams and systems in place. Other times, the work is so shoddy, I wind up with major expenses down the road.
      The work load is not incredibly different self managing long distance rehabs vs long distance turnkey. Just more phone calls paperwork and number crunching. Its really a matter of time vs anything else. If I have the time, I’ll self manage, if I don’t turnkey works.
      I do like turnkey for getting started in a new market. I get direct connections with local contractors, banks, insurance providers, attorneys, etc. Why, because I ask everyone I like working with for recommendations. I will still use the provider, but it also allows me to scout my own deals.

      Jason

  8. Mark rogers

    Obviously there are some bad eggs in every business. Bad restaurants, bad lawyers and doctors and dentists. You can go online and xpress opinions and tell stories with names and specific thru Yelp and other sites. Are there specific turnkey providers we should all be warned about? I’m close to buying a turnkey property and am curious if this is one of the bad ones. Willing to name names?

    • Pat Bournes

      Hi Mark – A word to the wise…. do not do it. There is a reason why turnkey – real estate vendors market to out of state investors. Out of staters do not know the local market. There is a ton of money everywhere now looking for a place to invest. If the local market offered decent rates of return don’t you think local investors would jump on it? I have invested in two out turnkey, out of state properties. Both have been disastrous from both cash flow and an appreciation points of view.

      • Engelo Rumora

        Sorry for your troubles Pat,

        You should never invest based on appreciation.

        That is too speculative.

        The team obviously failed you if the cashflow wasn’t good.

        Success when investing in turnkey always comes down to the team and not the market.

        Thanks and have s great day

  9. Susan Maneck

    I once watched attended an online seminar by one of these turnkey properties managers. Afterwards I looked up one of the firm’s properties and found it had been sold via Fannie Mae for 40% less than what they were asking and they had not yet done anything to fix-up the property. At that point, I had no interest whatsoever. I currently own properties in two states. But my mother manages my California property and when I retire my daughter-in-law will manage my Mississippi properties. I trust them.

    • Engelo Rumora

      Thanks for sharing Susan,

      There are a tonne of stories similar to yours that I can share.

      There is a monthly “pump and dump” seminar screwing investors into buying crappy turnkey properties.

      Most of the TV starts branding/names are used to flog the houses

      Much success

  10. Rajeev vibhakar

    sadly an over stated article. like everything there is good and bad. but this article is so generalized its impossible to really draw many conclusions. Turnkeys have a place in the market for investors with full time jobs (like me) who do not have time to hunt for properties, manage rehab or manage properties.

    For people who are simply diversifying their investments turnkey can be a reasonable option. simply depends on ones investment goals.

  11. Art Veal

    I have heard about turn-key but never invested. I had these same suspicions. I think a partnership might be better than turn-key. The company would hold too much of the control and while I am sure not all turnkey companies are bad, the incentive for some to take advantage of an unsuspecting investor just seems too great for me.

    It’s better to get your hands dirty in this game or choose an investment where you can hire formal outside management. Not a situation where they manage, renovate, and sell you the property. Too many opportunities to get over.

    Please don’t take my logic to mean ALL turn-key deals are bad. I just think there is not a good way to judge a turn-key company and if you were to do all the research and figure out a good company you might as well take that time and spend it on learning the actual real estate business instead.

  12. Mike Schelske

    Hello Engelo,
    I just came across your blog. You said that there are other alternatives to turnkeys for busy people, could you list those for me please? I just started with real estate and am looking for possible ways to get into real estate.

    • Engelo Rumora

      Thanks Mike,

      Not sure where I mentioned that there are other alternatives for “busy people”.

      All good things take time and effort.

      There are many ways to make money in real estate through wholesaling, flipping or even working as an real estate agent.

      They will require time and effort

      Turnkey on the other hand, doesn’t. But it comes at a premium to the buyer

      Does that help answer your question?

      Thanks again

  13. Ali Boone

    Hey Engelo! Hahaa…I like your responses to a lot of the comments.

