The Turnkey Trap?

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The Turnkey Trap?

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My first 2 properties were turnkeys. In 2 years the first rental has doubled in cash flow. I spent an entire year trying to BRRRR a rental and I couldn't recreate the returns I was getting while putting significant work in. Active investing works for some but I prefer to be more passive. I will also take lower equity for less time invested.

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My first real deals from scratch are turnkeys. Having 2-3 W2s, I can't imagine doing a BRRR. Had I learned more about real estate when I was younger I would have bought and improved and rented to buy another every two years. However, I did that only once and now I am at my most ideal house for the location I am living. Till I move to another town, I don't see myself moving out of the house I live in. Also the houses in my area were way too expensive for my liking. So, I found refuge in the turnkey option in the still-affordable states. I did look at the inspection reports very closely and asked a lot of questions. Never went to visit the locations, though. They were very far from me. However, both had renters in them. This can mean two things. You know the rent rate readily. You don't have to go through the hassle of waiting for a renter after the purchase. Now, I like that. This way I could calculate the cashflow immediately without speculation. One downside can be you don't know how the renter was selected. I took tht risk over not having a renter at all and not knowing how much it will rent for. One mitigation to these if that some sellers will give you a one to three month rent guarantee as well as six to twelve month rehab warranty. You can seek for these when you are doing the turnkey. On the first house I spotted 27 improvements through the inspection and I had the seller to agree to remediate 26 of them. Too soon for me to evaluate the cashflow, but there is no way I will find a better, cheaper, ready to move in property other than a turnkey. I don't like to work with partners. As long as you find a reliable source for turkeys and do due diligence, turnkey is a good way to go both for cashflow and appreciation values.

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@Juan Rodriguez Different strokes. If you're not connected, you should connect with @Zach Lemaster. He runs a great turnkey company that has helped me pick up a couple solid deals. He may be able to help you out down the road as well.

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It isn't so much that turnkeys are a trap, it's more a matter of the buyer knowing the market, knowing what you are buying, knowing how to manage, understanding tenants and repairs, and all of the associated details. It isn't a "buy and never think about" proposition for most people. And turnkey providers often don't provide a finished product according to the complaints I've read here on BP. A couple of providers do an exceptional job and many don't. I would get an inspection from an independent inspector and I'd do a personal walk through the property and get to know the neighborhood before I bought. Most buyers don't take that step and end up buying in a neighborhood they regret later with a property poorly "rehabbed". It can be a successful purchase if done with due diligence.

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Thank you. This is all valuable feedback. I agree that turnkey properties tend to sell at a premium, but if the turnkey provider is good, they do tend to come with all major capex and deferred maintenance addressed, so there should not be any big expenses for the first five years, and by then I would think that rent appreciation would've improved cash flow to better handle a capex event, and property appreciation would have been enough to have the property above what you may have paid for (depending on how much of a premium you paid for it). I agree with @Joseph Crunkilton that going active, while carrying a higher potential for returns, it can also puts you more at risk for cost overruns from the rehab (and the surprises that tend to show up in the process), plus a significant amount of time put in such as I have experienced with my STR.

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Been successful so far. One was a breeze and has been making solid returns year over year. The other had a difficult tenant where they paid for the majority of the cost and helped me with new management. Now I have a new tenant making almost double the cash flow I had originally. They're not perfect, but it was a great experience as a new investor. Will definitely keep monitoring as the years go on. Good question though.

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Solid process of buying them? Or so far have been solid?See how solid it is after 3-7 years, and how solid it is after your two first bouts of adversity. I hope it goes well, but you can't claim a deal is solid or successful really until exit or the goal is completed.

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You get a lot of folks on BP looking for instant gratification. Many do not realize that real estate is a game of patience.

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Extremely valuable info here...

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Bob, I am wondering two things: Don't you consider appliance warranty and tax write-off options to erase these worries away?Before my recent two turnkeys, I converted my home to a rental upon moving out to buy another. We managed that house ourselves and always kept a home appliance warranty. When an appliance broke, it covers it. We just got a dishwasher completely replaced through this process. And unfortunately, I lapsed on the warranty to change the rate for one month and water heater broke. I had to pay $2000 for it. But eventually similar to your $7200 AC, these will be tax write-offs. They will be reduced from your taxable rent and you are renovating your house for free at the end as long as you can come up with the repair money immediately. For the turnkeys, I did not have an appliance warranty because there is a property manager. Still may mean to come up with the money for a new dishwasher or an AC. Yet, again the tax write-off will take care of it at the end of the year. Due to this as long as I have some immediately accessible repair money set aside, I don't worry much. Am I too off base in this thought process?