Is Turn Key a Good Idea?

Question

If I could have a dollar for every time this question was asked...

To be frank, I had always answered - No. However, upon closer examination the answer is - it depends. Depends on where, how, and with whom...

Account Closed · Answer

@Ben Leybovich Of course I know what you meant. Its just that this A,B, C classification is really subjective and depends on the location. As you said, in a high economic growth area with no land, and no new construction, a 20's house can be A+. But even in midwest areas like parts of Chicago, many older homes are worth a lot of money. Neighborhood more than age of home determines its classification. And then in detroit you have mansions that are worth a Big Mac plus back taxes. Maybe it came off a bit snarky but I was just trying to make that point in a funny way.

Account Closed · Answer

So I guess then all the 1920's and 30's homes in my neighborhood that sell for over $1.5M are just C and D class properties then? Damn. Wish I had known before I bought here!

Arielle Gutierrez · Answer

Hi there,

From what I've seen in my market here in Germantown turnkey properties in popular Metropolitan suburbs have a tendency to be overpriced and to potentially have some real pitfalls. The best deals I've seen here have 1-3% COC return once all expenses  and average vacancy rates are taken into consideration. It's pretty pathetic. You're better off putting in the work to find a good deal.

Chris Clothier · Answer

Not entirely.  First, there is such a thing as Class A Turnkey properties.  We have built close to 40 properties in  in-fill neighborhoods from the ground up and investors have purchased those properties for the purpose of long-term buy & hold.  They are absolutely A Class properties in great neighborhoods and our price points on those are between $160,000 and $189,000.  We've even begun working more and more opportunities in Germantown, which is absolutely A Class. There is a lot of demand from renters in these price points.

As for the properties you described as B Class, I would say that both Alex (as the owner of his company) and my family (as owners of ours) as well as at least one other vendor in Memphis all migrated up the chain to find better properties in better areas of town.  Do they all fit your definition, probably not, but a large majority - by a wide margin -  of what we sell in Memphis does.  Dallas and Houston are almost 100% your definition of B and up.

I am going to agree with @Alex Craig that you are spot on with your criticism of Turnkey as it applies to those companies that use it simply as a marketing term to attract eyeballs to their subpar properties, management and operations.  There are a ton of choices for buyers today and much of what is marketed as Turnkey can be described as high-risk crap.  Here in Memphis there is crap marketed everyday that fits the warning label of your articles.  And to Alex's point, it is not just the house that is crap, but the company or operator themselves.  They have no way of being able to deliver a consistent experience for the investor.  They don;t have the business experience, acumen or team so the investor loses quite often.

Lastly Ben, the biggest risk for a buyer today wanting to purchase Turnkey is that there is no definition.  It has become a buzzword with no meaning.  Buyers have to be so cautious and really do their due diligence because it is difficult to tell companies apart from their marketing.  Today more and more companies are simply copying the marketing of companies who are bigger or more established and the buyer has no idea of what distinguishes the good from the bad.  Buyers Just have to be super cautious if they are going to purchase Turnkey.

Ben Leybovich · Answer

Haha - and that is why when the time comes that I can't find the strength to invest for myself and need to become more passive, you'll get a check from me. I like the asset class you are in. And while you'll never convince me that TK makes money, I am pretty sure that with you I wouldn't loose money. And when this becomes the focus, I'll look you up :)

John Chapman · Answer

Yep, that's the one.  It really was an excellent piece that was well-researched and well-reasoned.  Despite the uproar, I failed to see any criticism that rose above the level of "nuh uh."  Most critics also seemed to completely miss the point of the article.  Finally, I did not see any critic who had actually owned the properties that you criticize for any length of time that would have allowed them to speak intelligently about them.  (Read 8-10 years).  Anyway, not trying to hijack the thread.  Just wanted to say I thought your recent article was a nice addition to the series.

Ben Leybovich · Answer

Anish - I've read enough of you to know that you are a smart dude...what gives...?!

In a land-locked location exhibiting economic growth pressures, the equity appreciation warrants a complete re-build (the right way) of a 1920 house. All of the systems can be updated, and it's money very well spent.

This isn't the case in Ohio, Indiana, Kentucky, and Michigan whereby a TK 1920'es house hasn't added positive value in 50 years. CapEx in a house like this is akin to throwing good money after bad, which is why it doesn't get done. You know this is what I meant, Anish - why are you being smart with me?

Ben Leybovich · Answer

Thanks indeed, @John Chapman!

PIGS just ain't kosher...you know? The article with Serge - is that the one where we broke down the CapEx? Rattled some cages with that one :)

John Chapman · Answer

Okay, I gotta say I really loved your article on this, Ben.  But I'm also a fan of your $30K pig series and think your article with Serge Shukat about expenses was probably the best blog post ever on BP.  I really don't think you can ever say enough on this topic because people just won't listen and ignore the realities of expenses.

Ben Leybovich · Answer

No - 80'es refers to 1980+. 80es wiring / plumbing / foundation, etc.

A Class means 7 year old construction. No such thing as TK A class :)

B Class in Memphis is going to cost $120,000+. 1980 +. Sure - this is the space where Memphis Invest, if I understand correctly, @Chris Clothier, operates. And this is why they are able to achieve stable returns.

Is that the size of it, Chris?

Is Turn Key a Good Idea?

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