The 5 Most Frustrating Turnkey Rental Issues Investors Face

by | BiggerPockets.com

In reflecting back over the last seven years since I bought my first turnkey rental property, I’ve had a lot of time to see where the challenges with turnkeys have typically resided. I’ve learned from looking at both my own turnkey properties as well as hundreds of other investors who have bought them as well.

I want to share the challenges I have seen with turnkeys, so if you are possibly thinking of investing in one or more of them, you can set your expectations accordingly and look for various ways to mitigate risk.

Before I go on, though, I want to clarify a major point.

The problems and challenges that can exist with turnkey properties are rarely different from the problems and challenges that can exist with any other rental property.

Always remember that “turnkey” is a way of buying a property, not of owning a property. Once you buy a rental property, whether you bought it turnkey or not, it is still a rental property like any other.

The only reason I’m specifying turnkeys for this article is because turnkeys are often advertised as “hands-off,” so I think it can feel especially discouraging when something doesn’t go quite right. The hope with turnkeys is that you never have to put any effort into them, but turnkeys are still just rental properties, and there is no way to ever know that nothing will go wrong. If there were, everyone would buy a rental property!

There is also a difference between turnkey properties purchased in turnkey condition (meaning no work is required) and turnkey properties that are specifically purchased from turnkey providers. For the most part, this list applies to either, but know that my experience is primarily with properties that come from the turnkey providers.

So, what are the biggest challenges I’ve seen happen with turnkeys over the years? The list isn’t long, but it actually does cover every problem I’ve seen over the years!

The 5 Most Frustrating Turnkey Rental Issues Investors Face

1. The first tenant sucks.

This one is often the most discouraging because it can happen so early into ownership of your turnkey. Think about it—you buy a property that is advertised to cash flow from day one, and someone else is doing all of the work for you so you should be able to hang out poolside with a drink in your hand with no worries in the world. Then, all of a sudden, you aren’t receiving rent checks and you catch wind that your property manager may have to pursue eviction. Or you are getting rent payments, but they are late every month and you never know if the time for eviction is around the corner. So much for that poolside pina colada going down with ease. This goes against the exact reason you bought a turnkey!

This is super frustrating, and it can certainly make you question whether you made a good investment or not. But trust me when I say that one bad tenant is far from your investment going belly-up. Now, if you end up with 10 bad tenants in a row, then that’s another story. But your first one being bad isn’t necessarily a sign of future problems or demolished cash flow. As with any problem on a real estate investment property, you’ve got to put your emotions aside, not fear the worst, and do what you need to do.

Related: 3 Types of Investors Who Might Benefit From Owning Turnkey Rentals

If you get the bad tenant out in a decent amount of time and then you and the property manager are diligent about who you select, you should be able to minimize loss. This is can tough if the tenant doesn’t do enough to warrant eviction and so they stay for a prolonged amount of time, but just remember that payment is payment, and it’s not a permanent situation. Still, take into consideration whether the reason you have a bad tenant is because the property manager assigned to manage your property is bad. Don’t assume this right off the bat, but keep an eye peeled for your property manager not doing his/her job.

property-management-contract

2. The property manager is subpar.

If your property manager does in fact slide on his/her job, you could be in for a rollercoaster. While I don’t think this is always the case, I can say that every bad tenant I’ve ever had in my properties came from a bad property manager. I’ve been through a few rounds of property managers on my properties, so I know exactly how frustrating (and expensive!) it can be. Also, property management isn’t typically a turnkey company’s strong suit. They often offer property management because it’s part of the buying model, but in reality, they are much better skilled in dealing with the properties and their rehabs directly rather than customer service.
A lot of turnkey companies outsource their property management now, which has been highly effective in a lot of cases. But regardless, you have to keep an eye on the PM and be ready to make a switch if necessary. But again, even if that happens, it’s still not the end of the world. Yes, it can be frustrating and hurt your wallet a bit, but just as with a bad tenant, you can make a switch and be fine. Leave the emotions out of it as much as possible, and you’ll be along for a smoother ride. My biggest mistake has been waiting too long to fire the PM and hire a new one. I knew something was off in their performance, but I always talked myself out of it, only to find out later my suspicions were correct. This is where you should never be completely hands-off with a turnkey or any other rental property you buy.

