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" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

45 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!

  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.

  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.

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