Turnkey Property question

[Will Gebbie]

I constantly hear ads for memphisinvestmentproperties.net on the biggerpockets podcast. Has anyone bought any properties through them? How has your experience been?

[Chris Clothier]

Originally posted by @Troy Sheets:

My impression of turnkey is that if you live far away and can't invest locally, it's a potential avenue to get started, but if you can do the work yourself such as finding a deal and managing a rehab, you'll be light years ahead. Most of the turnkey markets seem to cash flow but don't appreciate much at all. I'd rather have a little cash flow with a shot at massive appreciation in the mid-term. There are areas in my market where a $220k SFH today will be worth $350k in 3-5 years, even if we have a correction it might take 10 years or so, but it beats the midwest in appreciation hands down.

Hey Troy, good post.  I think when you write that you’ll be light years ahead by doing the work yourself, you mean that from a financial standpoint and not necessarily a knowledge standpoint.  Is that right?  I would say those are reversed.  You will understand, hopefully, more about real estate and the inner workings of deals and some of the minutia, but not necessarily ahead financially.  In your post, there are a lot of assumptions that I think are a bit off and I’ll simply give a few of my thoughts for conversation. 

Turnkey is just a marketing word.  It has a different meaning to just about everyone using it and different meanings for just about everyone reading it.  That is unfortunate, but it is the environment we have to deal with, especially here on BP.  So, when we read about Turnkey posts here on BP there are usually really broad assumptions that are not accurate.  For example, you can buy an investment property where a local professional or company has purchased the property, renovated the property and has the property under management in just about any market.  There are no “turnkey” markets out there today. There are certainly markets that get a lot of attention and ads and discussion here on BP, but there are many more markets out there where turnkey companies operate and passive investors can achieve their expectations.

To assume that you can be ahead financially by doing things yourself rather than with a Turnkey company would also be an off assumption.  There are companies out there that use the word Turnkey to market themselves and they are small, single-person operations with big marketing.  You can beat those companies all day long.  There are brand new companies that started marketing themselves within the last few years and again, they’ve operated in the greatest real estate boom and their marketing is ahead of what they can actually produce as far as results are concerned and again, you should be able to beat their results on your own.  But, there are a number of well established companies that have been in the niche industry of providing passive investments and using the word Turnkey to describe their companies for a long time.  The relationships they have and the volume they produce is going to be impossible for an individual to match or even come close to beating.  From negotiating material and labor costs, to borrowing costs and time frames for completion, there is simply no way to compete against those efficiencies and use of market force.

Lastly, the appreciation angle.  I’m not sure about every market, but I can tell you that too often we use market appreciation data and then make too much out of it.  That is for both good and bad.  For example, four particular markets that run the gamut from “old turnkey markets” to “new turnkey markets” are Memphis, Dallas, Houston and Oklahoma City.  Memphis and Oklahoma City are often described as low cost markets and you can read a lot of posts on BP about how there are no deals left in Memphis or it is an old, picked over market with no deals or appreciation.  Dallas and Houston are described as high taxes, bad soil and poor investments.  The reality is that just about every premier, secondary and tertiary market has pockets and neighborhoods where you can find appreciation.  Either forced or natural.  The fact is that most cities continue to have higher demand than product availability.  Memphis is projected to end the year at 6.8% appreciation, Oklahoma City at 5.5%, Dallas at a little over 9% and Houston is on a three year run of a total of 10.3% appreciation.  Does that data really mean anything? In my opinion, no, since you can find all kinds of different and competing data points on every city and it often changes within the city.

As an investor, I think you should focus on your expectations.  If you want appreciation, you need to purchase properties near/at or above median price for any market.  You can find properties that will appreciate in any market, you just have to  buy in the right price points.  Same thing with cash flow.  It is a mathematical equation so it can be adjusted in any market and with different inputs.  As for the $250k houses being worth $350k in 3-5 years, I can certainly see that being the case.  The same can be said right now for suburbs in each of the cities I mentioned above even though they are all considered “cash flow” markets and not appreciation markets.  In my opinion, the higher price points in just about any city give investors the most flexibility to see appreciation that is actionable (meaning you could actually sell the house) and cash flow.

Sorry for the long response, but I am always fascinated how we as investors can fall into traps of broadly labeling markets or ideas.  Love to hear what moves you actually make and if you move forward locally or go outside your market.  Best to you -