3 Types of Investors Who Might Benefit From Owning Turnkey Rentals

by | BiggerPockets.com

Guess what? Turnkeys aren’t for everyone. But guess what else? They are perfect for some people.

There is much debate about whether or not buying a turnkey rental property is a smart investment. The primary argument that comes up against turnkeys is that they are sold more or less at market value, so you can’t force appreciation on them, and being able to do that is the crux of rental property investing success.

I will say that forcing appreciation—buying something under market value and then doing something to increase that value—is one of the most solid ways of profiting on an investment property. It may even be the most solid way to profit. But the reality is there is a certain level of work, effort, skill, and risk that goes into doing the things to a property that will force that appreciation (assuming you aren’t just using the market by itself for appreciation).

Turnkeys offer you a property where all of this work has already been done, and therefore very little of your time is required to invest in the property. While you will then pay closer to market value for the property because you aren’t the one forcing the appreciation, you also aren’t required to invest all of that work, effort, skill, or headache into the property. You can also still be plenty profitable with the property if you buy right and manage your investment right.

So, obviously, there is a debate going on. Should you buy turnkey or not?

Before I continue, I do want to offer you some more information on this idea of doing the work to force appreciation for yourself versus going the turnkey route. I encourage you to read “Is It Better to Buy & Rehab or Purchase Turnkeys? Let’s Look at the Pros & Cons.” This article will give you a more in-depth discussion about the specifics of the two options, and it will even start to hit on who may fit better into which category.

Then to expand on that, let’s talk about who specifically turnkeys are perfect for! Of course, anyone can decide to buy a turnkey and it can be a great investment, but here are three groups of investors who I believe would benefit from turnkeys.

3 Types of Investors Who Might Benefit From Owning Turnkey Rentals

1. New Investors

As with just about anything in life, you will always be better at something if you first learn the fundamentals. It’s like learning to crawl before you learn to walk, skiing on the bunny slope before diving down a black diamond run, or learning to tread water before learning the butterfly stroke or the high dive. It can no doubt be frustrating to start slow and spend time focusing on the basics, but in the long run, you’re much more likely to succeed not only more smoothly but to much higher levels.

Related: Mastering Turnkey Real Estate: How to Build a Passive Portfolio

It’s all about building a solid foundation.

In my opinion, buying a turnkey rental property is a perfect way to learn the fundamentals of real estate investing. There are a few things that, no matter what investment strategy you decide to go with, you need to know and use on a regular basis. All real estate investments use them, require them, and rely on them. If any of these are lacking in your arsenal of investing skills, you could be in for a world of hurt.

Running Numbers

Duh, investing is all about the numbers. So if you can’t run numbers on a property you are analyzing, what are you really buying into? The idea that something might be profitable? Please don’t do that. There are very few investment strategies where you could get away with not understanding how the numbers work. Turnkeys are no exception to the numbers game. They are, however, a chance to learn the most basic understanding of numbers before you have to learn to work numbers on much more complicated investments. Once you understand how to run numbers on a simple property like a turnkey, you can then use that as your numbers foundation, so to speak, and then slowly add in more complicated paths. But at least you have established that solid foundation.

If you’re curious what running numbers on a basic rental property looks like, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”

A Simplified Approach to Calculating Expected Value (EV)

Market Analysis

You’ve got to know the market you are investing in. You need to know why you are investing in that market. You need to know the risks of that market. Why? Because those aforementioned numbers depend on it. While there are a lot of markets I don’t personally agree with, I support anyone buying anywhere they want as long as they can explain to me why they are buying there. Even if I wholeheartedly disagree that buying in a particular place is a bad idea, if you can acknowledge to me that you know the exact risk(s) of buying there, then I will totally stand behind you.

For example, the most basic of market analysis questions is—is the market you are looking at a growth market, a stable market, or a declining market? If you can’t tell me that, I don’t think you have any business justifying a particular market. Turnkeys, at least the ones from turnkey providers, are almost always in cash-flow positive markets—meaning they are in markets that have price-to-rent ratios supportive of positive cash flow. Of those cash flow markets, I can promise that not all turnkey providers are in growth markets. I believe that some are, in fact, in declining markets. I personally don’t advocate declining markets, but again, if you can intelligently explain to me that you understand the risks of buying in declining markets and you acknowledge that you are pursuing a declining market, I’ll totally support you! Because turnkeys are available in both of these types of markets, they are a great way to teach you how to differentiate the types of markets out there and what factors to look for in a solid investing market. Even if you decide to flip later—and flipping markets can be very different than rental property markets—you are still going into it with a working knowledge of market analysis.

