The Top 3 Mistakes New Turnkey Owners Make Once They Buy

by | BiggerPockets.com

Turnkey rental properties definitely offer an opportunity to own rental properties in a much more hands-off way than most are used to when it comes to real estate investing. With everything done for you — finding the right property, negotiating the property, rehabbing the property, and tenanting and managing the property — turnkeys have opened up the door for a huge number of people who wouldn’t have previously been equipped to buy rental properties to now go ahead and invest.

As I’ve clarified in several of my articles, owning a turnkey is no different than owning any other rental property; turnkey is only a method of buying, not of owning. However, I have found that buying a turnkey can tempt an investor to slack on how they “own” the property. The reason I believe turnkey owners are more tempted to slack on how they own the property is because of this “hands-off” advertising.

The fact of the matter is, turnkeys are not flawless, and at no time should an investor assume they should always be hands-off with their property. They should own the property in the exact same way that they would if they had bought the property do-it-yourself style.

With that said, here are 3 ways that rental property owners (in general) can increase the ease of their investment and returns — and where new turnkey owners tend to slack (severely).

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The Top 3 Mistakes New Turnkeys Owners Make

In working with turnkey buyers for the past five years, I can truly say that not doing these 3 things is what causes the majority of headaches for new turnkey owners. I share them in hopes that you will follow them and then be excited about how much more gracefully your turnkey investment flows!

In no particular order, the top 3 mistakes that new turnkey owners make are:

1. Not Buying Eviction Insurance

Part of the hands-off advertising seems to make investors think their tenants won’t have to be evicted. I understand this as a turnkey buyer myself, as I would like to think that these “experts” placed good enough tenants that eviction shouldn’t be a possibility, but there is no 100 percent guarantee against eviction, ever.

Even if you do a substantial amount of due diligence on the tenants that will be coming with your property, eviction insurance is cheap enough that every turnkey buyer should consider it. Few things are worse for a new rental property owner than quickly having to deal with an eviction process. The process isn’t crazy-stressful itself because the property manager will deal with all of that, but the financial hit can quickly become a major deterrent for wanting to continue on as an investor. Nothing is flawless with rental properties — or turnkeys — so take out all the stops you can to avoid stressful situations later. Buy the insurance.

2. Not Switching From Reactive to Proactive if Challenges Arise

This one should probably be listed as number one because I think it’s arguably the biggest problem I see with investors who have just bought turnkeys. Again, going back to advertising that these properties are hands-off, I think that this tends to give people the idea that not only will everything always be taken care of for them, but that they don’t have any say if they did want to chime in.

That is not the case. When you buy a turnkey property, just the same as if you buy a rental property, YOU own the property. You are in charge, you are the final decision-maker, and you can ultimately do whatever you want with the property. If challenges arise, such as a tenant stops paying or continuously pays late or a repair doesn’t get done, any rental property owner — turnkey or not — should immediately hop into their proactive shoes and not wait around to only be reactive.

I’ve had so many people come to me saying something is going on with their property and they are freaking out, yet they don’t actually have any details from the manager as to what is going on. Not having enough information, it’s not only very difficult to come up with a solution, but it also tends to make for an overly dramatic situation unnecessarily. Most often, things are just fine once all of the information is laid out. I’m not sure that’s the best explanation for it, but basically any rental property owner needs to be ready to demand what is going to happen next, hire or fire anyone necessary in order to make that happen, and at all times, make a decision. I see too many people relying on everyone else to make a decision. On that note…

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3. Not Standing Up to Property Management

Remember, you own the property. The property manager does not. Technically, the property manager works for you; ergo, you are the boss. Did you hear that? You are the boss. You are the final say, you make the final decisions, and if the decisions your property manager is making aren’t to your liking, you can fire that manager and hire a new one.

This is not an excuse to run around bossing property managers around like they are some kind of minions — because pretty soon, you won’t have a pool of managers to pick from any longer, but if at any point they are no longer doing their job, you are the one who has to crack the whip. Not all property managers are good, and actually most of them are not. If a manager is doing their job and making sound decisions, you should leave it to them to do their thing or you really will annoy them. But so many investors, turnkey especially, assume the manager must know more than them ,and they let them just keep running wild while they are the only ones hurting.

