Is it possible to build wealth with only turn-key properties?

Question

I currently work 50-60 hours per week and am looking for a more passive way to invest in real estate as I believe that will give me the highest return in the long run.

I understand that buying a turn-key property from a company is going to have smaller margins, but assuming that I’ve vetted the company and deal is it possible to make substantial income using turn key companies?

For context my goal is to gross $20,000/month.

Jay Hinrichs · Answer

buying turn key or not to generate 20k a month of NET NET NET spendable income will take fairly long time. And will require a boat load of capital and credit..

the fix up and refi crowd gets to the same space with less cash  they need the same credit.. And usually some forced equity but they are still  limited by cash on hand..

if we run the numbers and a good rule of thumb with max debt on the asset at least as it relates to SFR type rentals is that 200 per month per door.. which is basically a higher touch C class type area.. So it would take 100 doors..

or just try to wiggle your way into smaller multi family were your buy say 20 unit stabilize it get your track record your lenders are going to want to see.. buy another or 1031 your first one up and move up in doors.. that could make things go quicker.. All this takes some time and effort of course.

some investors I know in the lower end assets who can really control management will buyer the cheaper homes for cash and run with no debt there cash flow if the properties are run extremely well can be double or the leveraged ones.. so you could get there quicker by owning say 30 houses free and clear to get to the same number. .with less risk

JD Martin · Answer

Substantial? Probably not in the early going. Assuming you've bought a well-done turnkey property at an acceptable price, and that you are in a stable/growing market, natural market forces are going to carry you over time. Couple that with tenant pay-down of your mortgage (you didn't say you were using all cash) and eventually, given enough time, you will have properties without debt that can provide very strong cash flow.

Limitation on your strategy:

1. Number of loans you are able to get;

2. Amount of starting capital you can put into the deals to keep the ball rolling;

3. Ability to buy turnkey properties with all of the heavy lifting complete (new roof, floors, etc) at prices that still allow some cash flow now, even if it's marginal;

4. Amount of years you want to wait/can afford to wait for your slow-motion strategy to pay off.

Most of us are limited by two factors:

1. The amount of cash we can access to make deals happen, and

2. The number of years we have left to live.

If you have a plethora of both (theoretically on #2, of course) then virtually any buy-and-hold strategy is going to work, whether you buy a dump and rehab it and force equity or let someone else do the hard work, take the profit and sell you a today's market property which you then hold for 30 years.

If you are asking if you can buy turnkey properties with very strong cash flow even after the note and get to 20k net income - 20k gross income is simple, but it might only net $200/month - the answer is almost assuredly "no". If it were that easy, everyone would do it.

Jonathan Greene · Answer

If the point to doing deals with smaller margins is to save time and be passive in the space, it's definitely not worth the time. The term passive income is really confused by both. The only way to get to passive income in real estate is from a lot of knowledge, hard work, and some luck along the way. The margins are way too small to do it with turnkey and your money could make way more somewhere else when averaged over the amount of properties you would need to clear 20k/month. Plus to be passive, you would still be the owner of so many turnkey and the more passive you are, the more money you lose to the companies managing them all.

Joseph Cacciapaglia · Answer

You can get a decent return on investment and build wealth over time with passive real estate investments. You won't get the same level of entrepreneurial profits that you receive from more active investments, but you can still do very well. With many of the more active methods investors are really getting paid for the time, effort, and risk involved, and then using that payment to boost their returns. For individuals that already have high paying jobs, continuing to work and investing passively can work just as well. A large percentage of my clients are high earners with demanding jobs that do this with small multifamily properties that are professionally managed.

Lane Kawaoka · Answer

I did turnkey from 2009-2016 and got 11 sfhs. It was part of my w2 salary but got me started.

Mike D'Arrigo · Answer

@Thomas W. It depends on how you are measuring wealth. Is your primarily objective equity or cash flow? You won't have built in equity from a turn key but you will have equity through principal reduction and through appreciation if you buy in the right market. Your cash flow won't be much different with a turn key than with any other method of acquiring a property. Cash flow is simply a function of rental income and operating expenses. Those will be the same no matter how you buy. Something to keep in mind is that any initial forced equity that you might have (no guarantee of it) is a relatively small portion of the total equity that is build over a long term buy and hold. To reach your goal of $20,000/mth you will need to build a sizable portfolio of somewhere in the neighborhood of 100 properties. Working 50-60 hours per week, you don't have time to be hands enough to scale enough to generate the cash flow you want.

Greg Dickerson · Answer

It's all a matter of how much cash you have to play with and the time value of money. The only truly passive investing vehicle is investing in a fund or syndication. When investing in TurnKey you still have to manage the managers and keep up with all the expenses like taxes, insurance, maintenance, mortgage payments etc. On top of that you have one bad tenant or one vacancy that can wipe out all your profits. Unless you can refi your cash out and Martin profit over the long haul you return will not match the same cash invested in a vehicle and compounded over the same period of time.

Evan Polaski · Answer

@Thomas W., to layer on to all the other responses: possible, of course it is.  But since you are paying a premium for a finished house, you cannot bank on any appreciation, that should be bonus if it happens.  I would also look long and hard at the financial projections provided.

Industry standard management fee for single families is 10% of gross per month.  If the turn key operator is managing for free, since you bought from them, what happens when they disappear and you need to hire new management.

Most people don't budget for leasing commissions.  I have seen 1 mo rent for new leases and 1/2 month for renewals.  If you turn each year, that is 8.33% of gross to go to reserves each month. 2 year term 7.5% of gross reserved each month.

Vacancy: 5% is a turn every 2 years

Capital expenses and repairs: I have calculated I need to reserve about $200/mo, every month, if everything is new.  This will leave me enough in the account to handle each item when the useful life on that item expires.  Roofs: 25 years.  It might be new today, but at some point it needs replaced.  HVAC and Water Heater: about 12-15 years.  Appliances: note this is a rental and people are rough on them: 7-10 yrs.

Then you also have taxes and insurance, and any debt payments.  Make sure the turnkey operator is calculating taxes based on what you will pay, not what they paid.

So back to your question: is it possible, yes.  I would argue, at least in my area, it is very unlikely in this market you will ever get there.  You will probably be cashflow negative from day one.

Jon Kelly · Answer

@Thomas W. Of course it's possible, you just need 100 turn-key units cash flowing at $200/month. Assuming the purchase price per unit is $100,000, total value will be $10,000,000. You'll need 25% down or $2,500,000. Then, just sit back and enjoy the $20,000/month in cash flow!

Tom Ott · Answer

Purchase Turnkeys is a great way to build passive income. Yes, there are other strategies out there, but not all of them make sense for everyone. Investors who invest OOS or work a 9-5 tend to go with Turnkeys as all of the work has been done for you. The idea is that you are building passive wealth and little-to-no work is done on your end.

Ideally, the Turnkey Provider will do everything in-house. They should own the property first (NOT a listing from the MLS) then they should do all of the renovations in-house, place a tenant PRIOR to closing, and then the TK provider should stay on as the manager, again in-house.

Is it possible to build wealth with only turn-key properties?

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