Exit strategies for turnkey property?

Question

Aloha BP!

Are there any exit strategies for turnkey properties? If a turnkey is bought at market value in a stable, non-growing type of market, how would an investor get out of it? It seems as though many turnkeys are purchased for the long-term but there may be a time when the market dips and the investor may have to sell at a loss because it was purchased with little equity to start off. Thanks in advance. ALOHA

Chris Clothier · Answer

Justin,

Great question and one that you want to answer on the front end and will have as much to do with the "who" you are working with as where you are investing.

An established company with longevity should be the type of company that is going to have demand for their service and product into the future.  Whether you buy the property with equity or no equity is not an indication of your ability to sell it at cost, below cost or even above cost in the future if the markets moves down or if the market moves up.

If the property is performing, producing the return you expected, and you want to sell it at some point in the future, then with the right company there will be demand for their services and for a property that is performing.  In that case, your buyer will look very similar to you.  They will be a passive investor, buying for a steady and consistent return.

Specifically, as you asked about market dips, ideally you wouldn't sell it if it is still performing from a rent and return standpoint.  However, if you did need to sell, your front-end decision on who to work with and the demand for their product/service will play a huge role in your ability to sell for the best price possible.

Dean Letfus · Answer

Always say to yourself, (when buying turnkey), I'm not buying a house, I'm getting a tattoo.  Then you know you may have it for life

Ben Leybovich · Answer

Haha Nope - the exit is created at the front. And in TK, you are giving your exit up as the operator's profits :)

Intelligent investing cannot be accomplished if what you pay is not discounted against the intrinsic value of the asset.

Account Closed · Answer

I don't do anything with TK but just thought I'd add , most seem to get a rehabbed place on the front end but when you sell 8 years down the road , that pitch isn't there to the next buyer ......

Ali Boone · Answer

Hey Justin! Well, a couple things...

As already said, selling a turnkey is no different than selling any rental property. "Turnkey" is only a method of buying, not a method of owning. So your options are just that of any other property-- hold forever and keep collecting the cash flow, hold for a while before big CapEx things start going wrong then sell, sell if you see big appreciation, sell if you just want to because you want to...whatever you want to do.

But it sounds like more of your question is about the money aspect of it. Keep in mind, there isn't just one one to make money on rental properties. There's your monthly cash flow, there's (potential) appreciation, and there's the tax benefits. What's nice about having more than one stream of income is that you can have something happen to one stream and still make money.

Assuming the situation you propose- the property doesn't have any equity because you bought at market value- if you buy right and have good cash flow, and you also have the tax benefits, you have a good chance of profiting.

But for the appreciation, first of all it's rare that a property value doesn't go up over the long-term. Maybe a crash here and there, but if you hang onto it, it is mostly likely going to go up. More importantly though, the market you buy a turnkey in is the most critical. If you buy at the beginning stages of a [proven] growth cycle, you can get plenty of appreciation on a turnkey. I bought turnkeys when Atlanta was just starting into it's boom and my properties all appreciated about $40k in only two years. That's not feasible right now in any market, but it does explain how to best set yourself up for appreciation. But again, with a turnkey, you aren't buying for appreciation...you're buying for cash flow. So appreciation is just a bonus.

The real trick is not to buy in a declining market because then you will lose money with your property over time. Buy in a solid growth market and you should be fine.

Brian Lacey · Answer

Love me some diversified REITs. Can't get enough of the medical and senior care facilities haha.

One way to diversify, and move into other asset classes.

Carlos Vega · Answer

@Ben Leybovich Are you saying that buying turnkey isn't a smart investment in the first place?

Ben Leybovich · Answer

What I am saying is that selling for more than you paid is necessary to drive IRR, and TK, by its' very design, precludes this in 99% of the cases. So, yep - TK is not particularly a smart investment...REIT would be better if you want to be a retail investor :)

Sam Shueh · Answer

Buy for the long haul. There are only one cycle every 7 or 10 years.

Anton Ivanov · Answer

@Justin Young

Exist strategies with turnkeys are the same as any other rental property, it really doesn't matter how you bought it in the first place.

The situation that you described (buying at market, no appreciation) can happen with any deal, but purchasing a turnkey makes it much more likely since you WILL be buying at market.

Here is a great writeup on the general exist strategies you have available:

https://www.biggerpockets.com/real-estate-investin...

And here are some more "unconventional" things:

https://www.biggerpockets.com/renewsblog/2014/02/2...

I would say that if you've held on to the property for a long time, it's likely that due to mortgage pay-down you will not have to sell at a loss, especially considering all of the cash flow you collected over the years.

Exit strategies for turnkey property?

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