Not to scare anyone off, but bad property management can cost you more than just about anything else. The reason is that bad property management can place bad tenants, which can cause unpaid rents and evictions. They can forego necessary repairs, which can later cost you tons in makeup repairs. They can avoid keeping things up to code or secure, which can cost you in violations or vandalism.

I don’t say this to convince you to avoid working with property managers, but I do say it to tell you that you should always be on the lookout for any red flags with your manager. Not nipping bad managers in the bud immediately becomes a very slippery slope into financial headache. In case I didn’t mention this before, you are the boss of your property, and the property manager works for you. Do not micromanage a good manager or annoy them, but do stand up immediately to a bad manager to avoid more headaches than necessary. Turnkey buyers tend to always assume the property management that comes with the property will be good, and that’s just not always the case. Property management is the lowest on the turnkey totem pole in terms of what the turnkey sellers are experts at. For more information on doing due diligence on turnkey property management, check out “The Downside to Turnkey Rental Properties No One Tells You.”

There you have it. If you buy a turnkey rental property and you don’t make these three mistakes, you are likely to see some smooth days and nice change in your pocket! If you do make these mistakes, don’t say I didn’t caution you.

Turnkey buyers — any other helpful tidbits you can share from your own experiences?

Let me know with a comment!

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.

10 Comments

  1. Stephen S.

    How much are you paying for eviction insurance?
    Who sells eviction insurance?
    How does the insurance company ensure that they will not have to pay out on the policy? / What is their risk minimizing protocol? Certainly they must have an involvvement in the tenant selection process?

    You mention Property Managers being “mostly not good”. (I am paraphrasing you here) and potentially putting poor tenant choices into one’s properties. This seems more likely than not to me. The maximum return to the property manager results from tenant-issues and turn-over. And I have strong suspicions that skimming of fees, intentionally sloppy book keeping, and contractor kickbacks serve to augment property manager’s returns as well. None of these things benefit the owner. I dislike that owners are property managers are naturally in an adveserial financial relationship but I can’t think of a good / easy way around it. If I have to manager the property manager, what the hell; I may as well manage the property,.

    stephen
    —————-

    • Ali Boone

      Well I can’t say I’m in agreement with that one for my own properties, Stephen. Managing managers is a lot easier for me than managing a property. Totally different arenas of management. But for anyone who is more skilled at managing their own property(ies), I’m in full support of it. It just happens to not be me…

      For the eviction insurance, I can’t say a for sure quote. It depends on the property and location and numbers and all that. I know of a B-quality SFR in the midwest and it was going to cost the owner $56/month. For the details on the logistics of the company, you’d have to ask the company. I don’t know the internal workings.

  2. Katrina Prather

    Nice job Ali! I just wanted to add my experience to the article conversation. I’m a proactive person, but lacked the insight on applying it this time. I guess I was pretty naive as a new investor who purchased a turnkey property by the time I closed. I did visit the property and things looked good as one unit was rented. The inspection was fine. However, what I didn’t realize is that the property mgt company who sold me the property would place tenants in the units without everything functioning properly. One example is that as it started to get cold, the tenants needed to light the gas furnace which wouldn’t light and something had to be replaced. It was about $75, but an expense unexpected. Another recent issue was the replacement of a backdoor which basically appears to be near rotted and is costing me near $300. It wasn’t something I noticed as a problem a few months ago when visiting. I’ve had several maintenance requests occur over the months. This is my first property and has been a learning experience like most people’s first property.

    I’m still glad that I made the purchase and I’m not mad about anything. It’s good to learn early on what to look out for moving forward. I plan to make some proactive repairs and do a more thorough check on functionality and potential issues if units become vacant. It seems as if the PM was a little misleading in dealings of the property. If anyone has any feedback on things to keep an eye out for, I’m open to listening.

    • Ali Boone

      All good info Katrina! Thanks for sharing. And I totally hear you on how frustrating repair expenses can be. Can I ask a couple of questions? What price point was this property (and irrelevant, but what market?) Were you offered a scope of work warranty? If so, were these within that time frame? And when you say they placed tenants too soon, is that just for small repairs like the ones you mentioned or was the rehab not complete?

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