What's wrong with turnkey?

Question

Hello, I'm very new to BP but have been doing a lot of reading of previous posts, particularly about turnkey properties.

I live overseas, and am considering investing in a US property. From what I can tell, turnkey seem like a decent way to go for someone like me provided that I do some due diligence on the house/area, have an inspection done and appoint a good manager. But I'm wondering about some of the downsides that other posters have mentioned...

A few people have said that buying turnkey usually means buying at market value. I'm trying to figure out why this would be a bad thing. If I invested in shares instead of property, I'd be buying at market value, so why would this be different. Have I missed something?

The other point that has been made a few times is that turnkey usually doesn't offer much in the way of capital appreciation. Is that so bad if the annual yield is good? If I hold a property for 5 years with no capital appreciation but it's been cash flow positive for that time, isn't that OK?

Thanks!

Abdul Azeez · Answer

And why would buying a property at market value not be a good investment? When you buy a stock you buy at market value and look at annual returns inclusive of dividends and long term appreciation. For turn key real estate, the different components of return - cash flow, tax benefit, debt paydown and long term appreciation still hold true. The going in with equity part does not apply because someone has done the hard work in getting it to a shape where you can buy. I do not see this necessarily as a bad thing.

Jeff B. · Answer

I confirm all the above too. The sole 'negative' might be the lower returns due to the necessity of the Property Manager, which is required for you only because you are not local to takeover yourself. This is similar to someone living in Nevada buying out of state - - just not practical is it.Like your comment on appreciation vs cash flow. You'll see plenty of comments of buying only for appreciation but to me that's nonsense - - I've loved the 19yrs of monthly deposits to my account :-)

Tom Ott · Answer

Hi Lisa,Turnkey is a very different type of investment and is sometimes not for everyone. If it does not fit their investment strategy, they might tell you it is not a good thing. For others, they will praise their investments in turnkeys.Investing in turnkeys allows you the ability to invest in markets you would not normally be able to get into. It can be very difficult to renovate, or let alone, manage a property while living far away from it and having little contacts in your new market. A TRUE turnkey provider will have done all the work for you by renovating the home and they will stay on as a manager of the investment.Turnkey investments are great for someone investing outside of the country where it can be difficult to do many of these things on your own. I know many who live outside the United States and say they would not have gone any other way than turnkey.Feel free to send me a message if you have any other questions, I'd be happy to help!

Jay Hinrichs · Answer

when you see those post about no equity at purchase this is because many who make this type of post have only known real estate investing post 08 GFC ... were buying home with equity was common and the norm.MEMO to folks the market int eh US has recovered in many to most markets.. NOT ALL but many.. so there is no reason to sell properties below market value like was done 5 to 8 years ago.the only way to get instant equity these days is to be a value add or distressed property buyer who spends thousands and its their job.. pretty tough to do remotely.. its a completely different model.so whatever you pay for a property that is market value.. you do want to run comps though some out fits that targeted Australians will defiantly sell for ABOVE market value.. so its important to get true comps on the properties before pulling the trigger

Jay Hinrichs · Answer

Aussies not gullible \many just did not know what they did not know.. when I used to post on the property investing website based in AU it was apparant to me that you don't have the same tools ( online tools like zillow ) that we have in the US.. so you did not know that you could do a lot of work on your own.so Spruiekers would hit you with properties that they would present as secret inventory .. and you need to pay 5k to join the network etc etc.

Lisa P. · Answer

Many thanks to you all for your replies. I think they confirm what I thought - market value (but not above) is ok if other factors like tax, yield, etc work for me, and capital appreciation isn't the be all and end all. Much as I'd like to get rich quick, I realise it's improbable.@Jay Hinrichs thanks especially for the note about being wary of places pitching to Australians (are we more gullible I wonder?). I've definitely come across a few - some look too good to be true (or just scams), and one of my next tasks is to figure out how to work out which are legitimate!

Rosston Smith · Answer

With turnkey, you're buying properties at their ARV. So you won't be purchasing the building with much equity in it at all.As long as the numbers work and it cash flows that's fine. You're just paying premium for a property with no equity and its priced right at what its worth, or more.