who makes more $ investor or Turnkey provider / Property manager

[John M.]

see a case study what happens and who makes money when you buy a investment property from turnkey provider.

Say investor bought a property of $100 k from turn key provider. Typical profit for turnkey provider 100K property is at least 20 - 30k  minimum. Generally wholesale property cost  40-50 K , 20-25K rehab. 

Now investor pay 100K -110K for this product and appraisal is most likely less or same as purchase price. So no equity from day 1.

see what else:

$3500- $4000 closing cost (typical)

$1000 first month rent for finding tenant 

10% PM fee

15% surcharge on any maintenance fee

Let's say property has $200 cash flow..you will pocket $2400 at the end of year.  I am not considering tax benefit and equity for simplicity. Similarly I am not considering vacancy and maintenance to keep it simple.

It will take more than 2 years just to recoup closing cost and tenant finding fee. Within year or max 2 years...u will have turnover ...again u will pay 1 month rent - $1000 and $2500-$3000 most conservative estimate to make house ready for rent.  This cycle goes on. 

Now see property management company cash flow:

$1000 - tenant finding fee + $1200 (10% monthly fee) + $400 (resign fee) or $1000 - tenant finding fee.

When PM company is charging 10% every month ..can someone explain why there is 15% surcharge on maintenance invoice amount.

[Clayton Mobley]

@John M. I received your colleague request (thanks!) and I will definitely be responding with some info after this post. Whenever I get a new inbox message, I always check out the profile/recent posts to make sure I know what the person is looking for, where they are in the whole REI journey, and whether what we offer is going to be a good fit. Luckily, I stumbled onto this thread! I think you've already received some great feedback from the likes of @James Wise and @Dorothy Butala, so I will try to keep my post short (not generally my strong suit).

As has been pointed out, a couple of the assumptions in the original post may or may not be correct, depending on the turnkey provider you use. For one, what is this surcharge on maintenance costs? My company doesn't charge anything extra for maintenance, and I generally think that any company that has little extra fees like that either isn't working hard enough on their core offering to pay the bills, or is trying to get one by on investors. We charge a 9% PM fee (a little below average for the industry), and a one-month leasing fee (new tenants), that's it. Maintenance charges are passed on at value. Any late payment fees (if a tenant pays rent late and we have to chase it down) are split 50/50 with the investor - you get 50% because it's your property, we get 50% because we do the work of making sure you get paid.

All that being said, of course we make money! We don't nickel and dime our investors, and we're very upfront about our fees, but a business is a business. No one would start a business to lose money, and we wouldn't be able to stay in business, pay our employees fair wages, and provide the quality services we provide, if we didn't turn a profit. Any turnkey company (or really any company) that tries to sell you on the idea that they're doing you a favor, losing money, by 'letting you' get such a great deal, is lying - that's a used car salesman tactic and huge red flag. No business could stay afloat without income, so the idea that some magical turnkey company exists that passes on every penny of profit to investors is a fallacy.

I think the point of your post was about the margin made by the company between the purchase and sales price - and you're right, we don't sell our properties at cost, and that's where we make most of our profit. However, the assumption that any turnkey company will sell you a property $10-20k above appraisal, resulting in negative equity, is also incorrect. You shouldn't be working with someone that charges that premium. Why? Because the way a good turnkey company makes money isn't by tacking on a premium, it's by capitalizing on economies of scale in the rehab process, having the networks to get distressed properties at great prices, and having their own wholesaling operations that scour the market for those opportunities to cut down on commission costs. A company that has to tack on a $10-20k markup just to turn a profit is not doing those other things very well, which is another red flag.

Think of the difference between an individual finding, rehabbing, and renting a property vs how a company handles it: When an individual goes to buy a fixer upper, they may get a good deal or they may not, depending on their experience level and, frankly, confidence in their ability to negotiate. We have a lot of weight (and liquid capital) behind us, so we can negotiate faster and harder than an individual, we know how tax auctions work and can place competitive bids, we're built to find solid properties that need work, and buy them as cheaply as possible. We also have consistent rehab processes, buy things wholesale, and have streamlined our operations to ensure that each rehab is executed efficiently and to the same standard. When the rehab process is 80% done, we get to put the full weight of our marketing efforts into finding a quality tenant as quickly as possible. Someone doing one or two properties simply can't achieve the same cost cutting economies of scale, nor do they have ongoing online and print advertising campaigns to help them find the best possible tenants. Like anything else, a company built to do one thing is going to be more efficient than an individual trying to do it once or twice; a professional mechanic is going to fix eight cars in the time it take a first-time car owner to replace a tail light and change the oil. That doesn't mean you can't make/save more money going the DIY route, it just means you're going to work a heck of a lot harder.

So, turnkey companies can buy low, rehab efficiently, and then sell at (or, in our case, sometimes below) appraisal value (and you should always be able to see an appraisal and/or get your own independent appraisal done). The difference between our purchase/rehab costs and sales prices is how we stay in business. The investor gets a tenant-ready property with little to no effort on their part (apart from vetting the provider, which is key) and, if the company does their job well, a source of consistent, reliable passive income month after month.

Like anything else, you pay for value. Turnkey doesn't provide value to people who are willing and able to get rock bottom prices and cut costs on their own by doing their own rehab and self-managing. But not everyone can do those things, or even wants to. If you want to be a real estate investor, but don't want REI to be your new job, then turnkey provides value - value you pay for. And that value is two-fold: firstly, you get the value of newly upgraded property (and you don't close until the rehab is done, so that vacancy time isn't on you), purchased at market price, that (if you finance) your tenants will pay 75-80% of over time; secondly, you get the psychological value of knowing that someone else has skin in the game, someone who absolutely knows what they are doing and has efficient systems in place to ensure you do as little work as possible while still collecting monthly income. Whether turnkey is for you comes down to what you prioritize, and where you place value.

Ok, I clearly failed in my attempt at a brief post, but hopefully this gives you an idea of where some of your numbers/assumptions might be a little off - or, if you find a company where they're spot on, why you should consider going elsewhere. Turnkey isn't for everyone, but it has a valuable place for plenty of investors. The industry is a bit muddy at times, so you definitely need to to your research and ask plenty of questions, but there are absolutely some top notch providers around the country who provide real, tangible value and honest, consistent service.

Best of luck!

Clayton