Long Distance Turnkey Properties: A Good Idea?

Question

I have recently learned about turnkey properties. It sounds like it would be appealing to investors who may have a hard time finding properties that cash flow in their local area. Has anyone had any experience with buying a long distance turn key property? I have heard that they are not a good idea because you are too far removed from being able to monitor the property manager and get to know the area you are investing in. I would love to hear your thoughts!

Darrin Carey · Answer

Buying cashflow properties in other areas can be good investments. However, there are some pitfalls too. A "Turnkey" property may come from a provider, the MLS or any other source. A Turnkey property could be fully renovated, or simply a property that is currently rented. I'm here on the ground in the Midwest in glorious Dayton, Ohio. I've bought and sold "Turn Key" properties, and seen what many people offer as "Turn Key", and I've bought rental properties in areas thousands of miles from where I lived. Here is what I have seen and experienced, and how to avoid some of the big problems that come up. @Michael Lauther hit a major point. You MUST have a good team where you are investing, even if it's local. I've been ripped off by bad property managers, anything from non-performance, to them actually stealing the rents and security deposits. Contractors seem to have a whole different ethic when someone is not overseeing them. Even a local property manager will keep this in check. I bought a "finished" house from a lady in Florida, who had fantastic pictures showing it the house done. Two wall were painted, and a piece of new carpet set on the floor for the photos. Some bath and kitchen pics were from a different house. Fixtures were set, but not installed etc. Then surprisingly, no one could find the "contractor" Taking even basic steps will save a lot of grief. Check the BBB (personally, I don't like the BBB). If someone has a 'D' rating do you really want to hire them? Are they licensed in their profession (if required). Ohio requires all Property Managers for a third party to be a licensed real estate agent. Are they. I get a surprising number of calls from people with bad managers who aren't licensed. Interview several while you visit the area. Personalities differ. Prices vary. Most PMs in our area, charge 10% of collected rent. That gives them a good incentive to keep your property maintained and rented. Your Property Manager also becomes a source for rent amounts, values, and other team members. Look for recommendations here on BP. I've pointed several people to good local professionals. All you have to do is ask, someone on BP will help. @Chris Clothier hit the second big point. You MUST visit where you are investing. There is nothing like getting you boots on the ground and walking the neighborhood. I am continually amazed by the number of people who will spend $30,000 on a rental house, but not $500 on a plane ticket. Pay for a property inspection (about $400). You're about to spend thousands of dollars on a property. Get an independent assessment of the property condition. I tell all my potential buyers to do this too. It's good business for me and protects them. The last property I sold, as a result of the inspection, I paid and unplanned $906 to have a roof repair done. I didn't know about it before the inspection, and I do not begrudge it to the buyer. I told him the roof was already repaired. (It was, but not correctly) Determining value can be harder depending on the area. An appraisal will give you a formal written opinion. An agent can give you their opinion. Using third party sources like Zillow, gives you data, but can be very misleading. You can see the price, but what was the condition? Were the nearby sales all finished properties? or do they need substantial work? Are these even comps at all? Is it the same school district? All factors in determining value. What do you do in an area where people are buying cheap properties, putting substantial dollars into renovations, but not selling them? All the sales are low, but the values are obviously more. (Any Appraisers able to help with that?) Ultimately, a property is worth what a willing buyer and seller agree it is worth. I know this is a long rambling rant, but I hope it helps. In summary, Visit the location and property Interview and build a good local team Stay involved Trust, but verify

Jay Hinrichs · Answer

@Ali Boone @Jon Holdman "Would rather kick back and just collect the checks." Ali this is the farthest thing from reality.. Turnkey can work no doubt but its not just kick back and collect checks.. You must do extensive DD on your provider, you must have independent inspections of the rehab.. You must work with and manage your PM on a monthly basis. To give the public the impression that turn key is just kick back and collect checks is really dangerous in my personal opinon and experience which is quite deep in the space.

Jon Holdman · Answer

@Brian Ash give the search function a try as there has been a LOT of discussion about this lately. My take is that if you randomly choose a turnkey provider you are likely to get some combination of an overpriced house with claims of rent in excess of market reality and a shoddy rehab that will continue to require ongoing maintenance. Or, worst case, all three. Many of these sellers seem to be targeting far-away, naive investors who will evaluate properties based on where they live, not where the property is located. I'm sure others will provide you feedback on the positives of these properties. At the very least you MUST do your own due diligence and evalute the property, neighborhood, city and rental prospects on your own. Go see the property.

Chris Clothier · Answer

@Brian Ash Just wanted to clarify some of your thinking real quick. Turnkey is nothing more than a marketing word. It does not necessarily describe anything. Lots of people today use it and if you lined up 5 of them, they very well may give you 5 different ways of doing business. It all boils down to you - your needs/wants/desires as an investor - your willingness to put in the time and effort. One assumption that I would say is only half correct is why people buy. An over-whelming number of investors that I have dealt with over the past 11 years do not have the time and/or motivation to invest actively. So they look for a passive investment. Where they live does not matter. They do not have the time or the motivation to invest even next door so they are looking for alternatives. I've typed too long already, but there are lots of answers to your questions up top. I will answer them in another posting if you would like my take on some of those after all the other answers you have already received. Bottom line is this - get on a plane and go visit whomever and wherever you are looking to invest. There is nothing inherently wrong with buying out of area and even far from home. There is something wrong if you expect it to go successful, but do not want to do your due diligence and then hold whomever you buy from accountable. Those are the keys.

