Opinion: Turnkey Real Estate ISN’T Actually Overpriced. Here’s Why.

by | BiggerPockets.com

Many people will say turnkey rental properties are definitely overpriced.

I don’t agree.

It’s not to say turnkey providers never overprice their properties—shady turnkey providers most definitely may overprice everything they sell. I’m not talking about the shady providers in this article. I’m talking about turnkeys as a whole.

Assuming you are dealing with normal turnkey properties (and not shady ones), I believe the most someone can truly claim is:

Turnkey properties cost more than the typical rental property investment.

Kind of a boring statement, huh? Boring maybe, but it’s weighty when you compare it to the claim that turnkeys are overpriced.

Here’s why people are tempted to say turnkeys are overpriced:

The general theory behind investing in rental properties has always been to buy a property below market value so you can force appreciation on the property. That forced appreciation, hopefully in addition to positive monthly cash flow, is one of the primary streams of returns on a rental property. Turnkeys, however, typically aren’t typically sold below market value. Therefore, that forced appreciation is no longer part of the returns equation.

This is not untrue. Turnkeys are typically sold at or around market value, and therefore forcing appreciation can be difficult or impossible.

But here’s where the clarification comes in. The properties that people buy below market value are not in perfect condition—hence why they are priced below market value. Note: There are exceptions, of course, and not every property will fit this exact equation, but I’m using this as a generic premise on how these things usually work.

So, when you buy a property under market value, typically you then fix it up to bring it up to a market value (or better) condition and then re-appraise the property, and that’s where you suddenly end up with added/forced appreciation. You forced the appreciation by improving the quality of the property. The awesome thing about real estate is that when you do this, typically the appreciation doesn’t equate to how much you had to put in for the improvements, but it ends up being more than you had to pay for the improvements. Therefore, awesome magic money gain in your pocket. Bingo.

But if you don’t get that part of the deal, like with a turnkey, does that mean you are overpaying?

No!

With a (good) turnkey, you are paying what the property is worth. When you buy a distressed property in so-so condition (or worse), you are paying what it is worth. A turnkey property is fully rehabbed or fully redeveloped, so it only makes sense to pay what it is worth.

Does that make sense? You aren’t “overpaying” for turnkeys; you just aren’t buying a property that is priced under market value. So, if someone wanted to argue this point, the only real statement they could argue would be “are you overpaying for a rental property?” not “are you overpaying for that property?” It’s an argument of concept.

So now that we have that cleared up, what are the remaining issues? I can think of two:

  1. Should you pay market value for a rental property?
  2. Is there really no way to force appreciation on a turnkey?

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Should You Pay Market Value for a Rental Property?

This will always be up for debate, and the right answer depends on two things:

  1. Your investment strategy (and therefore goals)
  2. Whether or not there is benefit to doing so

Investment Strategy

While rental properties have historically involved the buy-rehab-rent-refinance-repeat (BRRRR) method, and that particular method is a specific strategy in itself, they do not have to follow that strategy. The other strategy is to just buy and hold a property.

Does the BRRRR method get you higher returns than just buying and holding? Yes. Well then, why wouldn’t you always want to do that on a property?

  • Lack of time
  • Lack of knowledge and/or skills
  • Lack of interest
  • Aversion to risk

While the BRRRR method is fantastic and can provide fantastic returns, it’s just not for everybody.

The fact is, there is skill and knowledge required to successfully BRRRR a property (properly, for financial success), and it takes a decent amount of effort to do it.

Take me, for example. I love investing, I love real estate, but I also have absolutely no interest in knowing details on any of the skills required to BRRRR, and I also have no interest in spending one ounce of time working on any of the properties I own. I prefer to just get money, without working, while I go hang out at the beach.

Now, if you are the kind of person who has an interest in all of that and you spend the time to gain the knowledge you need for it and want to do it, I absolutely think that you should BRRRR for the added returns.

Related: The Top 4 Reasons to Never Invest in Turnkey Real Estate

If you aren’t sure which route is better for you, check out more details on each method at “Is It Better to Buy & Rehab or Purchase Turnkeys? Let’s Look at the Pros and Cons.

