Turnkey investing is a very hot topic in real estate circles and seems to only be getting hotter. On a daily basis in the BiggerPockets Forums there could be from half a dozen to two dozen conversations involving turnkey real estate. Those conversations may involve questions from new investors to advertisements of opportunities, but almost all of them get comments from investors who hate the concept. Some are uninformed opinions, and others are comments from experience, but all seem to point to two clear conclusions:
There is no definition of what turnkey real estate really means.
The worst investment you can make is a cheap $40,000 turnkey property!
Read this article carefully, and pay close attention to the end. If you are thinking about buying turnkey investments, there are many great opportunities all around the country, but there are probably more out there that are not. Investors are often their own worst impediment to making turnkey portfolios work, and I give a few ideas at the end regarding which investors this concept works for best!
What is Turnkey Real Estate?
To be very brief, turnkey real estate involves a model where an investor purchases a property — usually for long-term buy & hold — that another investor or company has purchased, renovated and put under in-house management with a tenant. That is my definition of a turnkey real estate investment. However, and unfortunately for investors everywhere, every week there are new turnkey companies popping up and creating their own spin on what it means to be “turnkey.”
Some companies own all of the services, while some do not. Some offer a completed property with tenant, some do not. Some companies are fully capitalized, while others need to use an investor’s money. Still other companies act as a real estate broker working off the MLS and then broker all of the after-purchase renovation and management services as well.
I am not here to tell you as an investor which one of these definitions is correct. I have been in this business for a number of years now and have seen all of the good (and most of the bad) and can honestly say that the word “turnkey” no longer has any true meaning. It is defined by the seller and marketed and sold to the buyer. As an investor, this is a major issue when you begin to investigate buying turnkey investments because different companies will have a different definition of the word “turnkey” to fit their model.
Related: What Are The Different Kinds of Turnkey Properties?
What I will tell you is that no matter the definition, there is one type of investment that I have seen fail every time when it comes to turnkey properties. In my opinion, the real blame for this failure falls on the constant marketing of turnkey investments and the lack of experience on the part of turnkey companies. Everyone markets the same thing and attaches the same emphasis on return and service without thought about how those two things are going to be delivered.
If you are looking to invest in real estate through a turnkey provider, exercise extreme caution when it comes to the marketing and pricing of properties. There are two absolutes when it comes to this business: turnkey investments sold at super cheap prices with super high returns are the riskiest investment you can make today. No matter how sincere a company or turnkey provider may be, it is impossible to maintain long-term relationships and high-level management and service without building in the revenue.
High quality renovations, high quality customer service and high quality long-term investments are not words that can be used by super cheap, low-end property turnkey sellers. They do not go hand in hand.
The Worst Turnkey Investment
I started as an active real estate investor and had many opportunities to invest all over the country. My business was extremely successful, which gave me all the capital I needed to make lots of mistakes! I didn’t know it at the time, but my biggest mistakes were the properties I was investing in for passive income. I was buying a lot of properties in Memphis, where I had spent part of my time growing up and where my family was still investing. The properties were turnkey for all intents and purposes even though that term wasn’t really out there at the time. What attracted me most (looking back it is easy to see why I, like many new investors, was attracted) were the low prices and low barrier of entry into real estate. I was buying cheap properties with little work being done to them — and what on paper were fantastic double-digit returns.
Before long, I had other investors around me asking what I was doing and what projects I was working on… so I told them. These same investors were some of the first investors to push my family to start our turnkey company. Unfortunately, like I said, when we first started, we fell into the mindset that super cheap properties with super high returns were great investments. We also believed that the best way to compete for investors was to offer cheap pricing. Keep the pricing low, and allow investors a low hurdle to their plans to build portfolios.
I speak from experience when I tell you that cheap properties — defined by me as anything priced $50,000 and under — make the worst turnkey investments. I have had them in my portfolio, and I have managed them in the past for other investors, and they are not profitable for anyone. We are currently managing over 2,700 turnkey investment properties, and here are our conclusions from reviewing factual data from managing those properties:
Two percent rent ratios are unicorns in the turnkey industry. They may pencil out as 2% properties, but you will pay in deferred maintenance what you should have paid for proper renovation and see your rent ratio cut to 1.5% or less.
Turnkey providers who operate with these low price …read more