Turnkey Real Estate Investing

You may have heard the term, “Turnkey Real Estate Investing” and wondered what it actually is.  People have different opinions, usually depending on which side of the transaction you are sitting on, generally, a turnkey property is one that is rent ready. The Turnkey property is typically fully rehabbed and as such, requiring minimal maintenance for the near future.  Typically, a third party turnkey provider helps an investor to acquire, rehab, finance, and then manage a property.   Usually the property is not in the geographic vicinity of the turnkey investor and would otherwise be unattainable to the investor.  This sounds great, but there are pros and cons to this type of investing and this comes at a cost.

Pros 

Limited  Amount of Work Required by the Investor

The biggest draw for most turnkey investors is the purported limited amount of work.  These investors typically have a full time job and don’t have time to run a real estate business, but they want the benefits of the real estate investment vehicle.  Like nearly everything today, the work can be outsourced and there are many companies that are entirely turnkey providers.  The internet is full of these providers and you can find one in nearly every market that supports rental properties.

This limited amount of work is the number one reason that people use turnkey providers in my mind.  If your time is better spent on your day job, then turnkey investing may be perfect for you.

Invest at a Distance

All real estate is local, but your local markets may not support the type of investing that you want to do.  This is especially true of investors in coastal areas. These coastal areas have no properties that “cash flow” and the only way to get into the market is to find a new market.  Turnkey providers provide investors the ability to hold real estate that is often thousands of miles away.

Access to new Markets

Investors can now research and find markets that are attractive to them and build an instant team.  Typically it takes years to build a great real estate team in a new market. With turnkey providers, the team is built for you already.  You just need to find your market and then select the right turnkey provider.  New markets are key to investor diversification and should be considered prior to any new investment.  A good turnkey provider will be able to provide you with intimate details of a market.  Details that would take a long distance investor years to figure out.  So for the investor looking to expand, it’s a perfect partner.

Cons

Paying a Premium

No matter how you slice it, you will pay a premium.  The turnkey provider is looking to make money on the acquisition/rehab of the property and then often on the management of the property.  The turnkey provider is running a business of buying, renovating and selling the property, they have to make a profit to stay in business.  The profit made by the turnkey provider comes directly out of your pocket. Understand that a turnkey purchase is a long term investment, you can not expect to a quick return.

You may not get what you pay for (i.e. a poor rehab or team holding itself out as than it is)

When paying a premium, the expectation may be that you will get a “perfect” or “new” house. Unfortunately, these are typically older houses with a rehab. Most turnkey providers only rehab the house to a level that allows it to pass and inspection and allow a tenant to move in.  It is obviously impossible to repair or replace everything in an older house and still have the rehab make financial sense.  As a buyer, ensure that you review the scope of work, compare that to what your independent inspector finds as wrong with the house, and then obtain a home warranty to try and cover some of the gaps.

You may also quickly discover that the turnkey provider does not have the network as originally advertised.  Often times, they don’t have all of the components of the team, acquisition, rehab, management, etc. and you end up with a flipper who is not providing the full service turnkey property as promised.

High amount of trust required in the turnkey provider

A good provider has gone through and fixed things that are likely to break, but they typically don’t repair everything.  The relationship with the provider is important. It takes time to learn if your turnkey provider is good, average, or poor.  I evaluate providers based on the amount of maintenance costs I have in the years immediately after the rehab.  In a perfect world you would have time to evaluate the property before investing in the next one. This requirement to let the property “season” before investing in the next property can be difficult for an investor as they move into new markets.  You may have to wait a long time before you can make an informed decision about the quality of the rehab.  Additionally, you may have an outlier home on your first purchase (either really good or really bad), buyers need to do your due diligence on the provider through additional methods as it is difficult to just rely on a single purchase.

There are a lot of scammer or fly by night turnkey providers that pop up and disappear just as quickly.  Do your due diligence before selecting one.  For more information, check out bigger pockets, Norada, or REI Nation.

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