3. There are unexpected maintenance headaches.

Because your turnkey property should in theory be sold to you in perfect condition, it can definitely be a blow if there is a serious maintenance issue not too far into your ownership. I actually haven’t seen this one happen much, but part of that is because I really encourage everyone to get a third party property inspection prior to closing on their turnkey. I have seen buyers close on a property before the seller has time to complete certain items, and then they seem to have a hard time getting those items completed as promised, but I also don’t encourage people to close prior to everything being verified as completed (for that exact reason).

I had an instance with one of my turnkeys where I ended up having to replace a heating unit, for a significant amount of money, and when I went back to the original property inspection report, I realized that the unit had not been tested because the inspection was done in the summer. so no heating was tested. That mistake falls on me for not having that more thoroughly checked, regardless of the time of year. It was definitely frustrating because the property should have come with a perfect heating unit, but it didn’t. I’ve had other maintenance issues with my properties but none that were as direct of a “turnkey mishap” as that one. Everything else was due to other issues or caused by tenants. That one heating unit was something that shouldn’t have happened with a turnkey property. But again, that was on me for not checking it in the inspection report. As with the tenants or property managers, as long as the problem isn’t continuous and on-going for an extended amount of time, it’s not going to kill your investment.

4. You run into freak-of-nature problems.

Sometimes, the purchase is simply a scam. Fortunately, no turnkey company I’ve worked with has fallen into this category. I have, however, heard of companies who have sold people “turnkey properties” that were never actually turnkey properties or even performing properties. This was common back in the earlier days of the crash when a lot of internationals were buying turnkey properties and never coming to the U.S. to ever see the properties, so a lot of people got away with selling properties not as advertised. Even more recently, there have been reports of people never receiving the property as advertised and ending up stuck with an un-rehabbed property with no tenants. Fortunately, there are very few of these situations these days, but I know they exist. Proper due diligence, however, should mitigate this risk entirely, so be sure you are on top of it.

proactive-property-manager

5. You encounter a series of unsolvable issues.

In all of the turnkey purchases I have witnessed (hundreds), I’ve only seen this happen twice. In both cases, it was a freak kind of situation where little probably could have been done to prevent it. In the most notable case, with a duplex, one of the unit’s tenants stopped paying rent almost immediately. It took an extended period of time to evict them, and by the time they were evicted, they had completely trashed the property. Then, once the property was vacant and the turnover repairs began, the property was severely vandalized. The city reached out citing that some permits weren’t in place, so they were implementing fines.

Related: Sorry, But Turnkeys Aren’t 100% Hands-Off. For Success, Know THIS.

Then the insurance company came up with some reason that they weren’t responsible for paying for any of the vandalism repairs. Eventually, the expenses became so great to get the property back to a rentable condition that despite all of us, including the seller, chipping in to help out, the property had to be let go because the investor couldn’t complete the payments. All of us who had been in the industry for so long were shocked at everything that happened. It was one freak thing after another, and there was nothing any of us could do. But this goes back to the importance of having the good property manager in place who will find the best tenants possible and stay on top of everything.

I only mention the worst-case scenarios that I’ve seen to support full transparency. The statistics don’t at all support that these things will happen to you, especially if you work with turnkey providers with solid reputations and do proper levels of due diligence.

As for the more common problems, none of those issues have to be long-term or deal-breakers. Still, in the moment they happen, it can feel like catastrophe is setting in, especially if you are a brand-new investor and were pitched this “hands-off” investment deal. I totally get it.

Here are some tips to support the most successful turnkey investing experience possible.

Tips to Mitigate Potential Problems

  • Higher quality properties and locations help mitigate against attracting bad tenants.
  • If you have the chance to go check out your property in-person, it’s absolutely worth the trip. You’ll want to verify what you are getting and verify who you are working with (and your confidence levels in them).
  • Always get a property inspection done prior to closing!
  • Don’t close before all repairs are verified as complete, even if the turnkey seller promises to finish them.
  • Set realistic expectations. You are buying a rental property, and rental properties don’t operate perfectly 100 percent of the time, no matter how nice you buy. Know that if anything happens, it’s not the end of the world, and there’s no need for emotions.
  • Be set and ready to manage your property. Whether your tasks involve handling the property manager or occasionally flying out to check on your property, there’s no such thing as a hands-off property. If you end up with one, great, but always be on standby in case your brain is needed. You are the boss of your property!