Due Diligence

Go ahead and mark this down as one of the most important phrases of your investing career. Everything you are told, everything you are quoted, every person you hire needs to have due diligence run on it. Some things require less due diligence than others, but you absolutely have to have a working understanding of how to do due diligence when it comes to investing. Turnkeys are the perfect thing to teach you this because, almost literally, your only job when buying a turnkey is to do due diligence on the property you are buying. Because you aren’t rehabbing or getting quotes or swinging hammers or finding tenants or any of the other detailed work that goes into a property, this opens you up to have to do absolutely nothing else other than due diligence. Learning how to do this level of due diligence will help you perform more complicated due diligence as you advance through the investment ranks.

Managing/Ownership

Because turnkeys are typically managed by property managers, you gain an opportunity to learn how to “manage the manager,” as I like to say. Much like with due diligence, managing the manager is an overseeing of sorts. When you are doing due diligence, you’re doing things from the 25,000-foot view rather than being down in the weeds. When you are managing a manager and managing the general flow of your property, that too is from the 25,000-foot view. Turnkeys aren’t always perfect, and once you own them, they are truly just like any other rental property, so you begin to learn things about the effects of bad tenants, the flow of the management, decision making, problem solving, and eventually exit strategies. All of these skills are foundational to any type of investing. And because you aren’t busy fixing toilets for your tenants, you have time to clearly learn these things and carry them on with you throughout your investing career.

If you want to check out a fairly entertaining article (if I do say so myself) on the difference between investing in something more simple like a turnkey versus going hardcore into the more advanced types of investing, and/or if you like snowboarding, check out “What Snowboarding Can Teach Us About Real Estate Investing Strategy.” You may get a clearer picture on the opportunity to learn the basics before you take on the harder stuff!

2. Side-Time Investors

This refers to the person who doesn’t want a career in real estate. Maybe they have a full-time job they love, maybe they have a family they are busy with, or maybe they are like me and would prefer to travel and lay on the beach than swing a hammer. This group of people just doesn’t want to expend a crazy amount of time or effort into real estate investing. They do, however, want to do something smart with their money. Turnkeys are excellent for this. As I said in earlier paragraphs, your main jobs as a turnkey investor are understanding numbers and markets, due diligence, and managing the manager. These things are fairly easy to learn if you take the time and practice them—and once you learn them, you’ve learned them. They aren’t as drastic as figuring out how to initiate and conduct a rehab, for example. They can be learned in short amounts of time, and the on-going learning of them is on the minimal side. This way, you are free to go about your life outside of your investments, all while still seeing good returns on your money.

cash-on-cash-return-real-estate

3. Hands-On Investors—to Fill the Gaps

I’d say this one is the least talked about of them all. Everyone knows turnkeys are advertised as hands-off (which isn’t totally accurate, but they are certainly relatively minimal for time investment), and there have been discussions about the benefits of being able to learn the basics through something like a turnkey investment for the new investors. But I’ve not heard many people talk about why more experienced investors can benefit from turnkeys as well.

Typically, I don’t recommend turnkeys for anyone who is willing, able, interested in, or skilled in doing things on their own. If you can and want to do it on your own, do that. There’s more money in that. And for the most part, anyone who is already doing things on their own or has the interest in doing so isn’t going to be entertained by what a turnkey offers, and it may even bother them or stress them out. There are several reasons why most experienced or handy investors want nothing to do with turnkeys.

However, there is one exception to this that I think is worth throwing out.

Let’s say you are a BRRRR-er or a flipper in your local town. That’s great! That’s the dream investment scenario for most. So you are trucking along, buying the distressed properties, rehabbing them, selling them or renting them out, possibly landlording them, and that’s your gig, fantastic! But there’s one hitch in all of it that some people do want to do something about—only being able to invest so fast.

