Turnkey Out of State Investments— how does it all work?

[Steve K.]

Being in a competitive market, I've researched out of state investing a bit and have always been gun shy due to not feeling comfortable buying property that I don't personally control and having to work with a turnkey/management company remotely. However I had some drinks with a buddy last night who has had success with a portfolio of SFH's in Indiana using a turnkey company that he trusts and our conversation got me thinking. What I don't understand is this: if the deals are good, why don't the turnkey guys keep them for themselves? What's in it for them to give up these deals to out of state investors for a smaller percentage than they'd keep if they just held the properties themselves? We're talking about $25k-$50 deals here so low barrier to entry, the sales commissions/ management fees can't be that great for the turnkey company and I'd expect a legit company to be capitalized such that they could buy and hold those properties themselves. So why offer them up to random out of staters if the deal is good? Not trying to be snarky here or ruffle any turnkey people's feathers, I'm genuinely interested in learning what each party gains from an arrangement like this and specifically what's in it for the turnkey company and why not just hold the property and keep all the profit?

[Jeff Schechter]

You are all partially right and partially wrong...

1. We do not keep the best deals for ourselves. In fact there are no best deals. Any successful company has to standardize and turn out a very similar product. As a result nearly every one of our properties looks extremely similar to every other one. In rare cases we have a property that does not come out as well or may not perform for whatever reason. Sometimes it's just due to surprises during the rehab Those are the ones we actually keep as we do not want to put out an inferior product. Often times those get sold off to a wholesale Market.. or we just keep them and accept the lesser performance.

2. We don't look at Property Management as a huge profit Center. It exists to keep investors happy. When investors are happy they buy more properties.

3. We do not make an enormous amount of markup on each property, but we do make it up with volume and do very well. Most sales represent approximately what we would gather in rent over a period of two years. That's an attractive number for a flip. That only works because of systems and volume... See #5..

4. We essentially have a rolling inventory. Investors always get first choice.

5.. we do enough volume and have rehab processes dialed in so well that we can deliver to the investor a product better than what they can do on their own. It's about systems and economies of scale. As an example if you wanted to come to Indianapolis, buy a wholesale property, hire contractors, rehab it then find an outside management company to find and manage tenants, you would have a very difficult time getting the same long-term results. And you'd have a lot of time effort and heartache into the process. We simply offer a very attractive done for you solution, and even give you a one-year warranty on any property you purchase from us.  

6. Needless to say this is very attractive to investors from other parts of the country that can't get the same price-to-rent ratios that we can get here locally. TurnKey is not for everyone, but it does make a lot of sense for an investor who has a busy career and wants excellent returns, but who still wants to be more passive about the process.