Turnkey Property Providers seem too good to be true?

Question

I've done a lot of research related to turnkey properties. I've found several solutions (e.g. Norada real estate). I recently did a demo with them, but it all seems too good to be true. What am I missing? Can I actually trust their numbers? What kind of due diligence should I do?

Jay Hinrichs · Answer

don't over think this.

you have a few things working here.

Turnkey providers are no different than any other fix and flip company .. only difference is they work in areas that are renter dominated by and large so the exit is to landlords not homeowners..  But the same concepts apply they buy a home that is beat up.. they rehab it .. and they sell it to an investor.

You have the marketing companies that generally own nothing and are just brokers that work multiple states and their business model is to align with fix and flippers in these rental areas and act as their brokers..

then you have other companies that take it to the next level and own the PM in house and they own and rehab the properties.

These business's exist because generally speaking there is not enough organic demand for the rentals in the market IE they need to go out of state to create demand.. this serves a few purposes for the investor.. it keeps values up.. demand creates value.  If there were no out of state investors buying in these markets and it was all organic locals the values of the homes would be far less than they are today  SIMPLE supply demand economics.

So don't over think it .. you can get on MLS feeds and see what stuff is listed for on MLS.. sometimes a nicely maintained owner occ home bought through a traditional broker is just fine.. you then hirer a Pm to manage it.

Or if you prefer someone to hold your hand through the entire process you can hirer one of the rental real estate national resale brokers.. or go direct to a company in a market that specializes in selling rehabbed rentals to investors .. they may do some rehab to sell to homeowners but their main business is selling to out of state investors..

Taylor L. · Answer

I interviewed a friend of mine on my show, Phoenix O'Rourke, who started exclusively as a turnkey investor. He talked about some of the problems he's had, and mostly they come down to managing the manager. Nothing terrible so far, but he's been sure to review their renovation plans and pare back as needed, because they were excessively rehabbing the properties between renters.

I would at least hire someone to tour the property, if not fly there myself and check it out. If you're just getting started it's well worth investing time and money making sure you understand the process and you're comfortable with it.

I would also pull all my own rent comps and look at potential exit strategies. What if I want out in a year? What can I get for the property? If I'm buying way over market, I'll probably be at a huge loss.

What is my breakeven occupancy? How solid is the market in general, and the submarket in particular?

Norada is a reputable company, but I always double check others' work when it's my money on the line.

Marco Santarelli · Answer

Hi @Charlie Helo — Welcome to BiggerPockets. :)

That’s a very good question and glad you asked.

All numbers can be verified —and should be.  If the numbers are projected (pro-forma) then you’ll want to reference then again other sources, for example property managers and online rent rate tools for market rents.

Another thing you must do is make sure the numbers you’re being given include “soft” expenses such as vacancy allowance and maintenance & repairs. You must budget for these. Some sellers, real estate agents, and providers don’t give you those.

That’s all part of your due-diligence, which we’ll help you through, as well as a complete home inspection, which we insist you do!

If you’re living or focused on a very expensive market (like CA or NY) then some  deals may seem “too good to be true”, but always keep the context of the property’s local market in mind.

Please post any other questions you may have (and/or contact the Investment Counselor you spoke with).

Continued success!

Lane Kawaoka · Answer

I started with turnkey and despite with what most people say its not good value... I was too busy at my engineering job and lived on the west coast so it was my best option.

Time = money

Tom Ott · Answer

Turnkey Investments can be a great way to invest OOS or keep your investment passive. Just make sure you work with a TRUE provider. Ideally, they should OWN the property first (not just list it on the MLS) renovate it in-house, and then sell it to you OCCUPIED. Never close on a vacant property or else it is not Turnkey.

Finally, they should also provide the property management in-house, and not use a third party. If they just push you off on some other company after the sale, are they really anything more than an agent?

Try looking at:Assessing the Risk of a Turnkey Real Estate Company5 Keys to Turnkey Real Estate Investing

Marco Santarelli · Answer

Thanks for adding some clarification @Dustin P.  :)

Continued success!

Dustin P. · Answer

@Charlie Helo I just wanted to clarify, I know nothing of Norada Real Estate Investments, so they may be a great turn-key provider. I was speaking more in general terms of looking at the trade off of finding properties yourself vs. going through a turn-key operator for rentals (Or going through a wholesaler for fix/flip properties would be a similar scenario).

Marco Santarelli · Answer

@Charlie Helo — What @Dustin P. Is likely referring to are distressed situation properties that can be purchased at a discount, fixed up, and assuming you didn’t have any major issues end up with a lower cost-basis (i.e. more equity) to give you a higher return (cap rate or cash-on-cash).

They both work but are different strategies. Your level of knowledge, resources, contacts, and available time will all play in to the strategy that’s best for you.

Continued success!

Charlie Helo · Answer

@Marco Santarelli Thanks Marco, also big thank you for the podcast. I’ve listened to almost every one. Hope to be a guest some day (once I’ve built a massive portfolio).

Per what @Dustin P. was saying: how much do returns differ for turnkey/what kind of return should I look for from 250k?

Also thanks @Taylor L. what is your show, I’d love to give it a listen to. I plan to visit the first few properties (a good excuse for a vacation!)

Andrew Hogan · Answer

Just remember to factor in turn around / vacancy costs... that can be a real bummer if you weren't expecting that upfront

Turnkey Property Providers seem too good to be true?

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