Turnkey Rental Properties As A Business Model

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Turnkey Rental Properties As A Business Model

Alex Z.
Investor · Ridgefield, WA · Member since 2016 · 31 posts · 30 votes

I have been researching turnkey rental properties as a means to get into real estate. I know there are reputable companies out there (some of them are on here). I know that they serve a need in the market with offering passive real estate investors a way to buy and hold real estate. 

But what I am struggling to comprehend is from the turnkey companies perspective what their incentive is for offering up cash flowing properties. It seems most of the companies own real estate in the same markets they are selling it. 

I sound cynical saying all this but here is what I am struggling with...

  • These companies are finding below market value deals and putting rehab money into them to the point that when they sell I am paying close to retail?
  • Are they making money by referring me to brokers, lenders, PMs, etc? 
  • Why aren't they just keeping these awesome deals for themselves?

I guess I am struggling to understand why, if these properties are good investments, are they offering them up instead of holding them?

Would someone with more experience be willing to shed some light on my mental block here? 

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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y

@Alex Z. I think that @James Wise and @Ali Boone hit most of it on the head.  It's just a fundamentally different business model.  I'm going to go out on a limb and say that James has spent money on a team, marketing, keeps contractors (or employs them directly) busy, etc.  The single investor that is doing buy-and-hold would pay disproportionately high marketing costs, probably doesn't have enough acquisitions to keep great contractors busy, etc.   Consequently, they would be at an economic disadvantage and their margins would be smaller.   

Not to mention, if an individual investor was sitting on massive amounts of capital, they might choose to buy one 300-unit apartment complex instead of owning 300 SFRs that they each had to rehab, rent, and manage.  So outside of the fundamental business model differences the "why wouldn't they keep the awesome deals for themselves?" answer could easily be: If I could afford 300 SFRs I'd rather have a 300 unit apartment complex.

Of course, that doesn't mean you should or shouldn't use a turnkey company.  Figure out where you want to invest, look at both options, and see how they compare.

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  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    8y
    • These companies are finding below market value deals and putting rehab money into them to the point that when they sell I am paying close to retail? Yes. 
    • Are they making money by referring me to brokers, lenders, PMs, etc? Yes. Or doing it themselves. My company (Holton-Wise) for example sell offers a turnkeyesq service where we broker deal & then do everything you mentioned above in house. So we make money when you buy. We make money on PM. We make money on repairs. We make money on Insurance & we make money when you sell.
    • Why aren't they just keeping these awesome deals for themselves? Two main reasons. 1 is we make money a whole bunch of ways as I described above. 2 is you cannot keep all properties as you will run out of capital. You have to sell to earn short term profits and hold some for your long term gains. It takes many years to recoup the initial investment when you purchase a rental property.
    1Reply
  • Alex Z.
    OP
    Investor · Ridgefield, WA · Member since 2016 · 31 posts · 30 votes
    8y

    @James Wise Thank you for the response. It makes complete sense why turnkey companies would charge & get paid for some of those services. Also, I was overlooking the short term capital part of the equation and that makes sense. 

    In a way, selling turnkey's to investors is a way to earn revenue to fund future deals of their own. Makes complete sense. 

    One more quick question for you. I know it depends on markets, condition, etc. But is it unrealistic to think that a new investor could buy a property from a turnkey company and have instant equity in a house? Or is it very similar to retail where appreciation & paying down the mortgage will ultimately give you the equity?

    1Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    8y

    Very simply... it's two different business models. Flipping is one business/investing model, and buy-and-hold is another. Same models apply to individual investors...they usually do one or the other, or some combination of them.

    Turnkey providers are flippers. Their business model is based on the same model as flipping, rather than buy-and-hold. Most turnkey providers I know do hold some of the properties they find, but if they held everything they got, they'd run out of money pretty quickly. As with someone who does a lot of flips, the profit from one property tends to fund the purchase and flip of the next, and so on and so on the snowball goes.

    Just as with a normal flipper, they make their money on the flip- the difference between what they put into it and what they can sell it for. In my experience though, those margins aren't as big as people tend to want to believe.

    Hope that helps. It's just the difference between business models. The turnkey guys couldn't deal with nearly as many properties if they held everything they got. And that's not what their model is structured for.

    1Reply
  • Alex Z.
    OP
    Investor · Ridgefield, WA · Member since 2016 · 31 posts · 30 votes
    8y

    Thank you for the response. Makes sense. I was probably over complicating it a bit. 

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    8y
    Originally posted by @Alex Z.:

    @James Wise Thank you for the response. It makes complete sense why turnkey companies would charge & get paid for some of those services. Also, I was overlooking the short term capital part of the equation and that makes sense. 

    In a way, selling turnkey's to investors is a way to earn revenue to fund future deals of their own. Makes complete sense. 

    One more quick question for you. I know it depends on markets, condition, etc. But is it unrealistic to think that a new investor could buy a property from a turnkey company and have instant equity in a house? Or is it very similar to retail where appreciation & paying down the mortgage will ultimately give you the equity?

     If you had a dollar would you sell it to me for 80 cents?

    1Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    @Alex Z. I think that @James Wise and @Ali Boone hit most of it on the head.  It's just a fundamentally different business model.  I'm going to go out on a limb and say that James has spent money on a team, marketing, keeps contractors (or employs them directly) busy, etc.  The single investor that is doing buy-and-hold would pay disproportionately high marketing costs, probably doesn't have enough acquisitions to keep great contractors busy, etc.   Consequently, they would be at an economic disadvantage and their margins would be smaller.   

    Not to mention, if an individual investor was sitting on massive amounts of capital, they might choose to buy one 300-unit apartment complex instead of owning 300 SFRs that they each had to rehab, rent, and manage.  So outside of the fundamental business model differences the "why wouldn't they keep the awesome deals for themselves?" answer could easily be: If I could afford 300 SFRs I'd rather have a 300 unit apartment complex.

    Of course, that doesn't mean you should or shouldn't use a turnkey company.  Figure out where you want to invest, look at both options, and see how they compare.

    2Reply
  • Alex Z.
    OP
    Investor · Ridgefield, WA · Member since 2016 · 31 posts · 30 votes
    8y
    Originally posted by @James Wise:
    Originally posted by @Alex Z.:

    @James Wise Thank you for the response. It makes complete sense why turnkey companies would charge & get paid for some of those services. Also, I was overlooking the short term capital part of the equation and that makes sense. 

    In a way, selling turnkey's to investors is a way to earn revenue to fund future deals of their own. Makes complete sense. 

    One more quick question for you. I know it depends on markets, condition, etc. But is it unrealistic to think that a new investor could buy a property from a turnkey company and have instant equity in a house? Or is it very similar to retail where appreciation & paying down the mortgage will ultimately give you the equity?

     If you had a dollar would you sell it to me for 80 cents?

    :) point taken

    0Reply
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