Turnkey in a rising rate environment...who gets screwed?

Question

Hi all

I am interested in TK as a way to invest in a 'hands-off' manner. I have done lots of research and it still just doesn't quite sit well with me.

One issue I have: the companies price the properties based on expected rent and therefore your return. They then buy the properties wholesale or super cheap and rehab them. The difference between these two figures is their profit. As property prices have increased and as rates increase, however, they will still need to show investors similar PF returns to make them attractive. How does this occur / who is eating this cost?

- are they taking less of a margin (unlikely)?

- are they just buying in cheaper / worse areas (likely given most investors wouldn't really know the difference)?

- are they spending less on the rehab?

Who suffers when rates rise?

James Wise · Answer

These are all great points. That is why buying from a turnkey company who has already owned & renovated the asset may not always be the best choice for every investor.

Sam Mason · Answer

I am certainly not expecting risk free. But the inherent illiquidity and leverage in real estate should afford higher returns than most asset classes.

Vivek Khoche · Answer

@Sam Mason - In the investment world their is nothing like passive and risk free. I hear people saying that they don't have time but in the end they end up spending all their time once they crash land. Ask the OP of the post about her life in last few years.

https://www.biggerpockets.com/forums/311/topics/22...

Good Luck Investing

Vivek

Sam Mason · Answer

@larry fried

Sounds interesting. How levered are the underlying properties? Can you depreciate the property and write off interest expense for favourable tax treatment?

Larry Fried · Answer

@Sam Mason It sounds like you might be looking for a passive investment where your interests are more aligned with the seller/provider.  As a previous TK investor myself, who has seen prices rise and good TK opportunities diminish, for my own buy and hold investments of late I have turned to a investment strategy that allows me to invest in property - usually syndicated portfolios of 10 SFR, but also now apt buildings - that remain co-owned by the seller/managers.  I have written extensively about my investments in a series of blog articles starting with

Have I Found the Holy Grail of Passive Real Estate Investing?

You might find it an interesting read.

Bill Gulley · Answer

You got it, The last guy holding the bag! :)