Sizing Up TurnKey - Is it right for you?

Fundamental Principle

TurnKey providers offer a clear path into real estate investing - and though it’s a route we often recommend, it’s key to understand the tradeoffs you’ll make.

Our Story

In the summer of 2017, we were six months into our marriage and had recently survived a brutal winter and spring of homeownership. From rodent carcasses in our attic, to cement in our pipes, to severe roof leaks - let's just say our house hack hadn't started as planned.

It's key to set that context - because our next choice might seem just a little batty. After hundreds of hours of podcasts, books, and articles - Nick convinced a reluctant Diane to take the leap - and invest in our first out of state property in Indiana.

At this stage - we appreciated how much we didn't know. We didn't have any network, save for family in Indiana, and our only investment property was our in-state house hack (and while that was an excellent investment, you can see it had a rocky start.)

Considering those limitations, we chose to invest in a TurnKey property - recognizing this would limit our returns, but hopefully help us learn the process, build a network, and lay the groundwork for our investing future.

It worked out that way - eventually - but like many of our investments - it didn't go as planned.

In July 2017, we closed on our first out-of-state investment - a $72,000 single-family home just outside of Irvington. As the TurnKey provider promised, it was fully fixed up and came with tenants already in place.

We couldn't have been more excited. We learned the property was home to a young family, and we loved the idea of providing them a great home. As planned, we received our first rent check in August and our second in September. So far - so good - but it didn't last.

As we headed into fall, our rent checks stopped coming. After multiple conversations with our Property Manager, we finally got a straight answer. There had been a severe incident of violence in the home, and there was now a restraining order against one of the tenants. Unfortunately, the remaining tenant could no longer pay rent.

Our Property Manager didn't initiate the appropriate filings - we aren't sure if this was out of pity or negligence - but it took us until December to finally vacate the property. We incurred several months of lost rents, as well as more than $5,000 in damages. That was the vaunted beginning to our real estate investing career.

At this point, many would throw in the towel (Diane sure wanted to). But Nick believed our experience was an exception, not a rule, and that we were on the right path toward building generational wealth.

While painful, we'd learned some critical lessons along the way - such as the importance of building a trusted team. We knew we'd grown and become smarter - and that while we had new mistakes ahead - we wouldn't repeat the ones we'd made.

And truthfully, we would have missed out had we chosen to cut our losses and sell the property. It's now renting for $770/month, and we've had the same reliable tenants in place since January 2018. The house recently appraised for $91,000, and we're refinancing to pull cash out of the property.

We met reliable crews in the rehab phase, and we've used them for several projects moving forward. We gained valuable insight into the process, including how to close out of state, manage a Property Manager, and navigate rehab. Not all of these were part of our plan - but they were valuable learnings nonetheless.

In hindsight, should we have just acquired a property and rehabbed it ourselves? Perhaps, but considering all we didn't know, the risks would have been enormous - and we might have been too nervous to take that first step.

Is TurnKey for me?

If you're looking to close on your first investment property (especially out of state), TurnKey is worth considering. If you research on BiggerPockets and identify a reputable TurnKey provider, you'll probably have a much better experience than the one we've shared above. Read reviews and talk to people who have used that provider to ensure quality - but there are absolutely some reputable companies.

In working with a TurnKey Provider, you're buying into a cash-flowing asset without significant headaches (theoretically). Once you've secured financing, your work is mostly done - as the TurnKey provider manages the rehab and tenant placement. Especially as you're building your network, this support is valuable - as you won't have a reputation in that market or a network of contractors and agents who may be interested in working with you.

What are the Downsides of TurnKey?

While we're often advocates of using TurnKey providers for your first out-of-state purchase, there are some significant downsides to doing so.

Many TurnKey providers struggle with quality Property Management and tenant placement, and deals can quickly go south when these aren't in order. You're also missing out on equity in the short-term, as you're buying the property post-rehab at the market rate.

And while TurnKey simplifies the process, protecting you from beginner mistakes, you're missing out on large pieces of the process such as evaluating neighborhoods and managing rehab.

Going Solo on Your First Deal

If you want to purchase your first property out of state and avoid working with a TurnKey provider, you'll want to focus on what David Greene calls the "Core 4" (which we think of as the "Core 5" - but that's far less pithy). Keep in mind as you build this team - they may not be your forever team. We've made some significant changes as our needs evolve, but we remain loyal to those who have been great partners since day one.