Think about it. If you’re busy buying a distressed property and then rehabbing it, your resources (mainly you) are tied up in that one property for a decent amount of time. You can’t buy more or move faster because you only have so much ability when you are doing things on your own. You can, of course, start hiring out more and more and build systems so you can work yourself out of being a required part of the equation, but a lot of people don’t want to be outside of the equation. They want to be in it—that’s half the reason they are doing it in the first place. But let’s say that while you’re busy with that property and then with the next property, you have money sitting around that is doing nothing because you can’t move fast enough to keep it all in flow. It’s a good problem to have, I admit. But it’s still money sitting around doing nothing.

Related: Turnkey Investing 101: What to Avoid & How to Know if It’s Right for You

If you can’t buy distressed properties and rehab them properly faster than you already are and you have money sitting around doing nothing, turnkeys are an excellent option to fill the gap.

For someone who successfully invests locally and rehabs themselves, turnkey can feel almost like a repulsive idea and an insult to your skill. I totally hear that. But I’ve started hearing from more and more experienced investors who are buying an occasional turnkey, just to be sure all of their money is working positively for them. It makes sense—inject a turnkey here, another turnkey there on occasion, all around what you are doing locally. It’s the perfect scenario. It’s diversification, it’s keeping all of your money busy for you at all times, you can sell your turnkey not too far in the future if you want the funds to help a local investment, but you were at least collecting cash flow on your money instead of it sitting around gaining you zero!

To Turnkey or Not to Turnkey?

The good news is there’s no right answer. Turnkeys are great for who they are great for and hated by others. At the end of the day, the only thing anyone should ever decide is what is right for them personally. What is right for one person may not be right for another. We all have different goals, different interests, and different skill sets. No one but you can decide what investment strategy is best for you and only you.

So what is it? Do you fall into any of these categories and think turnkeys might be right for you?

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.

9 Comments

  1. That’s exactly where I am at this point. I have lots of equity in my houses that I bought 7 yrs ago in California and I’m starting to refi/cash out & looking to purchase bulk portfolios of sfr in growing up & coming markets.

  2. Rob Cook

    Interesting Ali. I am one of those who just does not see how turnkey can actually work unless appreciation is planned on and actually occurs, to save you by the bell. Sure, isolated cases of success surely exist, where turnkey can be profitable. Not being argumentative, and I am one of the most hands-on types doing rehabs full time on my own rentals. But let’s discuss the numbers. First, the exact same analysis pertains to a rehab buyer like myself or a turnkey buyer. Either the property cash flows or it does not. With either model, the numbers are shifted from, fixup costs in my case, to higher debt service for a turnkey buyer. If turnkey means, the property is already fixed up and ready to rent out/occupy, then presumably those fixup costs are already baked into the price. In my experience, with rentals, it is usually extremely difficult to find deals that will actually produce 5% returns, when all expenses are properly accounted for. And that is for my rehab purchases! I am usually not competing with potential homeowner/occupant purchasers for my properties. So there is usually not as much emotional demand and influence on the sales price. Yet, I still find it very hard to make the numbers work, even when doing all of the work myself on the rehab (I do try to adhere to applying retail value for all fixup costs in my accounting and analysis). SO, to be able to buy a profitable, cash-flowing turnkey deal (Assuming 80% LTV financing) is going to depend on finding a “stupid” turnkey rehabber it seems, one who either is willing to leave a lot of money on the table when they sell it, OR one who grossly undervalues their own fixup contribution expenses. Or I suppose a turnkey seller who is accepting of lower profits and plans to make it up in volume.

    I have bought quite a few rentals “turnkey.” but not from turnkey operators. No, they were from incompetent, would-be, rental investors who got in over their heads, over improved the properties thinking that would magically translate into higher property fair market values, like a simple math function. Of course, they discover too late, that no matter how much improvements they did, the rent price was not moved much, and therefore neither was the property value/price. It should be simply stated here that the following equation often does NOT work out in reality. Purchase price + fixup costs = Fair Market Value (Sales Price). NOPE! Wish that were true. And sometimes it “appears” to be the case, but that is the exception, not the rule. As I said, I buy rental properties, and often do not compete with owner occupant purchasers on them. So, in the end, an informed rental investor goes by the numbers. If improvements and fixup do not positively impact the analysis (increase the rent rate, decrease expenses, reduce turnover and vacancy, etc), then they are wasted inputs and will not be compensated for by a rational investor/buyer.

