Should You Invest In A Turnkey Real Estate Investment

(This post updated July 27th, 2016)

How would you like to have your cake and eat it too?

No, I’m not talking about baking. I’m talking about real estate investing!

You see, many people want to invest in real estate, but they also want to live in a great location where rental properties don’t make a lot of sense. They want to enjoy the sun, the city, the lights — but they want cash flow from rental properties that they’ll never find in their backyard. They want to own rental properties but don’t want to actively manage anything. They want their cake… and they want to eat it, too.

Is this possible?

Well, in recent years a number of “turnkey” providers have emerged that claim they can help investors do just this. But is turnkey real estate investing really all it’s cracked up to be?

Let’s find out.

What are Turnkey Properties?

Turnkey real estate investing is a loosely defined investment strategy in which the investor buys, rehabs, and has a property managed through a third-party, usually from a long distance away. Their goal is to make the entire real estate investment process as simple as possible, so all you need to do it “turn the key.” (Get it!?)

There are hundreds of turnkey real estate providers in America (and across the world), and no two companies are exactly alike. Some will buy, rehab, rent and THEN sell a property to you, the investor. Others will simply help you find the property and let you do most of the heavy lifting on the rehab side (if there is any rehab to do), then manage the property for you. Again, each company runs their operation a little differently, so if you decide to go with a turnkey company, it’s important that you do some in-depth research on exactly what that turnkey company will and will not do.

Benefits of Buying Turnkey Properties

Turnkey investing has several distinct advantages over doing it all yourself:

Service at a Distance: The first (and most obvious) benefit to turnkey real estate investing is the ability to invest in a good real estate market without you needing to live there. Being a landlord is not always easy, and trying to be one from thousands of miles away can be even more tough. Many people who live on the East or West coast of the United States, as well as many who live outside the country, rely on turnkey companies (usually in the Midwest, where cash flow tends to be higher) to invest in great markets.
Market Insight: A good turnkey company knows their market with far more precision than an outsider would. You might be able to do some research on a particular area and check out the school ratings, crime reports, and price ranges, but a turnkey provider will know the heart of an area. They will know why people prefer one area over another. They’ll know why this block is worse than that block. They’ll know the reputations behind certain neighborhoods, properties, and businesses. They’ll have an ear to the ground about societal changes that could affect the local economy. It is very difficult for an outside to gain this perspective, as it is normally reserved only for long time locals, which a good turnkey provider should be.
Professional Staff: Turnkey providers, because they are property management companies, will generally have either in-house staff or work closely with vendors to make sure your property is taken care of. They have someone who will answer the phone, someone who will fix a running toilet, someone who can sign a lease with a new tenant. When you invest on your own, you either have to do all these roles yourself, OR you’ll need to find them in a market you may not know.
Marketing Machine: Many turnkey providers buy, sell, and rent dozens or even hundreds of homes per month. For this reason, they are required to consistently drive leads into all the parts of their marketing funnel. They might use billboards, radio ads, newspaper ads, and more to drive both motivated sellers and tenants to their business. For this reason, they may find better deals than you could, as well as get tenants faster.
Management Experience: Let’s face it, most people are not good managers. Turnkey providers, on the other hand, are usually experienced in dealing with tenants and contractors. Their experience helps them make the right decision more often.
Simplicity: Finally, although each turnkey company operates a little differently, they all have the same goal: to make the investment property easier for you. When you invest in real estate by yourself, you are forced to handle all the moving parts yourself, which can be overwhelming. A turnkey real estate investment company attempts to simplify the process, so you ideally will only need to write and receive checks.

The Downside of Turnkey Properties

Now at this point, you are probably thinking to yourself, “Wow, turnkey sounds pretty ideal. Why wouldn’t everyone do this?” There are some potential downsides to turnkey investing you should be aware of before you jump into that kind of investing, so let me walk you through the two big ones:

Financial: A turnkey company is a business that needs to make money, and they do this through several methods. First, turnkey companies often buy the property at a discount and sell it to you, the out-of-state owner, for a higher amount, essentially “flipping” the property to you for a hefty amount. Then, the turnkey provider makes a monthly income by managing the property for you. Therefore, it would make sense that you will be paying a “premium” for the ease of service you are getting. You generally can’t have your cake and eat it, too! That said, remember that turnkey companies DO have a marketing machine running 24-7, and as such, are generally able to find incredible deals in their market, so even if they do make a profit when they sell to you, you might still be buying “below average” and getting a great deal.
Trust Needed: Perhaps the greatest risk when choosing to invest in real estate through a turnkey company is the level of trust you must place in this provider. After all, you are relying on their knowledge and expertise to choose a location, choose a property, choose a tenant, and manage that tenant. That’s a lot of trust you are placing in someone else who gets paid whether or not you make a good investment. It would be fairly easy for a turnkey provider to take advantage of out-of-state investors by encouraging them to buy bad properties in bad locations. In fact, I’ve heard many horror stories of investors who buy a property through a turnkey provider only to discover soon after that it was a “pig with lipstick” that immediately began costing the investor a lot of money in repairs.

So, should you invest in real estate at a distance through a turnkey company? That’s a decision only you can make after careful investigation into a particular company.

I’ve personally never invested in a turnkey company because I have both deals and the hustle needed to make greater profits in my own backyard. However, if my area did not present the same kind of opportunities, I would seriously consider it.

There are both benefits and disadvantages, so I would weigh those against the possibility of investing in your own market. If you live in an expensive area and want to invest in lower-priced properties, turnkey can be a great alternative to being a local landlord. Just be sure to do your research and know what, and who, you are investing in.

Have you invested in turnkey real estate? What would you add to my list of benefits and downsides?

Don’t forget to leave a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.