Turnkey Investing Questions...

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

7y

Originally posted by @Lynn Dickinson:

Hello Bigger Pockets!

This is my first ever post here. As a late-middle-aged woman, brand new to real estate investing, with a sick husband, living (in a rent controlled apartment), in a very expensive real estate market, with a full-time job and not a whole lot of money to invest, I've been considering some out-of-state turnkey possibilities as my initial foray into the world of RE. (I believe I have enough for a down payment on a home in one of the less pricey markets.)

But of course I have questions... (I apologize if they sound silly.) I hope you'll be willing to help me with some of these? Thanks!

1. Is the price listed on a turnkey property, "THE price?" Or do they expect to negotiate? I ask, because when I look at some of these exact properties on Zillow, they are valued at $40k-$50k less than what the turnkey provider is asking. Is that normal? Is it wise to pay that much more for a home than the area/market is estimated to be worth?

2. What is the usual, general, non-turnkey range of costs for a management company to manage one's distant rental properties? I know what the turnkeys are asking, I just don't know if that's in line with the norm, or if what they are asking is considered a high price. And is this fee ever negotiable?

3. I've been reading articles and listening to podcasts, and there seem to be mixed feelings about turnkeys - including some people who feel they have been "scammed" or "ripped off" by a turnkey provider. How does that happen and how can I avoid it happening to me?

4. Given my situation described above, does it sound like turnkey investing is a good RE starter strategy for me? (I can't really spend a lot of time/energy fixing up a place, and can't afford to buy locally - but I need to start generating some residual income and soon. My husband is not going to get well, and his care is starting to get expensive.)

If you have RE investing experience, I would very much appreciate any feedback or suggestions you may have on any or all of the questions above. Thank you SO much for sharing your time and expertise!

Welcome to the site Lynn. Some answers for you below.

1. All things in real estate are negotiable so you won't know if it's the price until you make an offer that is lower than the price or not. It very may well be the bottom dollar, but it might not. Never know till you try.

2. 10% of the rents + 1 months rent every time a unit is leased are the most basic charges. There are of course other charges beyond that such as lease renewals, lawn care, service calls, repairs etc....Any Property Management company you reach out to should have no problem giving you a copy of their contract which should outline all the products & associated prices.

3. Best way to avoid being ripped off or scammed is to get a 3rd party inspection & appraisal on any property you buy.

4. If you want to go out of state you'll need to work with a company who can do the work for you. Whether it's turnkey or a Property Management firm that also sells investments. Either option should be fine.

2 Reply

Clayton MobleyPro Member

Birmingham, AL · Member since 2014 · 875 posts · 947 votes

7y

@Lynn Dickinson Welcome to BP! Your questions certainly aren't silly, they're very common.

I'll give some quick answers to your questions here, but I also recommend you read this thread where @James Wise and I (and some other pros) weigh in on things to look for/ look out for when buying turnkey for the first time.

https://www.biggerpockets.com/forums/55/topics/675...

While you shouldn't be paying over market price for a property, Zillow is often not the greatest resource for valuations and other metrics. I would ask about comparable properties in the area, speak with an agent in the market you are considering and ask about values for props with the same square footage, bed/baths, etc. That being said - no, if a turnkey company is charging an extra $40k (even an extra $10k) I would walk away. We make our money on the spread between the purchase price+rehab costs and the market price we sell at. If a company has to inflate its sales price that much to make a profit, there's likely something up the line in their business model that isn't so efficient.
- Re: negotiation; the company should provide an appraisal, but you should also be able to get your own independent appraisal (if they have a problem with this, walk away). If the appraisal says the prop is worth less than they are asking, you should negotiate. This will be a pretty rare occurrence for a turnkey company that does consistent, solid work. There is something to be said for professionally rehabbed properties in cash flow markets, but you don't need to pay a massive premium for it.
PM companies (whether turnkey or otherwise) typically charge 8-10% of your gross rents. This fee is not usually negotiable since PM work is almost a zero-profit business (it's a ton of work).
- The other fee is for leasing: typically one month's rent on a new lease and a smaller fee for a renewed lease from an existing tenant. Ask about their average length of stay, % lease renewals, etc.
- Maintenance costs will also be your responsibility, though the PM company will take care of it for you and typically pay small expenses on your behalf, but asks for your ok on bigger items. However, maintenance costs should be incorporated into your prop analysis before you purchase and should not reduce your expected returns unless something major comes up unexpectedly.
- Fees charged to the tenant for late payments etc should usually be split 50/50 - half to the company for doing the work of chasing down payment, half to you because it's your property and you had to wait to be paid.
As James said, do your own due diligence and get independent appraisals and inspections. It also helps to understand the different ways the term 'turnkey' is used on the forums (ie not everything that's called turnkey is actually provided by a full-service operator), what the differences between a B and C class property are, etc. The post linked above outlines some things to look out for in order to weed out the fly-by-nights.
Turnkey can be a great option for folks in your position, and once you've made the decision to hire someone to take care of the day-to-day operation of the rental, investing in a market where your money goes further also makes sense. However, remember that all investment has risk. You can mitigate it with research and due diligence etc, but there will always be risk - your property may not rent right away, there could be a natural disaster, you may get unlucky with timing or tenants. Be aware that REI, like any other investment, is not a guarantee of income, but if you do your research and take the time to invest wisely, it does tend to be a more stable, reliable investment than, say the stock market.