    I’ll just throw out as my general comment- every time I hear someone say how bad of a turnkey experience they had, they also can’t tell me they did much of any due diligence on the property. The worst part about turnkeys is that people seem to think they don’t need to involve their brain in the process because “everything is taken care of for them.” Well, that’s insane. One of the best things about turnkeys is that you DON’T HAVE TO CLOSE UNLESS YOU’VE VERIFIED EVERYTHING. Condition of the property, quality of the rehab, location of the property, tenant info, property management info/interview, PRICE, numbers, etc. The only exceptions, in my mind, is yes property managers can end up sucking but that’s easy to deal with and tenants can go wonky unexpectedly, but both of those are fixable if need be. Everything else should be verified by the buyer. If a turnkey company sucks, well, don’t buy from them. Try another one. There are a couple freak-of-nature kind of exceptions to this, but if everything is total bunk after you buy it, that means you didn’t do due diligence and that’s on you (“you” being the general investor reading this). There have certainly been bad turnkey companies out there, but the concept as a whole isn’t bad. I’ve always bought turnkeys and mine are fantastic. All very profitable. So it’s a shame that bad companies or investors who put know brain into their turnkey purchases give the entire concept a bad name.

    Due diligence people, due diligence.

    • Engelo Rumora

      Thanks Ali,

      We have come across many investors lately that have some ridiculous expectations of 15%+ net returns year after year lol

      I wish I was David Copperfield lol

      One thing I will say is that every investment comes with it’s own set of risks and time involvement

      It’s very hard to have a completely passive and hands off experience unless you’re willing to hand over 100% control and access

      There will always be the odd bit of approval or information needed from the investors themselves

      On the other hand, Google is an investors best friend

      It’s not hard to Google the company or their ownership to see who is legit and who is a scam lol

      Thanks again

  14. Adam Widdicombe

    GREAT ARTICLE!
    You “may” not over pay…YOU will over pay!

    The wonderful world of the internet has allowed us to network and make connections like never before.
    Use LinkedIn, Facebook and heck even Bigger Pockets to meet Realtors and set up your own little investment team.

    Turnkey providers are like sharks in the water circling for the CA money!

    • Engelo Rumora

      Thanks Adam,

      There are many turnkey outfits that aren’t genuine which sucks.

      It’s tough setting up a good from out of state or country.

      It will take a lot of “trial and error”

      No matter how long it takes tho, the time invested will be worth it.

      You will also need many more “players” than just a realtor

      Much success

  15. jorge vazquez

    Buying a Turnkey Process – Not Turnkey Properties . Advantages and Disadvantages of a Turnkey Property
    The idea behind a turnkey property is that it minimizes the risk for the investor purchasing the property. By purchasing a tenant occupied rental property, there isn’t much that can go wrong. You buy it, and the cash comes in immediately.

    Though turnkey properties are easy and carry less risk, they are not necessarily an investor’s best option. Real estate investors take calculated risks to generate profits; therefore, properties with little risk are slow to generate profits.

    The main disadvantage to purchasing a turnkey property is that there is little to no equity left for the investor purchasing the property. The investor selling the property has already stripped the equity in the form of profits generated for himself.

    For example, if you purchase a tenant occupied turnkey property for $100,000, the property is worth about $100,000. However, if you purchase the property before rehab for $60,000, put $20,000 into the property to rehab it, you retain $20,000 in equity that goes on your balance sheet rather than the selling investor’s pocket.

    What is a Turnkey Process?
    As described in the example above, a turnkey process includes purchasing an investment property from an investor who will coordinate the entire “process” for you with industry professionals.

    As a real estate wholesaler, when we sell an investor an investment property with a turnkey process, it works like this:

    We present properties to an investor fitting his investment criteria, including financial projections.
    He selects a property, or multiple properties.
    We sell the selected property/properties to the investor.
    We coordinate the rehab, and the investor pays the cost.
    We assist with the selection of a management company who finds a tenant for the property, and manages the property from month-to-month.
    By purchasing an investment property with a turnkey process, the investor shares in the risk, does just a little more work, and keeps more of the equity.

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