Are Turn Key properties worth a shot?

Question

I see several turn key properties in the listings.  Has there been success with these types of buys?  Using the analysis tools many seem to work based in the numbers even using a small buffer for inputs. Just looking to see if there has been any success with them or is this a suckers play......

Theresa Harris · Answer

There is nothing wrong with buying properties that require no work.  I've done that a couple of times.  As long as the numbers make sense.

Joseph Schweizer · Answer

Hi @Eric Swain!

It all comes down to due diligence. You need to research the property, neighborhood, market, etc.. Also, if it is being sold by a turnkey provider and you plan to use a PM, you need to do your research on the provider and the PM as well. I made my first investment in October 2020 and it was turnkey (See post below). It is going well so far.

https://www.biggerpockets.com/forums/850/topics/895660-my-first-investment-property-an-out-of-state-deal

Best Wishes!

Eric Ashby · Answer

I bought a few turnkey properties 2017-2019 (a little over 10).  I always thought of it as a safe way to deploy leverage capital which gives benefits over and above the REIT.  I live in a market where real estate does not make sense as an investment so the ability to grow as quickly as I wanted with a “pre-assembled” team allowed me to purchase many more than if I had to deal with rehab etc.  You can say that the TC company has taken all of the profit but that is very short-term thinking.  Over time the profit will come from owning solid cash flowing properties with leverage in growing markets and for me, especially with consideration of this unexpected appreciation of late, I have made substantially more utilizing turnkey than I otherwise would have.

Johnny D. · Answer

Great question.  If you are just starting out and still have a full time job, turnkeys are often the best option.  You won't make as much money long-term with turnkey properties than properties with high forced appreciation potential, but they tend to be more passive (nothing in real estate is truly passive) and can help you learn the ins and outs of real estate while you gain more skills and knowledge.  As mentioned by others, one of the most important things with turnkeys, as well as anything in real estate, is whether the numbers work.  Ideally, this would involve a high cash on cash return while also being in a safe neighborhood.  Just keep in mind, it is much harder to find good deals with turnkey properties, particularly in a seller's market.

On your question with whether there has been any success with turnkeys, they absolutely have been.  Plenty of people buy nothing but turnkeys and live very comfortable lifestyles.  They are great when properties are appreciating, but keep in mind they don't provide much cushion when properties depreciate.  Also, it takes a very long time to acquire them as you have to constantly keep saving up for the next down payment.  For example, the most recent turnkey that I have held for at least a year earned 20% cash on cash return for the last 12 months, 6% in principal paydown, and 37% in appreciation (it would normally be much less than this, but last year was obviously a crazy year).

Even though those numbers look great compared to an 8-10% profit in the stock market,  If you are able to BRRRR a property to where you get most or all of your invested cash back out, the profit is infinitely higher.  Here is the difference why BRRRR is much better than turnkeys - if I don't refinance or sell the turnkey property I mentioned, it would take me five years to buy another property if that was my only savings.  With a BRRRR property, I am able to buy another property in months instead years, and thus, maximizing the profits on multiple properties much more efficiently.

Evan Polaski · Answer

@Eric Swain, I can relate with the natural inclination of being skeptical.  As Theresa and Joe mention, if the numbers truly are correct and meet your investment criteria, they can be fine.  But like all real estate, and any investment, it comes down to understanding the numbers and confirming if they are realistic.  I have been sent a fair number of turnkey properties, and never bought them because the assumptions were way off.  And when I ran the numbers based on my decade of owning rentals, there were much better options available for my capital.

Eric Swain · Answer

As a newbie to get in I am a skeptic and wanted to make sure I’m not drawn in with simplicity - hence suckers play. Thank you for the feedback!

Joe Villeneuve · Answer

Hey, the only stupid question is the one you don't ask.  That, and the answer to every question you don't ask is the same,..."NO".  So you might just as well ask the question.  The answer could have been ..."yes".

Joe Villeneuve · Answer

I'm not sure how to comment here, without offending you (in this format), so I won't...other than to say it's easier to assume the worst.

When I was a hitting coach, I used to tell my players to go up to the plate assuming every pitch was a strike, and take if it's a ball rather than assuming every pitch was a ball, and swing if it's a strike.