    Which brings me back to my main point – that in my experience, which is admittedly narrow and limited, I cannot see how a non-cash buyer of turnkey rentals can cash flow and be profitable, absent a stupid seller. And despite the idiocracy we live in, I do not like counting on finding a greater fool as a business model. So, I do not really differentiate between the distressed types of properties I usually end up purchasing, and your turnkey type rental deals. I analyze them the same in all ways. They either work, or they don’t in the numbers. The main thing differentiating the two types of deals is the opportunity cost of the buyer’s time. And that is a whole other subject and area where most people make major mistakes evaluating.

    IF the numbers work for a turnkey investor, then go for it, that is a dream situation for us all! But my experience (with my own limitations acknowledged) has shown me it is hard enough to make rentals work even when I have to do a ton of work on them myself (“Compensating” myself for my time and risk at an hourly rate of $75 an hour for the accounting and analysis). So it is only by finding workers who can actually produce at my level for much less cost, in reality, than my own $75 an hour cost, that a turnkey proposition can work out. I.e., the turnkey guys do the work for less than $75 an hour, fully burdened, all efficiencies accounted for, etc. Doing that, is essentially what contractors do all the time (I did for over 30 years as a major regional residential remodeling firm owner- and still own the firm today). I pay carpenters $25 an hour, and bill them out at $75 an hour, which, after a full accounting of all of my business expenses, etc. yields about a 10% profit or less over a 30-year experience as a top remodeling firm). And before anyone revolts in horror at a $75/hour labor rate, go to a car dealership and ask what their shop rate is. It is barely enough to be profitable at $75 an hour.

    So profiting as a purchaser of the turnkey rental property, has to be based on arbitrage. Finding sellers (turnkey providers) who “undervalue” their time, risk, and profit potential. Isn’t that the same thing we all do when we buy any well-analyzed real estate purchase?

  3. Jerry W.

    Turn key is easy. it is also the least profitable form of real estate investing. Turn key providers do not sell below market, they usually sell for well above market. If you can sell on the MLS and get $100K for a house, why sell it to an investor for $90K? The answer is that you will not. You pay a premium for turn key. Hopefully over time you will recoup your paying over market rent. You can buy nicer houses that need very little work and sometimes make good cash flow, especially with a motivated seller. Turn key operators are not motivated sellers. They are in the business of selling and so will not sell at big discounts to market value.

  4. Steve Vaughan

    I like the article, Ali. Multiple types of investors could benefit from TK.
    If it were me, though, I’d worry about such centralization of the whole thing. The TK co did the rehab, recommended the inspector, sold it to you with their realtor, then manages it. I need less vertical integration.
    I could see myself buying a decent b house off the MLS somewhere with a good realtor representing ME. I’d then find an unbiased inspector. I’d then find the best PM in the area. I may do that first.
    Either way, I’d have 3 professionals that may not even know each other. With TK, they’re all under one roof and all on one side. I highly doubt it will be yours.

  5. Nathan G.

    I see turnkey as a great way for certain investors to sock away their money and get a safe return. My father-in-law purchased properties 100% cash which is a terrible cash-flow but he was in his 70’s and wanted safe, not creative wealth building.

    I think the greatest danger her is the all-inclusive turnkey company that buys the home, renovates, sells it, and then manages it. They are making profit at every turn and it provides far too many opportunities for the client’s wallet to be squeezed. I would prefer to create some checks and balances by spreading the process across multiple companies.

  6. christopher stacy

    Ali (or anyone who can answer the question), how do know if the market you are looking at is a growth market, a stable market, or a declining market? Especially if you are not local to that market? I live in Virginia and I am looking at the Tampa area. My realtor tells me that deals are few and far between and most properties are priced at market. Obviously, that’s not a declining market, but what is the process to analyze that or any market? Thanks!

  7. Kennith Osborne

    A list of providers turnkey providers and most importantly property management companies on BiggerPockets with a discussion section would be very helpful. I have considered doing this to get started.

    I think a property manager would be helpful in helping you evaluate what they can rent a property for in the area they operate.

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