Benefit

If you pay more for a rental property and therefore lessen your returns, there should at least be some benefit in doing so or it wouldn’t be worth it, would it? So what are the possible benefits if you do go the route of paying more for the rent-ready property?

  • Minimal time effort required
  • Minimal stress required
  • Less risk
  • Ability to expand portfolio quicker
  • Mobility

You’ve already heard one of the benefits of not doing the BRRRR thing—me spending time at the beach rather than swinging hammers on my properties. While I’m at the beach, I also don’t stress over my properties. So there’s the time effort and stress bullets.

You also dodge a lot of risk by not taking on such a heavy load of work on a property. There are just more moving components, and with every added component in a real estate investment, there is an added layer of risk. And then for expansion and mobility, if you aren’t tied up with one specific property (i.e. having to be there and having to focus on it while it’s being worked on), you can buy properties really anywhere you want to and you can buy more properties more quickly. Yes, more capital is required for that if you are buying up front and not waiting on profits from a BRRRR appreciation force, but it’s an option for many investors.

For more thoughts about whether there is benefit to paying market price for (good) properties or not, check out “Do the Markups on Turnkey Properties Kill the Deal?

Can You Force Appreciation on a Turnkey Property?

The answer is yes.

For the most part, forcing appreciation on a turnkey is not really a thing. The other factor is that turnkeys are not sold on the basis of appreciation; they are sold on the basis of cash flow. However, if appreciation is of major desire with your turnkey and you really want to make it happen, there are a couple options for it.

1. Buy only in certain stages of market cycles.

Unfortunately, this one is not always an option. However, when it is an option, it’s an awesome option.

The part of this one that can’t be controlled is when certain markets, or the whole real estate economy, are in advantageous positions.

The most advantageous time to buy in a real estate market is when it is on the brink of a major boom. Now, a “major boom” should not be interpreted by just anybody; it should be a very solid thing based on positive market fundamentals. These booms can often be predicted. What goes into those predictions is above my pay-grade, but know they can happen. Don’t be tricked by people saying that some market is “certainly about to hit a boom” when it’s really not, though. There are some markets out there that people have been saying are on the brink of a boom for like the last 20 years. That’s not so solid. So be sure the boom is really coming.

If you buy right then, at the beginning of the boom, the market boom itself will force appreciation on your turnkey. I did exactly this with a lot of my Atlanta properties. I strategically bought them in 2011 and 2012, right when the impending boom was first starting. Because I bought right then, all of those properties increased in value by over $40,000 each in about three years or so, give or take. Considering they were all priced between $55k-95k at the time, that’s not too shabby of appreciation numbers! But now that boom in Atlanta has ended. It’s over. So if you buy in Atlanta now, you can expect extremely minimal forced appreciation on a market value property just due to change in market phase.

Each market will be in its own phase in the growth cycle, so when to buy in each market is specific to each market itself.

More generally, however, the real estate economy as a whole can have a big impact on the ability to see a lot of appreciation in a short amount of time. For example, right now as I write this article it is 2017 and the real estate economy as a whole is at extremely high prices all across the board and because prices are so high, there are really no major markets expecting any crazy amount of appreciation. So right now, the option of using the market to force appreciation on a market value property is very limited, if an option at all. This is the downside to this method—it isn’t always an option. But like I said, when it is an option, it’s a great one.

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Related: The #1 Indicator That You’ll Have a Successful Experience When Investing in Turnkeys

2. Combine the BRRRR strategy with the turnkey strategy.

Whoa, what? Yep, you can do it. There are turnkey companies out there who sell straight-up turnkeys, but there are also companies out there who give you the option to end up with one of their normal turnkey properties, but you finance the work along the way (rather than not paying anything for it until you buy it at market value), and when you do that, you are the one to gain the equity from the BRRRR on the other end.

For more information on how this can work, check out “What Are The Different Kinds of Turnkey Properties?