The Core 4

Your Agent

The first partner you'll want to identify is your agent. Your agent will help check out properties on your behalf and act as your fiduciary and process coordinator. Remember, agents are paid on commission - so keep their incentives in mind, especially as you're just starting to build the relationship. If you send your agent on wild goose chases - you'll burn them out. Be serious about a property before asking your agent to evaluate it.

It's critical to set realistic expectations here. More than likely, your agent isn't going to be bringing you home run deals. Even as seasoned investors, we're not getting a lot of home run deals in our inbox - they tend to be singles and doubles at best.

To find investor-friendly agents, work with whatever out-of-state investment group exists for your region. Agents will likely engage actively with that community, and you'll also be able to build your investor network and ask for referrals. Just don't be a tire kicker, or you'll quickly establish the wrong sort of reputation.

Your Lender

Most lenders offer similar products - so take the time to build a relationship with someone you enjoy, as you'll be spending a lot of time with them. Consider local lenders when learning a new market, as they can speak to different neighborhoods and offer some invaluable insight.

Before you start exploring properties, make sure to get pre-approved with a lender so you set reasonable expectations for the offers you can make. You should expect your lender to close in 30 days (non-Pandemic times) and offer LTV's ranging from 70-80% depending on the market. Finally, be sure that the lender can loan on the value of the properties you're considering; we've run into this challenge on some of our smaller acquisitions.

Your Contractor

Contractors are challenging, as they often get burned by early investors asking for scopes of work on properties they'll never purchase. As you're building your network, be prepared to pay a contractor to walk a house, and put a scope of work together for you.

If you're looking to identify a contractor, it's worth starting by asking fellow investors for recommendations. If you're local - try checking out Home Depot or Lowes at 5 am, and see who is there getting a jump on the day (and currently working on projects). Your agent and property manager will also likely have some recommendations, so it's worth asking them as well.

When working with your contractor, build your understanding of what things cost using resources like Bigger Pockets. Don't be cheap - not every line item is worth bargaining for the lowest possible price. It's key to remember that your contractor needs to pay the crew, and make a profit - and you don't want them cutting corners to do so.

Throughout the project, check in with your contractor (we do this weekly on big projects) and make sure you don't pay for work until it's done. This ensures your contractor stays the course - and finishes the project on time.

Finally - we pay an inspector to validate all completed work before we send out the final payment. No matter the quality of our contractor, the inspector nearly always finds problems that need fixing.

Your Property Manager

From our experience, we'd say finding a great Property Manager is the toughest piece of this puzzle. Quite frankly, we've made terrible decisions here before - and it's cost us.

Many quality Property Managers won't give you the time of day until you have a property, or even a more substantial portfolio - so you'll need to start with one that's hungrier for business. You may need to evolve your Property Management over time as your portfolio grows.

Start by asking for referrals, or again, leveraging out of state investor groups and forums. We'd recommend you speak to at least three in your local market - and take the time to understand their fee structure. The cost of Property Management goes well beyond the monthly price and includes things like lease-up fees, resigning fees, markups on work, etc. Make sure you understand the full picture, and that you're comfortable with how they're incentivized.

No matter what - be willing to pay for proper management. Reliable Property Management is perhaps the most critical component to building a strong out of state portfolio, and what you don't pay in the short term - you will in the long run.

Once you've established your Property Manager, work with them to help validate your assumptions and numbers. Ask about their vacancy rates, and thoughts on various neighborhoods, to inform your investing and pricing decisions.

*Bonus* Your Investor Network

Hands down - the best relationships we've cultivated have been with our fellow out-of-state investors. Our network has generated great referrals, partnerships in times of crisis, and genuine friendships that keep us sane during the rockier parts of this journey. We now have an alliance of experts - each bringing distinct knowledge to the table - who can challenge our thinking and help us up-level our efforts. We can say with certainty - we wouldn't be where we are without them.

Closing Thoughts

There are risks in purchasing your first (or any) investment property - but no matter the path you take - solid research and a great team will set you up for long term success. You'll make countless mistakes along the way, but if you consult those who came before you - hopefully, you can avoid making ours.