What Are Turnkey Properties

[Anna Z.]

Hello guys,

I'm new to BP and real estate. I've seen people bring up "turnkey" properties a lot. So what exactly is turnkey properties and how do you find them? If there are anyone that have purchases a turnkey property, how was your experience with them? Is it a good idea for beginners?

[Jon Holdman]

I'm going to have to disagree with Ali Boone on this topic. Her description of turnkey properties is accurate. Or, at least that's what the sellers of turnkey properties would have you believe.

IMHO, you must be every bit as savvy about rentals, the financials of rentals, rehabbing, and the area where you're investing as if you were buying, rehabbing and managing it yourself. Ali's given you the positive side of the story, so I'm going to jump to the worst case. I've looked at a bunch of these turnkey properties. While a few are as Ali describes, many are much closer to my description.

A turnkey seller buys a junk property for a dirt cheap price. They do a shoddy cosmetic rehab that makes it look OK. They take the first tenant they can find and rent the place with a lease that looks good, but with the actual rent less than the lease states. They put their own PM in place. They sell it to an out of state investor who doesn't investigate the area in any detail. They sell it at an inflated price because the investor compares it to properties in their own area, rather than the area where the property is located. The marketing material claims taxes, insurance and property management are the only expenses, so it looks like it generates plenty of income.

The investor thinks they got a great deal. What they really get is an ongoing string of problems. Maintenance is a never ending issue. The PM is repeatedly shelling out of expensive repairs done by their in house people. The turnkey company is actually subsidizing the rent, which they can do because they make plenty elsewhere on the deal. A year later, the tenant bails out. The PM bails. The investor finds a new PM and discovers the rent is less than they were told. The new PM informs the investor of the repairs that need to be done, thanks to the shoddy rehab. And that its hard to find tenants in the war zone where this house is located. The investor decides to sell, only to discover the property is worth quite a bit less than they owe. So they stuck. Either take a big loss all at once or bleed a little each month.

Now, I've just painted a horrible picture. The only way you know which of these pictures is true is to do your own due diligence. In the words of Ronald Reagan "trust but verify". Get on a plane and look with your own eyes. Learn what's a good rehab and what's lipstick on a pig. Investigate rents. Talk to people independent of the seller of the turnkey. Drive the area. At midnight. Investigate values in the area. Forget what's a good deal where you're from and learn what's a good deal where the property is.

Realize that even the very best turnkeys come with a price. You're paying to have someone do a bunch of the work for you. That's fine, if that's what you want to do. And if you're going to invest far away from where you live, part of that choice is to pay people to do some of the work for you. Just be sure you understand and are willing to pay that price.