My only caveat to suggesting this method of forcing appreciation with a turnkey is that you must be very cognizant of the company you choose to do this through. Because you are assuming the majority of the risk during the purchase and rehab and all that jazz, it is ten times more important to make sure you are working with someone legit. Regular turnkeys can be fully verified before you put any money down on them, but the BRRRR versions of them usually can’t be. Because your money is going in before everything is officially verified, the risk is on you.

There are several companies around who offer this kind of setup, and currently I am only working with one. My team and I only trusted this company with their BRRRR+turnkey offerings after a) working with investors who bought their regular turnkeys for several years and b) watching and tracking their success with the BRRRR and turnkey buyers for almost two years.

So, be diligent on who you work with, but if you find the right company, combining the BRRRR method with the turnkey experts is a fantastic way to force appreciation off the bat but also still reap the benefits of not having to swing the hammer yourself, while reducing risk (because they are experts in doing all that stuff and you aren’t).

Are turnkeys overpriced? Absolutely not. They are priced at exactly what they are worth. You pay more to save yourself hassle, work, and risk. But are they for everyone or do they fit into everyone’s strategy? Nope.

What’s more important to you—extra returns or ease of process?

Every investor is different! Chime in and let everyone know which side of the fence you are on.

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. Christopher Neeson

    If your dealing with a perfect turn key company (which I haven’t found yet). You will find that cashflow starts falling into that of a standard market sale based on market value.

    I have yet to see a turn key property that’s been renovated and remodeled pull a ROI of 200% in its first 18 months. Then continuing to produce even higher ROI in following years.

    In fact most turnkey properties I see available for buy and hold strategy (which I use) only offer maybe a 4% to 14% ROI.

    1)Ok so one scenario I go from getting paid back in less then 18 months double what I invested.

    2)Then on the other hand in a best case scenario I’m expected to wait at least 7 years if not longer to see cashflow enter my pocket that wasn’t there to begin with.

    In most cases a smart investor would take the fist plan as you can create a 1400% ROI in 7 years with this option instead of waiting for that 100% Return On Investment!

    When you can go from
    $4,800 cashflow year 1
    $12,100 cashflow year 2
    $25,700 cashflow year 3
    $68,300 cashflow year 4
    Now that’s actual cashflow not income.

    So on and so on as you continue all while keeping your out of pocket working income invested less then $30,000 overall why wouldn’t you.

    There comes a time when money out of your pocket seems like it was never yours to begin with as you move forward.

    I would say that each person should choose wisely how dedicated they are. Done turn keys are the equivalent of a new savings account or 401k. Sometimes worse……

    Choose if you wish to be on a much more stagnant side of growth or potentially win bigger while the time is here.

  2. Cindy Larsen

    I keep wanting turn key realty to be a good deal, but, every time I look at it, I find the following problems:
    1. The properties are located somewhere far away from Washington state where I live, so I can’t do the level of due dilligence I find necessary for a safe investment: it is difficult to assess the neighborhood, the quality and condition of the property, future capital investments, etc
    2. I would be dependant on a property manager I do not know and I would not be able to easily replace them if necessary, due to the remote location.
    3. The numbers don’t add up: the last turnkey opportunity I assessed offered 10-15% ROI, but, their numbers did not include a reserve for future capital investments (usually 10%). So, not such a good investment.
    4. The exit strategy is unclear.

    Turnkeys all seem to come down to: trust me, this is a great deal. That is way too risky for me. THe whole reason I am a real estate investor is that it offers the ability to determine the risks to my satisfaction by doing due dilligence: unlike the stock market, it is deterministic. For an individual property, it is not rocket science to figure out your ROI, and, you have the ability to personally affect your ROI through your own decisions and actions. Turnkeys do not offer these advantages, as far as I can tell. In fact, turnkey investing seems remarkably similar to having a stockbroker that you trust to invest for you, except that all of your eggs are in one basket, or maybe a few baskets.

