What are the pro's for purchasing Turn-key rental properties?
Real Estate Agent · Baltimore, MD · Member since 2020 · 18 posts · 8 votes
What are the pro's for purchasing Turn-key rental properties?
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y@Nicholas Pedrick we like properties that require either very light rehab or none at all. We are not interested in doing much more than cleaning, paint, fixtures, landscaping and flooring. We avoid anything that requires permits. There is several advantages:
1. Speed to rent. We can have tenants placed before closing, so we are collecting rent before our first payment is due.
2. Remove the time and budget risk of a full rehab. When you open walls you can find problems, waiting for subs or inspection issues... you name it, things can go wrong.
3. Very little time invested. We are full time W2 and don't have time to manage construction projects.
4. No risk, time or cost associated with refinance. We put financing in place when we acquire and leave it long term. Paying multiple closing costs has an expense.
5. Tax advantages, because property goes into service faster, so you can start claiming depreciation, rather than waiting until it is rent ready.
No doubt if you rehab, you can gain more equity. That is true of anything, the more you do yourself, the more money you save. It is your choice what is your best use of time and expertise.
I would call it easier in some ways, but harder because it requires more capital. For someone with more capital than time, it is the easier path. For someone with little capital, it is not easier.
62 Replies
- 6yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
Originally posted by @Johnny Lau:
I bought 4 last year sight unseen, it's easy with the right amount of due diligence. 2 are doing well (set it and forget it), 2 are doing so-so because of unexpected expensive repairs needed such a a large tree falling onto one and another needing foundation repairs of all things, one needing sewer main repair. Each repair being around 4k on a 115k and 130k house. Really disappointed on those ones because it's a turn key! But, oh well, they all should do ok in the long run.
Johnny, no matter how well a property is rehabbed, there can still be problems. that can come up. Most turn key companies don't scope the sewer line as a matter of routine. That is something you can always have done separately during you inspection. The foundation issue should have been called out in the routine inspection.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes6y
Originally posted by @Matt M.:
What I said may not work for others, because I can do the work myself. But... buying the properties that I buy, even if I hired all the work out, I’d still be in a much better position than buying turnkey. Full rehabs aren’t for everyone. I just can’t fathom buying a property that basically has zero equity from the get go.
Totally understandable, and that's certainly the biggest downfall of turnkeys. But it can still be the safer option for some, or the more desirable option. In the equation you mention, the biggest problem I've seen is with the buying of the properties. So many newbies don't know how to buy the right property, that it wouldn't matter how good or cheap the contractor was... it's going to hose them. Happens all the time. But don't get me wrong, like I said, I'll be the first person to tell someone not to buy a turnkey if I think they have the ability to avoid it. Just not everyone does, so it is a way for those other people to get into REI and into REI in a safer way.
- 6yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by @Nicholas Pedrick:
I'm looking to start investing in properties this year. I find myself leaning towards properties that I can rehab on some level to ultimately gain more equity overall. However, I see a lot of experienced investors building their strategy around turn-key rental properties.
1.) Why is the strategy so popular?
2.) What are the benefits of purchasing Turn-key rentals vs. Properties that need a little bit more help?
Any advice and insight from experienced pros would be very helpful in helping me figure out my next step with investing
Thanks for all your help!
Nicholas, You need three things to invest in real estate on an active level successfully and without luck. You need money, time and knowledge. Thats a pretty dumbed down list, but hear me out.
Without one of those readily available, you have to start exploring the best way for you to invest and what you give up in order to get started. Money is almost always going to be a must. There may be strategies where you can invest without having any money and I'm sure plenty on the site will throw out how, but there is always a trade off. Without money, you take on risk. Massive risk! So you can invest without money, but not without taking on that risk.
Time is necessary to run your operations. That can include interviewing, hiring, holding accountable, reviewing and all of the decision making that goes into your processes. Without being able to allocate the time, you will find it impossible to invest actively.
Knowledge is a real kicker. Many don't have the necessary knowledge to invest in real estate actively. Of course, it takes time and experience to gain the knowledge, so if you are short on time or capital necessary to gain the experience, you are not gaining the knowledge either.
This is why so many investors choose to go a passive route. Take the word Turnkey out of it. It doesn't mean anything and too many of the comments on here treat the word like it has an actual definition. Too many people use it to describe what they do and too many do different things. Just stick with the word passive.
The pros for purchasing a passive investment, not a REIT or some indexed fund bs like some will suggest, but the pros for actually owning a physical property yourself and doing it passively, is the fact that you can get started building a portfolio without having the three prerequisites listed above. And do it successfully! Often times, the part that is almost never acknowledged by the "never turnkey" crowd is that with scale, prices come down. Can you buy the same properties and do the exact same work for the exact same price as an experienced and volume company? Maybe. Maybe not. If an investor can figure out how to negotiate the same volume pricing without the value then the answer would be yes. Maybe the company selling the property is actually just using the word turnkey to describe their model when in reality they are just buying junk properties, putting lipstick on them and marking them up, then I would say you can definitely do the same work for the same price. But I am guessing you're not talking about the junk sellers.
