Successful exit strategies for Turnkeys: Do they exist?

Question

Hey BP -- I'm moving toward my first residential investment property and weighing the pros and cons of out-of-state turnkeys. I don't imagine investing with turnkeys long-term and so I'm wondering how others have used them as a stepping stone to more lucrative opportunities. Assuming that I find a solid turnkey provider in a solid market, what should I be thinking about with regard to exit strategies? Has anyone been successful with anything other than cash flow? I don't want to start with turnkeys and find out 5 years later that they're dead weight. If you are a turnkey provider, please refrain from chiming in on this one. You'll get your turn. :) Much appreciated!

Larry Fried · Answer

Account Closed that different strategies should be considered. I have written an article about various passive strategies I have deployed:Three Key Routes for Passive Real Estate Investing

Andrew Johnson · Answer

Account Closed I think others have hit most of the points so maybe this will just reinforce it. I don't know if turnkeys would make sense for a short-term hold for a couple of reasons:1.) In theory you're paying something to get the property ready for market. Rehab, maintenance, etc. so what you're buying *should* be in turnkey condition. 5 years from now that won't be the case. 5 years of renters can have an...shall we say...impact. Getting a property "rent ready" is usually a different scenario than "sell rent".2.) If the turnkeys are being purchase in an area where 90% of the homes and rentals then the buyers are investors. Buyers don't want to pay "market", they want a deal. You've paid market because you wanted "turnkey". You aren't really in a position to demand the "turnkey premium". Additionally, turnkey companies spend a good chunk of money getting out-of-state investors interested. You likely don't have the funds or business set-up to do that. In short, you don't have a 'buyers list'.3.) It costs money to sell. Call it 6% on realtor fees and another 4% (just for simple math) to get it ready to sell. If you do want to sell to an owner occupant you'll either have to time your leases well or do a cash-for-keys scenario. That's another good bit of money if your tenant is savvy. If you do to sell to a future owner and you want to avoid cash-for-keys you will have to leave it vacant. That's at least 30 days of "no rent" and likely 60+ days.4.) Let's hope you bought the turnkey based on real comps. I see a lot of advertising of turnkeys based on cap-rate which doesn't determine value in an SFR. When you go to sell and you want to get an owner-occupied (instead of that investor that wants a "deal") they're going to pay based on neighborhood comps.I'll leave out trying to guess what the real estate market will look like in 5 years. It might be up...it might be down...it might be plateaued. We all have theories but nobody really knows.

Matt R. · Answer

This exit part might be a big issue if you want or need to exit turnkeys within 5 years. Many are not in areas that make this shorter term hold period a viable option you figured out. If you can find one that is in a hood that is gentrifying that could make this 5 year plan work much better. Those providers are not very common but do exist. Understanding non turnkey locals likely snag most those up. I would agree with Tom that either way you want to deal direct and or has inhouse management. Those ones seem to put much more thought in the whole process and will typically draw the line on avoiding the real high risk managment areas at least. To find that up and coming area is your next challenge. Check FS houses? in Indy maybe. Good luck with your search!

Tom Ott · Answer

Turnkeys are a great investment for out of state investors. I would suggest going with a Turnkey provider who is an actual provider. Make sure they; own, renovate, and manage the property. In terms of exits, turnkeys can be a great option as well. You can hold it longer if you would like if the market is not appreciating, OR if the market is on the rise you can successfully sell you property.

Ali Boone · Answer

Hey Aaron! I'm not a turnkey provider but I do work with a lot of them (indirectly, not for them)....just want to be upfront on that. But I have two articles I want to give you that kind of start speaking to your questions.The first I wrote about why turnkeys can be awesome for new investors...which that wasn't your question but the content in it does kind of speak to how they can be used as stepping stones. Mostly, it's for the knowledge gain and experience gain before you get into more complicated deals.https://www.biggerpockets.com/renewsblog/turnkeys-...Then for exit strategy, here's info on what you can do with turnkeys after however long you want to hold them-https://www.biggerpockets.com/renewsblog/turnkey-e...Hope those help!

Jeff Wallenius · Answer

Aaron Hunt turnkey is a long term play. If your looking to exit in 5 years, you need to think of a different strategy. There's plenty of of others options out there. I'm happy to discuss further if you need additional.

Nicholas Abramo · Answer

Account Closed Turnkeys are a great way to immediately network and create a team in that area. I purchased my first turnkey property in Ohio a couple of months ago and it has been a learning experience. You will be paying market value if not more for the property, but everything is done for you. That really forces you to hold onto the property for the long term. The sooner that you wanna exit the more money you could potentially lose. Like you said you could use a turnkey property as a stepping stone to leverage their team after a purchase to build your portfolio. Meaning using the existing PM etc and finding a local investor friendly agent to find you deals. That's one possibility but it all depends on how hands on you want to be investing out of state.

Account Closed · Answer

@Jeff Wallenius - I'll take a look at your website and see if there's anything there that I might be interested in. Thanks for the reply. Jeff.@Ali Boone - Thanks for the articles, Ali. Read 'em...very helpful.@Nicholas Abramo - Got it! Using TKs to begin building a team for later investments seems viable as long as someone knows they want to be in a particular market. Something for me to consider for sure.@Tom Ott - I'm definitely looking to hire a property manager sooner than later, but right now the cons of TKs are outweighing the pros.@Matt R.- That makes sense, Matt. I really want to use SFR as a stepping stone to MFR and I don't want to be years out before starting on the multis. I want these first few investments to really catapult me to the next level and I can see how most TKs would not do that.@Andrew Johnson- Good stuff, Andrew. Really appreciate the detail. Barring significant appreciation, it's clear that the cost to sell would rule out most TKs given my goals.Thanks for the link, @Larry Fried, I will take a look!