Should I Get Started with a Turnkey?

Question

Hi all,

I'm a lifelong resident of Memphis but still green behind the ears with Bigger Pockets.  I have been interested in becoming an investor for a while now and am currently knee deep in a two year plan to raise capital for it.  I should be ready to buy near the end of 2016/early 2017.  I am spending the meantime reading books and bigger pockets, doing research.

As a new investor I want to dive right in and get started when I can to get some experience. So my question is simple.  Is it a good idea to start with one of the turn key providers here in Memphis, or should my first deal be made on my own?  Likewise, if it is a good idea, does that make for a viable long-term strategy?

Thanks for your help!

Brie Schmidt · Answer

@Ronnie Carney That is a question only you can really answer.  It is going to depend on time, money, and skill set.  If I want a pizza I am fully capable of going to the store, buying the ingredients, and making a pizza.  I can also order delivery and leave it to the professionals to make.

Kevin M. Rooney · Answer

Turn-Key rental properties are a great option for investors looking to get more cash flow with less work. They are also a great option for investors who can’t find cash flowing properties in their state and must invest from a long-distance. Turn-key rentals are properties that are fully repaired, rented and managed by a property manager. Buying a turn-key property allows a long-distance investor to buy a property that cash flows with minimal work.

What is a turn-key rental property?

Some consider a turn-key property to be a house that is remodeled and needs no repairs, but it may not be rented. I consider turn-key to mean the home needs no repairs, has a tenant in place and has property management in place. Make sure you and whomever you are talking to about turn-key properties have the same definition of turn-key! If you are investing out-of-state for a turn-key property you want to make sure it is already rented and has property management in place.

What are the advantages of turn-key rental properties?

Here are a few advantages of buying turn-key rentals and why I am buying a turn-key rental. I go into much more detail on each point throughout the article.

• Easy to find: You can buy a turn-key property very quickly from      a turn-key provider, because they have a stock of turn-key properties      available to purchase. Turn-key companies can have a large inventory      of turn-keys because they are providing cash flow and making them money      while they own the properties. You do have to know the right turn-key      companies to work with.
• Less work than a normal rental: Turn-key properties are already rented, already      managed and repaired. You don’t have to find contractors, property      managers or real estate agents.
• Provide cash flow from day one: The first day you buy a turn-key it will have a      tenant in place paying rent. You don’t have to worry how long the repairs      will take or how long it will take to get a tenant.
• Provide a great return: Most turn-key rentals provide returns from 10 to 15      percent. That return begins right away and takes little work to maintain,      because a property manager takes care of the house for you.
• Provide      diversification: Buying turn-key rentals in different markets of      the country gives you diversification.
• Can be bought for      cash: Many foreign investors have trouble buying properties,      because they cannot get financing. Turn-key rentals can be as cheap as      $30,000 making it easier to buy with cash.
• You can invest your      retirement savings: You can invest a self-directed IRA or 401k      into turn-key rentals.

How can you find turn-key rental properties?

There are many turn-key rental property providers throughout the United States. Some companies are local to specific markets like Memphis, Ohio, Missouri, Florida, Texas, Chicago, Wisconsin and other companies have properties all over the country. Some companies market others properties and are not the actual seller but do help the investor by way of consulting, API owns all that we sell. The properties vary in price, rents, financing options and returns, but a good turn-key property will cash flow. Even with cash flow I would advise investors to spend time researching the area they want to invest in and the property manager, before buying any turn-key property.

How much money do turn-key rental properties cost?

Every turnkey property is different and every location for turn-key properties is different. I have seen turn-key rentals that are repaired, rented and managed range from $35,000 to $100,000 in price. I have not seen turn-key properties in higher price ranges, because it is much harder to cash flow on a higher priced rental property than a lower priced rental property. The lower priced turn-key rental properties usually provide better cash flow and may be a good option for foreign investors who have a hard time getting a loan on properties in the United States.

When would investing in a long-distance, turn-key property be a good idea?

I have many people reach out to me about investing in rental properties, but they do not know how to start because their market is too expensive. When starter homes are $300,000 or more in an area, it is almost impossible to cash flow on a rental property unless you pay cash. When you pay cash your returns are not nearly as good as if you can get a loan (as long as the property cash flows). Rents are almost never high enough on a $300,000 home to cash flow no matter where you live.

The down payments on a $300,000 property are going to be at least $60,000 unless you use a technique to buy with less money down. Then you have to add closing costs, reserves, repairs and other costs associated with buying a rental property. I can buy two or three cash flowing rental properties in my market, where someone in a more expensive area could only buy one rental property that may not cash flow at all. I never invest for appreciation, which is what many people are forced to do in these areas.

If you are in an area with very expensive homes or very low rents compared to home prices, you may want to consider long-distance investing and possibly long distance, turn-key investing.