With all of that said, I wouldn’t buy my properties any other way! Every investment strategy will have challenges, and turnkeys are no exception. But I know that I’d much rather manage a property manager than be a landlord myself, and I also prefer cash flow to buying locally. I don’t mind paying market value for a property with good cash flow if it means I can be stress-free (or stress-minimized) and not have to do all the heavy lifting.

Any turnkey investors out there—have you run into any other challenges with your turnkeys that I didn’t include in the list?

Comment below!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

7 Comments

  1. Ali Hashemi

    Ali – any thoughts on insurance company making lots of minor demands …. as a turnkey investors I’ve run into time consuming issues originating from insurance company making lots of small to medium demands in order to maintain coverage.

  2. Nancy Roth

    So you mitigate many of the above risks by considering the length of time the tenant has lived there and how they have performed, before pursuing a purchase. Get the lease and ledger ahead of making the offer.

    My business is providing safe and healthy housing for people who need and want it. Give me a tenant who has been in place 5+ years, and who has a record of good performance, even if the rent is somewhat lower than we might see on a brand-new lease. That newer tenant might be fine, or might be a joker, just waiting to test your tolerance of a late payment. Or nonpayment. How’s your risk tolerance? Mine is fairly low, so unless the numbers on a property with a new tenant are amazing, I’m apt to look elsewhere for a purchase.

    A heating unit replacement hurts, yes. But to my mind, that is a capital expenditure, not an unexpected maintenance issue. (Offhand I can’t think of any unexpected maintenance issues–I expect them all!) Your reserve fund, which you fund and build up starting on day one, should soften the blow. These expenses come with the territory, my friend. Go easy on the guilt! It’s not “on you.”

  3. Christopher Smith

    I avoided most of these frustrations by purchasing turnkey (like) properties at the very depth of the housing crises (2010 – 2013).

    I bought them myself right off the listing (no turnkey providers per se), and since there were so many to choose from then at such incredibly low prices there was no need to pick anything but the best of the lot in the best of locations. Really fantastic houses in almost new most condition (generally 2 to 3 years old), in very desirable neighborhoods (A-/B+ class properties), drawing from middle and upper middle income prospective tenant pools (people who really care about their reputation, and consequently your property). Additionally, I didn’t need to purchase too many since they were located in the Bay Area 6 in total, acquired at about 1.2, now worth about 3,1, and all cash flow well even if the yield to current FMV is somewhat lower than Midwest properties would achieve – I have a couple of those as well.

    Ironically, it was the very opposite of what the crowd (including many on BP) seemed to be recommending at the time, which was acquiring a boat load of dirt cheap trashed C/D properties in rather suspect neighborhoods drawing potentially from a very problematic tenant pool. Sure glad I did what I did and totally ignored the conventional wisdom of the day. I have managers for all the properties and they pick great tenants, and I have achieved 98% to 99% occupancy over the entire time period. I do stay involved in the process of managing my managers but that takes very little time and minimal frustration, and do nothing else except for tax filings.

    Not quite as care free as buying a REIT, which I have a couple (CIM and MPW), but really not too much more involvement, at least so far, keeping my fingers crossed.

    • Manon Sheiman

      Congrats, Christopher!
      I did sort of the same thing, only in my area, Central Coast, agricultural area, and my equity has doubled and my tenants have never moved out. I purchased all cash within our DB pension plan. Of course, my prop values are not as high as yours, we can all be envious, but you did smart, that’s for sure.

      I did not know until a few days ago that I could get financing on my props, as my pension plan administrator did not like me investing in RE, besides, they cannot give advice, and she told me I had to sell it all. Got a new admin.

      • Christopher Smith

        That’s very interesting that you were able to acquire your properties within your pension plan. That would avoid the one problem I have now, how to disposed of my properties without being hit by a crushing tax burden. I could try to 1031 or borrow against them, but those options have their drawbacks.

        In any event, I’m in no rush to sell them since they all cash flow very nicely and all will very likely continue to appreciate at healthy rates (even if those rates are likely to slow some from the torrid pace of the last few years). Additionally, since I have excellent property managers, I can be as active or passive as I desire.

        Continued good luck on your operation, sounds like we both hit the rental property lottery. 🙂

  4. Jon Horton

    Agree with the property inspection prior to closing. What process do you recommend to validate that the repairs found during that inspection, have been completed satisfactorily, especially for an out of state investor?

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