    For passive investments via my self directed Roth IRA I’m currently looking at buying pieces of mortgage notes, provided that the company that sells them also owns a piece of each note, so they have skin in the game. There are a number of these companies popping up. One review of these crowdsourced mortgage investment companies is here:
    http://www.therealestatecrowdfundingreview.com
    I’m still researching, but it looks like a way to get into hard money lending as well as standard mortgage notes, while minimizing risk by diversifying across multiple notes, and multiple companies, and, multiple markets if desired.

    I’m new to passive investing, and looking for options. If anyone has suggestions, I’d love some advice.

  3. Christopher Smith

    Nearly every property (both locally and those from a distance) that I have purchased have been Turnkey (or very close depending upon how you define the term), and I have made a killing over the last 5 or 6 years. But let’s clarify a coupe of things.

    1) Buying a Turnkey doesn’t mean checking your common sense at the door.
    2) Buying a Turnkey doesn’t mean checking your due diligence at the door.
    3) When I buy at a distance, I personally have a trusted rep on the ground (so I don’t have to be there).
    4) You very likely need to find situations (e.g., market, timing or seller specific) that afford you some current or future competitive advantage.

    My first real foray in rental property acquisition came during the 2011 to 2013 time frame when I bought several Turnkeys at the depth of the housing crises. We had prospective rental properties in my current locale that were selling for 35% of what they had sold for just a couple of years after they were built.

    I bought a couple of 4 year old properties from a limited partnership that went in and cleaned them up after purchasing them in foreclosure, and I also bought a couple from a builder (yes brand new homes) who’s operations got caught in a squeeze when their preliminary approved buyers could not get final loan approval (so could not come through with the cash) as the lending standards started to very rapidly increase. I stepped in and picked up those totally new homes with cash.

    All of the above Turnkey properties have far more than doubled since I acquired them and all have been rented out consistently with no gaps or vacancies and all very easily cash flowed and continue to do so very well to this day. So yes I paid the then market value for these properties, but just those properties alone have made well into 7 figures and continue to push forward like a steam roller.

    Now I can’t buy any more in that market since prices are now astronomically high and getting higher by the day, but I have shifted and bought a couple of Turnkeys in the Midwest in a place where I actually lived before moving to California (so I knew it very well). These were also in effect Turnkey, but with special situations that permitted me to get them (again in pristine condition) at about 85% of market (can’t do much better than that with Turnkey).

    They are tremendous cash flow generators and have had really great underlying appreciation since my buy because I picked them up just before the major surge in housing prices started to occur in that locale. Prices there now are pretty high so I have very likely been priced out of that market too, but I got in and at least got a couple with some very beneficial timing.

    So Turnkey can be done and done with tremendous success, but its not like ordering a Pepperoni Pizza from Domino’s. It requires control, focus, discipline, diligence and the willingness to assume some form of risk that most others do not want to take (e.g., be the guy who is willing to run into a burning house instead of running out of it in total panic, and have a well thought out plan for success once you are inside it).

  4. james moore

    Ali,

    I agree with you that for every scenario where someone says this is the way to go with regard to a particular investing strategy, there is always a flipside. I think turnkey investments include the following categories.

    1) A flip home made rental ready. A true turnkey that we all associate with by this definition.
    2) An exisiting home with a tenet in place. More of a rare beast but they do exist.
    3) A light lipstick to make ready rental home. This is probably stretching it a bit. But this was my first purchase.

    It is important to stretch out as I have the definition of turnkey, because when starting out and in the future one may start at the bottom of this list and move up accordingly when such senarios come up where the numbers make sense or to stay locked in one of these sub categories of turnkey.

    Your point about choosing to swing the hammer or not, is something very critical to think about for newbies. Where I am, a true tunrnkey is out of my budget or more accurately beyond my willingness to spend that much at this juncture. Although I buy properties and choose to swing the hammer and endure those stress bulets, as you say, there is both an upside and downside or flipside to any choice when investing in real estate. It is important also to think about your strengths and weaknesses when it comes to the scope and depth of the rehab necessary with any project. I would rather impress myself and shut the door on any doubt that I did it my way, the right way, than to have someone say to me to don’t do that and skimp on the rehab because afterall it is just a rental and I have had many people say that to me. And my reponse is to tell them I am an unapologetic contrarian and proud of it. My philosophy is to treat a property as though I would want to live in it. This is where having the I will swing the hammer philosophy and the stress that may come with it, can really pay off in the end if that aim fits with your temperament. A turnkey approach may be the way to go if this describes you because any strategy is possible in this game and that is why I love real estate so much.