Best of luck!

Clayton

2 Reply

Lynn Dickinson

OP

Member since 2017 · 7 posts · 3 votes

7y

Wow! These are wonderfully helpful replies! Thank you SO much, Clayton Mobley and James Wise! I very much appreciate your time and consideration. I will absolutely check out that thread you indicated, Clayton. Thanks for providing the link. That makes it easy - and in my world right now - easy is a very good thing. :-)

Onward and upward!

Take care,

Lynn

2 Reply

Kiera Underwood

Real Estate Agent · Oklahoma City, OK · Member since 2019 · 956 posts · 600 votes

7y

1. Depends on who you're working with! Call the provider and ask if the prices are negotiable or set.

2. 8-10% is what I've seen in OKC for property management that does a good job.

3. I've found a lot of turnkey providers are sucking equity. I'm not sure about scamming, but I do think there are strategies where you can avoid them making all the money.

4. I love homes that haven't been fully rehabbed, but that are still in good shape. As long as property management can handle minor repairs and you've got a warranty or enough cash reserves to cover you major repairs (which you can predict based on their age) there isn't too much to worry about.

What markets are you checking out?

1 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

7y

My answers-

1. Is the price listed on a turnkey property, "THE price?" Or do they expect to negotiate? I ask, because when I look at some of these exact properties on Zillow, they are valued at $40k-$50k less than what the turnkey provider is asking. Is that normal? Is it wise to pay that much more for a home than the area/market is estimated to be worth?

It's typically THE price. Turnkey providers don't usually negotiate their prices. For the prices, keep in mind that the turnkeys are fully rehabbed, which can put them in a dramatically different level of quality than nearby homes. Typically the nearby homes are priced assuming distressed conditions or otherwise. When you get an appraisal on the property, you can better see the true value of the property versus what you are paying (to confirm you aren't overpaying).

2. What is the usual, general, non-turnkey range of costs for a management company to manage one's distant rental properties? I know what the turnkeys are asking, I just don't know if that's in line with the norm, or if what they are asking is considered a high price. And is this fee ever negotiable?

The PM fees with turnkeys are usually totally standard with normal PM fees, if not lower. When they work with so many properties, they can often lower their fees as compared to companies who are managing more one-off properties. Remember, once you buy a turnkey, it's like owning any other rental property so there's no real different fees than would be with any other property.

3. I've been reading articles and listening to podcasts, and there seem to be mixed feelings about turnkeys - including some people who feel they have been "scammed" or "ripped off" by a turnkey provider. How does that happen and how can I avoid it happening to me?

The answer is easy- due diligence. There's very little about a property that you can't verify. I'd say one of the biggest mistakes people have made with turnkeys is assuming that everything they are told is true and that they don't need to put any effort in. People have closed on properties that barely even existed. Even just a property inspection would've confirmed that status. As people say on here, 'trust, but verify'. Verify everything you're told through property inspections, potentially visiting the property, etc.

4. Given my situation described above, does it sound like turnkey investing is a good RE starter strategy for me? (I can't really spend a lot of time/energy fixing up a place, and can't afford to buy locally - but I need to start generating some residual income and soon. My husband is not going to get well, and his care is starting to get expensive.)

I've always been an advocate of turnkeys for new investors. Here's why-

https://www.biggerpockets.com/blog/turnkeys-for-ne...

Hope those help!

1 Reply

Lynn Dickinson

OP

Member since 2017 · 7 posts · 3 votes

7y

Originally posted by @Kiera Underwood:

1. Depends on who you're working with! Call the provider and ask if the prices are negotiable or set.

2. 8-10% is what I've seen in OKC for property management that does a good job.

3. I've found a lot of turnkey providers are sucking equity. I'm not sure about scamming, but I do think there are strategies where you can avoid them making all the money.

4. I love homes that haven't been fully rehabbed, but that are still in good shape. As long as property management can handle minor repairs and you've got a warranty or enough cash reserves to cover you major repairs (which you can predict based on their age) there isn't too much to worry about.

What markets are you checking out?

Thanks for your response, Kiera.

So far I've looked at Syracuse, Memphis and Kansas City. Still looking and wide open to recommendations.

Please tell me more about your response #3. What kinds of strategies are you referring to? Thanks!

Take care,

Lynn

0 Reply

Lynn Dickinson

OP

Member since 2017 · 7 posts · 3 votes

7y

Originally posted by @Ali Boone: