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SHOW NOTES FOR EPISODE 214: PROS AND CONS OF TURNKEY RENTALS
If you are a real estate investor, especially a new or part-time investor, you may have considered buying a turnkey rental property. The ease and simplicity of buying a rent-ready turnkey is very appealing, especially if you have limited time and/or experience. However, before you can decide whether turnkeys are for you, you should be aware of the main advantages and disadvantages. In this podcast, Bill Manassero, an experienced turnkey buyer, shares the pros and cons of buying turnkey rentals.
Introduction
Ok, if you’ve listened to this podcast for a while, you know I have a strong opinion of turnkey rentals – it’s sort of a love/hate type of relationship. You see,
I love the “idea” of turnkey rentals but hate the reality of turnkey rentals.
I remember when I first wanted to invest in real estate. I was so excited. Was reading every book, blog and watching tons of YouTube videos and webinars. I bought the home study courses and attended the boot camps too. I was pumped but also scared to death to make that first purchase. What I really wanted was an experienced successful real estate investor to hold my hand as I found the right markets, evaluated properties and made that first purchase. Unfortunately, every successful real estate investor who was interested wanted tons of money for 20 minute calls once-a-week. Not the mentoring I wanted or needed!
So, when I got those first emails with pictures of beautiful properties, with the financial analysis already done for me showing how much I would make each month with these wonderful turnkey rental – without having to find the market (they already researched and selected the best ones!) – without having to do any rehab (they have done ALL the upgrades and repairs) – and without having to find a tenant (one was already in place) – nor did I have to research and interview property management firms (because they had already screened and selected the best PM already). All I had to do was to pay cash for the property and start receiving checks in my mailbox each month.
I was sold! Where do I sign?
I hopped on a plan out of Port-au-Prince, Haiti (where I was living at the time), flew to Atlanta (bought a beautiful 3/2 house), flew to Memphis (bought another 3/1 house and a duplex) and flew home. Wow! Was that easy! And guess what? The next month the rent checks started flowing in! This was heaven on earth! Could like get any better????
Or, should I have asked— could it get any worse????
In the months that followed, things started to happen. Tenants mysteriously disappeared. What? I had leases!!! I called my property managers to see what we could do. They said it would cost more in legal fees to go after them and that they probably wouldn’t be able to pay anyway. In other words, it wasn’t worth pursuing.
I was upset but, hey, I had read about this and these little glitches were bound to happen. Pas problem – No problem! Plus, I had a 6 month rent guarantee if there were any vacancies the turnkey company guaranteed they would send the rent check anyway. I’m so stinking smart… yeh right! And sure enough, like clockwork, I got me rent money. However, 6 months came and went and still no tenants. The rent checks stopped. I couldn’t understand why the property managers couldn’t find tenants.
The property in Atlanta still had tenants, but then the A/C broke – $3,000 to replace. There goes the cash flow for this year.
I switched property managers two times in Memphis. Trying to find someone that could find me tenants. Finally, got a good one and he switched to all section 8 tenants (their safe, right? Afterall, they have to be good or they kick them off the list they waited 5 years to get on!).
For months, it would be great but the section 8 tenants would break lease, trash the place and thousands and thousands of dollars later, I’d get new tenants. A/C units got stolen. Section 8 inspections would result in thousands more of repairs. One problem after another.
I had hired another turnkey company in Indianapolis for a duplex I bought there. You’d think I would have learned by then! Did a terrible rehab and when I asked them to fix it they said their contractors were more important to them than their clients.
And the list goes on and on…
Then, I started doing my blog and podcast and I heard from you guys — more turnkey horror stories from many of you.
Now, I am not going to brand all turnkey providers as bad. That’s not fair. I haven’t hired all turnkey providers. But I will say that the fundamental business model for turnkey companies is flawed. Most business models are that of a fix and flipper. They make the money on the sale of the house. The cheaper they can buy the house, the bigger the profit. And forget the property management side. Property managers don’t make much anyway and they’re hard to staff properly for great service – unless they are in high-end homes or multifamily- So, most turnkey companies will job property management out to someone else.
The bottom line is that they make their money on the quick sale on the front end – just like a flipper. Beyond that, there is not much incentive to do a lot more like maintain top property managers and get high quality tenants. There’s just no money in that part of the business.
That being said, I do belive there are pros and cons and I want to present some here so that you can carefully weigh out whether that is the best choice for you.
If you are a real estate investor, it is only natural that you are on a constant hunt for the best investment strategies and options available in the housing market. You must be aware of all types of investment properties, including their pros and cons. One of these investment property types is turnkey rentals, which are a fully viable option for many real estate investors. But before you can decide whether that’s the right investment strategy for you, you have to learn about its main advantages and disadvantages.
What is a Turnkey Rental?
Maybe you are relatively new to the exciting world of real estate investing and still have no idea what turnkey rentals refers to? No worries, I will tell you all about them. Turnkey rental companies vary in size, shape and services, but I can attempt to give you a rough description. Turnkey rentals are basically presented as investment properties which are in a fully rentable condition when you buy them as a real estate investor. Kinda like a “One Stop Shop” for real estate investors. Like when you buy stocks or bonds. You pay the money and everything is done for you! You just sit back and hope the money will come in!
One major drawback of real estate investing is having to prepare your income property before you rent it out, which delays the time when you can start making money from your real estate investment. So, so the idea of turnkey rentals is to eliminate this problem as you can start renting them out and collecting rental income as soon as you purchase them. Moreover, many of them come with readily available professional property management services inplace, which means that you will have quite a problem-free experience as a landlord.
Now that you know what turnkey rentals are, let’s take a look at their main pros and cons:
Turnkey Rentals “Pros”
Turnkey rentals indeed have some advantages over other types of investment properties. Here they are:
1. No Need for Fixes
As the name suggests, turnkey rentals are investment properties that are ready to be rented out upon the turn of the key. There is no need to do any fixes or repairs, which will save you lots of money and energy and headaches. You might need to add some furniture to make the income property more attractive for tenants, but not having to perform major repair work is a huge plus. DON’T ASSUME – Always have a formal inspection.
2. Immediate rental income
The fact that you can start renting out turnkey rental properties right away brings another important advantage: the possibility to start making money immediately. As soon as you buy a turnkey investment property, you can find tenants and start collecting rent from them, which is your rental income. As long as you are able to rent out your rental property for enough rent, you will have positive cash flow immediately.
3. Headache-Free Landlord Experience
As mentioned before, most turnkey rentals come with professional property management services. Some have their own in-house company. Some job it out. Of course you have to pay for this service – 10-12% of your rental income – the idea is that it will save you lots of time and efforts as a landlord, which you can invest elsewhere, in buying and managing another investment property, let’s say. RED FLAG – No landlord experience is completely“headache free”
4. Requires No Previous Experience
Yes, it’s true. I had no experience AND it was an easy way to quickly become a real estate investor quickly. Because turnkey rentals are rent-ready and because you don’t have to find property management, these income properties are easy for anyone, even people with zero previous experience as a real estate investor and/or a landlord, to get started. Kinda like real estate investing cruise control! Thus, if you have not dealt with real estate investing before, turnkey rentals can be a fast, easy way to get started without knowing anything. RED FLAG – Ignorance is NOT bliss until you need to know something! Always, always educate yourself first before getting involved in real estate investing or you’ll pay the price later.
5. Makes Out-of-State Real Estate Investing Feasible
Sometimes you just don’t live in the best rental market at the moment. That’s a reason which might prevent many individuals from buying and owning a rental property. Out-of-state real estate investing is always an option because it increases significantly the opportunities to find a profitable investment property. With turnkey rentals, out-of-state real estate investing is made easy, regardless of how far your selected housing market is from your own home. Since you will not have to deal with fixes, repairs, maintenance, and tenants’ requests, you are free to invest in real estate in any part of the country. Instead of having to find and build an out-of-state team, it’s a way of having an instant team in place. RED FLAG – Yes, it is easy but, keep in mind, if something goes wrong, it’s also tougher to get out there and fix it!