    My weakness which is also my strength is doing those quality finishes over just average ones. But this is where you have to carefully weigh your indivual tastes and criteria when choosing a true turnkey over one that needs some work, but that you can express your tastes and design to go above and beyond, if you choose to do so, over purchasing a lessor quality turnkey job. Investing is specific in many ways, but it is also relative to the vision, goals and tastes of that particular investor. I am on task to move on to my forth and fifth units, and I can say that I have struggled sometimes with that (would a, could a, and should a) rearview mirror mindset with regards of my choices, actions and decisions as an investor and the path I have chosen. The remedy here if one finds this as their struggle, as I have, is to doubledown on your convictions and have no regrets.

    Investing and specifically rehabbing can be a very scary and lonely place to be in when unprepared, some wither on the vine and die and some find themselves and their resolve and thrive on this activity, Because every investor at some point will discover their limits and their willingness or unwillingness to go to that place of stress and either push through it and raise the bar or walkaway. And I have done both.

    AlI in your article you say it is important to consider and challenge one’s assuptions about their investing strategy and to keep an open mind when it comes to turnkey investments and I think that is a very valuable message. As we and other readers here at bigger pockets who now or in the future will have skin in the game, it pays to keep an open mind just as much as it pays to find your nitch and stick with it until your mission and goals change and evolve as you aslo grow and endure with them.

  5. Mary White

    We are about to close on a turn-key 4-plex. We’re paying market value for it, but the rents it carries are $150-$200 lower per unit than they should be. Once we close on the sale and get to know the tenants a bit we’ll raise the rents and take a property that yields us $900 per month in our pockets up to $1500-$1600 per month. I would say a reason for buying turn-key properties is when the high quality of the units is hard to find in your market and you can see room to increase rents and obtain much higher quality tenants. Another one is for a balanced portfolio. We own a 6-plex that falls into the BRRR category (except that it’s commercial) that was an absolute homerun for us, but it’s an older building that is simply more work. We like the balance of a labor intensive property and an easy one. I liken it to a balanced investment portfolio with conservative and risky investments mixed.

  6. It does not matter if one thinks it is overpriced or not. This is why one gets an appraisal to find out the actual loan value. The turnkey seller will never think it is overpriced obviously. They want the highest price possible in order to make the most money…hello.

  7. Chase Webster

    So here is something I think I have seen turnkey companies do. They rehab and get higher than market appraisals (at least they look higher than normal based on comps) and then sell them for 5-10k above market (again based on comps). They focus on cash flow but you lose on appreciation because you’ve purchased a property that will be valued by a buyer based on…comps…At least this is what I think is going on. Maybe I’m wrong. Has anyone else seen this?

    • maurice amaraggi

      Hi Chase,

      I sent a private message after reading one of your posts about a house you bought in Cleveland from F Gutierrez. I share your view about turnkey companies. You were quite disappointed by your ROI. May I ask if after two years you find the performance better?
      Best.

  8. Demetrius Minos

    Hi Ali, I wanted to take a moment to thank you for all of you articles on this topic. They have changed my fortunes. As for this article – it’s great – but this quote stands out “Take me, for example. I love investing, I love real estate, but I also have absolutely no interest in knowing details on any of the skills required to BRRRR, and I also have no interest in spending one ounce of time working on any of the properties I own. I prefer to just get money, without working, while I go hang out at the beach.” YUP! That’s me. I just got my first TK property half a year ago and I am extremely happy. For others, make sure you analysis includes EVERYTHING. Looking at some of the comments above my feeling is there are some analysis that are not factoring in personal time, effort, goals, and other other things. Finally, Ali, I would love to connect with you.

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