Joe Villeneuve · Answer

I have to agree with @Theresa Harris here.  I have sold and bought them.  The analysis is exactly the same.

Why would you think it would be a sucker's play?

Gregg Cohen · Answer

Great topic!  As with any industry, there are great companies and no-so-great companies that operate in the "turnkey" space.  When we started our company in 2006, nobody used the term "turnkey" to describe selling a property that cash flows from day 1 of ownership with in-house property management for passive income to an investor.  We had to educate the marketplace.

Now, there are too many "turnkey" companies to count and the definition of "turnkey" is thrown around loosely.  Everyone uses it and it has become watered down.  It's really difficult for the investor to understand the key differences because most companies do a great job of minimizing the issues they aren't particularly good at solving.

If you want to invest in a market that can benefit from all 5 profit centers (not just cash flow) and you see a value in leveraging someone else's experience, systems and time to create a better experience, then you really want to find a "vertically-integrated company," not just a "turnkey" company.

If you already live in the right real estate market and you want to be an active investor, then a vertically-integrated company (or a turnkey company) probably isn't for you.

Here's some of the article I wrote on this topic:

WHY A 'VERTICALLY-INTEGRATED COMPANY BEATS A 'TURNKEY COMPANY' OVER A FULL REAL ESTATE CYCLE

There are big differences between doing business with a “turnkey property provider” and a “vertically-integrated investment company,” yet most investors think they are one in the same. If you are investing for a full market cycle, you’ll want to pay special attention as these differences will likely result in significant risk mitigation and hundreds of thousands of dollars in additional returns on investment from rent and home price growth for your rental property portfolio.

Let’s first define what “turnkey” has come to mean to today’s rental property investors. A turnkey company sells you a rental property. Some turnkey companies own the assets they sell you while many just act as a broker, connecting the buyer and the seller. Some may also do the property management in-house, but most outsource it. Turnkey companies typically operate in multiple real estate markets because they are in search of inventory. They operate with the idea of going a mile wide, rather than going a mile deep, in one market.

A "vertically-integrated" investment company is a much higher threshold.  A vertically-integrated company buys the property, builds or renovates it in-house, and does the property management in-house.  But that is where the similarities stop.

A vertically-integrated company is committed to one real estate market. They are major players in the social, political, and economic policies and initiatives in their market. They invest their own money to develop land, buy downtown buildings, and serve on local boards so they can be in the “know.” Their efforts help create a runway for future investment opportunities for their clients and attract jobs and talent to the area to raise median incomes. This allows rents and home prices to continue to rise, which will increase returns on investment over a full market cycle.

WANT TO KNOW WHICH NEIGHBORHOODS ARE POSITIIONED FOR RENT GROWTH AND HOME PRICE GROWTH OVER THE NEXT MARKET CYCLE?

Find out where a “vertically-integrated” company is buying and selling. The odds are that you want your money to be where they are. One of Jacksonville’s recent initiatives that has already had a major impact on downtown is the approval of The Downtown Preservation and Revitalization Program. This new program was created by the Downtown Investment Authority (DIA) and approved by Jacksonville’s City Council in October 2020 and our company, along with a group of other Jacksonville developers and downtown stakeholders, were a part of the process.

It allows for more incentive dollars to be allocated to developers to revitalize historic downtown buildings, which in turn leads to more residents and more amenities coming to downtown Jacksonville. Ultimately more residents and more amenities leads to higher rents for properties downtown. This is important because we need higher rents to support downtown revitalization without the need for incentive packages like this in the future.  Without larger incentive packages, it just didn’t make financial sense for a developer to risk millions of dollars renovating downtown buildings and that’s why many have sat vacant for decades.

HERE'S WHAT A PROGRAM LIKE THIS MEANS IN REAL DOLLARS:

There were roughly $530 million worth of projects completed in downtown Jacksonville in 2019 before this project was approved.  It has only been 3 months since the first project was approved with the new DPRP incentives and downtown Jacksonville has already seen 4 projects approved under the new program, totaling over $100 million in development.  That’s almost 20% of the total development we saw in 2019 and it typically takes years for the full impact of projects like this make it to approval.

That’s real growth that will lead to more residents, better jobs, and higher rents and home prices in all Jacksonville rental property neighborhoods in which our clients invest over the next 20+ years.

Are Turn Key properties worth a shot?

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