Diversification with turn-key rental properties

Many people like to spread out their risk when investing and rental properties are no different. If you own all of your properties in one place, it could be riskier if something were to happen to that area. If you have all of your rental properties in one place then the idea of an out-of-state property would provide diversification.

What is the difference between long-distance and long-distance, turn-key investing?

Long-distance investing is simply investing in real estate outside of your local market area. You are still in control of the purchase, the renovation and finding a property manager. If you have a great team that can handle all of these aspects for you, or you are able to travel to handle them yourself this can be a great way to invest. But it takes a lot of time and work to buy a rental property in another state when you have to control the entire process of finding the property, repairing it, renting it and finding a property manager.

Are turn-key rental properties a good option for foreign investors?

Foreign investors can buy homes in the United States, but it is hard for many foreigners to get financing. Traveling to the US, researching markets, finding real estate agents, closing on properties and then repairing and renting properties is very difficult when you live in another country. Turn-key rental properties make it much easier for foreigners or any long-distance investor to invest in rental properties. If you buy a turn-key rental property you might not make as much money as if you did all the work yourself, but the time and money saved will be worth it.

Are turn-key rental properties a good option for self-directed IRAs?

You can invest money from an IRA into real estate, if you have a self-directed IRA. When you use an IRA to buy real estate, the IRA is buying the property and all income and expenses must go through the IRA.

Conclusion

Turn-key rental properties are a great way to invest for cash flow when cash flow is hard to find in your market. Turn-key rental properties are also a way to invest in rental properties without having to repair a house, rent a house or find a property manager.

Steven Gillmer · Answer

@William Butler, the biggest concern that I have when buying a property with an existing tenant is I did not put them there and I so not know the property manager. You can request rent payment records and copies of the lease to help understand the quality of the tenant. Unfortunately, not all property managers have the same high standards when placing tenants and they are not very willing to share with you if they have had issues with the tenant.

The key is ensuring you complete your due diligence. I want to see a tenant that has renewed their lease at least once and that the property manager has been holding the tenant accountable to paying on time. If they pay late every month and the property manager has allowed it, you can just about guarantee they will continue.

Mike D'Arrigo · Answer

Turn key properties do not always cost more than when you do it yourself for the following reasons:

• Most turn key companies can buy properties for substantially less than an individual buyer. They have more sources i.e. auctions, tax sales etc and are paying cash. The worst way to buy is to finance an MLS listed property. The days of getting discounts on the MLS are long gone especially when you finance
• Turn key companies get volume discounts on materials and supplies
• Turn key companies have more leverage with contractors and get cheaper construction costs
• There are no construction cost overruns when you buy a turn key. Renovation projects rarely go as planned and quite often cost more than originally expected.
• There are no holding costs (taxes, insurance, utilities, mortgage) incurred while the rehab is being done and the property is being marketed for a tenant with a turn key.
• You don't lose 1 month of rent for lease up with a turn key property.
• Lost cash flow opportunity while you put a team together and find a property, especially when you keep losing out on MLS deals because you're financing.

Lastly, you need to think about what is most important to you. Is cash on cash return most important or return from equity assuming you can actually save by doing it yourself. As someone else already mentioned, you're going to have more cash out of pocket since you can't finance your rehab. This significantly reduces your COC return. Let's assume you managed to save $10,000 by doing it yourself, so therefore you have $10K in equity from the start. But you don't really have $10K. Equity is only realized when you sell. You have to look at the discounted value of that $10,000. At 3% inflation rate, the discounted value of your $10K built in equity will only be $7440 in 10 years if you sell. Now let's say that you spent $10,000 out of pocket for the rehab. Under this scenario, you have spent $10K in todays dollars, thereby lowering your cash on cash return to realize $7440 in future dollar value when you sell in 10 years. You have to ask yourself if it's worth lowering your cash on cash return and taking on all of the risks of doing it yourself for the potential to realize $7440 down the road.

Engelo Rumora · Answer

lol

Love it Brie :)

Alexander A. · Answer

Ha! I love this analogy Brie.  Pizza and turnkeys!  Love both!

Raymond B. · Answer

@Steven Gillmer,

To make the @ work, do the following: Hold down the shift key and type @? Look below this Window, and you will see a list of names of people that have posted in this thread. Click on the name of the person that you want notified via an email, that you responded to them. If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name. Then look below this Window and click on that person's name. Raymond

Ronnie Carney · Answer

This is all great information and I learn a lot from all the different opinions, they are much appreciated.  I will definitely be following up as I get closer to a purchase date.

William Butler · Answer

You mention the risks of properties that are currently occupied.  What risks do you see or feel an investor should be aware when purchasing a home with an existing tenant?

Kevin M. Rooney · Answer

@Mike D'Arrigo

Should I Get Started with a Turnkey?

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