Michael Lauther · Answer

@Brian Ash As someone who invests in Dayton Ohio from New York I will tell you it is no passive investment, and good property managers are hard to find. I have spent three years putting together a small out of state portfolio of my own, making connections and finding reliable contractors. In the end the return on investment looks to be better than most turn key. I am buying in low income areas for cash and looks to be 18%. I am all in for 5 properties after rehab for $115,000. These are properties all built before 1930 within the city limits. The gross rent is $3088. 3 of the five properties are sec 8 rentals and insurance runs about $4000 a year Taxes about $5800 year. ROI after expenses and reserve for maintenance. This is without use of leverage as I invest inside a Self Directed IRA. The one area I grossly miscalculated was cost of repairing a property after a less than desirable tenant leaves. So if the advantage of a good turn key operation is to get you into a decent property with a tenant in place, the question I would have is what is the ability for ongoing support. Do they manage the property and do they have a continuing support system in the markets they serve. If I decided to sell my properties the investor who took over would get a turn key operation and would earn a respectable return but..... over time if he did not continue to maintain a support team those returns would disappear with one or tow bad tenants who trashed the property and failed to leave on their own . The challenge in low income areas is management. I can fill rentals all day long if I rehab to sec 8 standards but the key to making money is low turnover and tenant selection. When I was looking for a turnkey investment I found several quality companies who are members of BP. They offered newer more expensive properties with similar returns but only after using financing Leverage increases return but also increases risk and is not as economical when used inside an IRA.. As far as I can tell the Cash on cash return from a quality turn key operation will be less than 15% closer to 10% but the trade off will be access to support that you would not have otherwise. I would be interested in seeing some of our turn key investors give examples of their results and actual returns as well as your experience with service from the sellers of the investments you have purchased.

Ali Boone · Answer

Sorry guys, @Jay Hinrichs. My intention was to make a very generic and relative statement, but clearly that's not how it came across. In absolutely no way are turnkeys completely hands-off. I've even written articles on BP about doing proper due diligence on them. You are right that it is not correct that zero work is required for them, but you are not correct in that you necessarily have to manage the manager every month. If you are having to do that, you have the wrong manager. In general, all the due diligence you mention and the managing of the manager is still not hard at all, assuming you know what you are doing and have the right folks in place. So more accurately put, 'turnkeys are much more kick back and collect checks' than other methods of investing. They do still, however, require proper due diligence going into them and always making sure your manager isn't screwing up (although when they aren't screwing up, there is little to no work necessary on your part for this). I actually do kick back and collect the checks. Occasionally I need to pipe up about something but not often.

Marco Santarelli · Answer

Well said. I've invested in (and sold) turnkey properties since early 2003 and although they may be the best passive investments, they still require some work and due diligence. It must be treated as a business. @Brian Ash read my article: Real Estate Is a Business!

Ali Boone · Answer

I've always bought turnkeys out-of-state myself and to me they are just as easy to deal with (if not easier in some regards) than if I were to buy locally. I stick to turnkey because of the distance issue but also because I have no desire to work in the trenches for an investment property. Would rather kick back and just collect the checks. You can most definitely do proper due diligence on a turnkey property. There is literally nothing about one that you can't check up on, so even if you were to find bad provider who is trying to scam you, if you know what to look for you'll catch it long before you buy the thing. Turnkeys have also come a long way from what they were even a few years ago. Turnkeys are a newer concept and with the massive opportunity they had starting with the crash, a lot of bad turnkey business models popped up and there were definitely some long-distance, a lot of internationals, getting snowed. But between those businesses falling out of business because of their bad models and you can seriously check up on everything about a turnkey.... there is no reason to let the thought of a turnkey provider ripping you off deter you from going that route. It's way less likely to happen than it used to be and you can prevent it from happening should it start. Just get in with people who have bought turnkeys and find out who they buy from and like and you'll be fine.

Tony Ngo · Answer

I have a rental property in a different state and it's working out great for me. I think the most important thing is to have a good property management in place.

Ali Boone · Answer

Haha @Jay Hinrichs. I haven't done the selling part but I can see your analogy. As I mentioned before, there were a lot of shady turnkey companies that popped up during the crash/boom. I know for sure the experience you mention did happen to a lot of people, and most certainly even more to international investors. The good news is most of those companies are out of business now, and the ones leftover who might still pull something like that....well, the only thing you can do is due diligence. Everything now can be verified somehow, so as long as someone is versed on what to check up on, they should be fine. There are no west coast turnkey companies because the prices don't make properties out here advantageous. This turned out to be a good convo back and forth and hopefully everyone who reads it learned something that will be of help! Sorry you only got to see the sucky side of turnkeys. I can say for sure there are good companies out there now and not everyone wants to dupe investors.