Turnkey Rentals “Cons”
Unfortunately, just like any other type of investment property, turnkey rentals are not perfect; they do have their drawbacks. Here are a few of the major ones:
1. Higher cost
Because turnkey rentals are prepared for renting out and because they offer professional property management services, they cost more to real estate investors. In other words, you will likely pay market or above market price to purchase the turnkey rental. However, you still should run comps and get a good idea where you purchase price falls. Nevertheless, any smart investor still should conduct a careful investment property analysis. They might be presented as being more profitable – in terms of cash flow, cap rate, and cash on cash return – than you would calculate yourself. And, of course, since all rehab work is done for you, in advance, hopefully by professionals, that value should be added on to the price. It’s just a matter of whether the “After Repair Value” is accurate in relation to the market price.
2. The Property Management Isn’t That Great
This is my experience and the experience of many others I have known. Good property management (PM) is just hard to find. I would say most PM firms are not that great, therefore, it is no surprise that turnkey (TK) PMs are any different. Now, one way some TK providers have tried to alleviate this problem by creating their own PM departments or businesses, it seems that most find, economically, it makes more sense to just contract with other local PM firms. The problem is, the turnkey company may not be actively working with your PM on your behalf after the purchase. The reality is that in most cases, the turnkey company is generally done with you after the escrow papers are signed and you are on your own with the PM. It’s no longer the turnkey company’s problem.
3. They Want Cash-Only Transactions
As I mentioned, TK providers are basically just flippers. They deal in volume and they want up-front fast transactions. If you prefer to finance the property, most TK providers don’t want to mess with you. They don’t want to deal with banks, inspections or anything that will slow down the purchase process. Like flippers, their money is on the line and they are on the clock! They may owe someone money (hard money lenders, etc.) and it costs them to hold on to the property too long. Some do allow for financing but it is not the case with all.
4. Not Always the Best Properties in the Best Markets and Neighborhoods
When most people buy from TK providers they assume that the turnkey company did their homework and that the property they are buying is in a good neighborhood and that property will appreciate over time. Unfortunately, that is not always the case. The TK provider makes their money on the spread. So, they look for cheap houses that they can mark-up. The bigger the spread, the bigger the profit. Sometimes they will buy homes in bulk, spread out over a broad geographic area – some in good areas, some not. It’s hard to find big profits in the best neighborhoods.
5. Less flexibility
Since your turnkey rentals are “make ready,” you have no say in deciding on the finishings, the color of the walls, the floor tiles, etc. But since you are buying these properties to rent out to tenants, as long as they look good enough to attract good renters and provide you with enough rental income and cash flow, that might not be an issue.
Conclusion
Now I realize that there may be those listening that have purchased turnkey properties and they are perfectly happy with everything. That’s great! If you have a good company and relationship with your turnkey company, keep it up. I’d love to hear from you and get the names of those companies that are doing it right.
And there may be those listening you did pick a company and are having troubles. For those of you in that situation, don’t be discouraged. You can turn it around. I did.
And for those currently still deciding, all I can say is do your due diligence:
- Research your markets AND neighborhoods carefully
- When you find the property, hire an inspector to thoroughly check out the property
- Interview the property management firm of the turnkey company well and before you buy. That way, if you don’t like them, you’ll have time to find your own
The beauty of real estate investing is that you can almost always, find a way to make something work. Just be smart – do your homework, get good advice and make good decisions. Anyone can find something appropriate for his/her situation. Even the busiest of people, with no previous knowledge of real estate, can become successful real estate investors and landlords.
Well, that’s it for today…
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