Investors have been investing this way longer than the oldest poster on BiggerPockets. Long before this site was dreamed up. They have leveraged their money (you can't do that with a REIT) to acquire assets with a higher value than the dollar amount they are putting in. Investors have leveraged others' time and knowledge to build portfolios for decades and decades. The only thing that has changed is the advent of the internet making it more widely available and the marketing word Turnkey got introduced.
There is nothing else that makes the transaction special. You can lose money and make money buying a passive investment. If you define a turnkey experience as buying a property that has been completely renovated and has a resident in the property producing a stream of revenue, then you can find it. It may be a good deal or it may be a bad deal. You have to know how to analyze and determine if it meets your needs and desires. Investors have to recognize that the word Turnkey is a marketing term. It markets to an investors expectations. Everything else is the same as any other real estate transaction.
For me personally, I buy properties at full marks value all the time. I have renovated long-term buy & holds above to above current market value because I believe over time the rest of the market will come up to me and beyond. I'm just the first in with the nicest property and achieving rents well above market value. By the definitions and advice that many investors give here on BP, they would never invest like me. And you know what, that is ok. I'm good with that. Every investor has to know exactly what they are comfortable with and how to analyze a deal to see if it meets their needs.
So, back to the original question. The pros are that it allows investors who do not have the time or the knowledge (and therefore lack the experience) to invest in real estate. From there, the rules are the same regardless of what you're buying or why. Know how to determine if it is going to meet your needs. Best to you!
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes6y
@Brian W. from my contacts who sell turnkeys they are seeing a lot of demand coming out of the April Covid19 scare. People want hard assets that cashflow.
Answering the general question above - As a TK buyer you are not doing much work and therefore your % roi is not going to be too high that said its going to be way better than mutual funds or stocks. For a lot of us professionals our highest and best use or hourly rate for that matter is going to our day jobs and doing what we spent all these years going to school to do than messing around building relationships and trying to run remote rentals (especially those in Seattle, California, Hawaii).
I started with turnkey rentals to get my first 11 rentals and I would do it the same way... well I would only get about 3-5 of them or at least till my net worth got to a certain point.
- Investor · Blacksburg, VA · Member since 2020 · 65 posts · 33 votes6y
@Ingrid Mignott what company do you use? Sounds like you've had success! I'm looking into the turnkey market myself, for the exact same reasons you mentioned.
- Investor · Blacksburg, VA · Member since 2020 · 65 posts · 33 votes6y
@Lane Kawaoka who do you recommend for TK? Sounds like you also have a TK success story! I'm military and my wife is full time, so TK is very attractive for us! We are looking for our first property, with the hopes of purchasing 5-10 over the next 10 years.
- Investor · Miami, FL · Member since 2017 · 8 posts · 4 votes6y
Originally posted by @Adam Cade:
@Ingrid Mignott what company do you use? Sounds like you've had success! I'm looking into the turnkey market myself, for the exact same reasons you mentioned.
@Adam Code I used CR of Maryland
- Investor · Miami, FL · Member since 2017 · 8 posts · 4 votes6y
Originally posted by @Adam Cade:
@Ingrid Mignott what company do you use? Sounds like you've had success! I'm looking into the turnkey market myself, for the exact same reasons you mentioned.
@Adam Cade I used CR of Maryland
- Real Estate Investor · Kansas City, MO · Member since 2012 · 397 posts · 187 votes6y
@Chris Wilkening - thanks for the tag, sir! Humbled to work with incredible clients like you. Our team is obsessed with working to make this process as simple as possible for anyone wanting to invest in real estate, and we love stories of when we get it right! Looking forward to many more together!
- Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes6y
@Nicholas Pedrick - there are pros and cons to every real estate investment in every asset class. No investment is all upside and no downside.... even outside of real estate. It's all about mitigating your risk, your growth strategies, your financial situation, your available time, your goals etc. Turn keys, if you get them from the right sellers, save you time, stress and potentially money. As humans, we tend to make comparisons and look back with 20/20 hindsight thinking the path not chosen would've been better. The saying "the grass is always greener..." exists for a reason. The alternative to turn key is not some ideal, guaranteed slam dunk goldmine. Buying dilapidated houses with cash or hard money, rehabbing them, finding tenants, refinancing them...is certainly not easy or quick. Without experience you could very easily (when you add everything up) come in around the same price you would've paid as a turn key. Between the fees and points on the hard money, the holding costs, the rehab costs, being off on your budget, having to fire contractors and finding new ones, or contractors just not showing up, the cost of finding tenants, fees and points to refi...it adds up quickly. And, depending on your situation and how many rentals you want to own, do you want to spend 6-9 months to turn a run down property into a rental or be able to buy 2 turn keys in that amount of time?
- Rental Property Investor · New York City, NY · Member since 2020 · 3 posts · 1 vote5y
@Nicholas Pedrick thanks for initiating this conversation that has brought a lot of valuable insights on turnkey investing. I am a rookie in REI contemplating investing in turnkey as I am very busy with my W2 job. Did you end up investing in turnkey and if that is the case what was your experience like?
@Ingrid Mignott how was your experience with CR of Maryland ?
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