Hidden Dangers of Turnkey Rentals

There are lots of turnkey property companies out there, and some are more reputable than others.  This question deserves a fair shake.  I’ll try to give it one, but I have some strong opinions about this.

WHAT IS A TURNKEY PROPERTY – DEFINITION

A turnkey property is a fully renovated home that is purchased by an investor.  It can either be rented out immediately by the investor, or more commonly, comes already rented out with a property management company in place.

In essence, it’s answering one of the most common real estate needs out there:

I live in an expensive area, and I can’t invest here, but I want to invest somewhere, what should I do?

Use a turnkey property company!!!

It’s a potential solution to long distance investing.  Turnkey property providers usually buy distressed properties in good rental markets (not high cost of living areas).  They buy at a discounted price, and then rehab the property so it’s move-in ready.

At this point, they can either sell it to an investor, or go a step further.  They’ll find a local management company, get a tenant placed, and sell the property to investors with tenants and property management in place.

It’s supposed to be a win-win.  The turnkey property company flips the property to the investor for a mark-up, but there is still supposed to be enough “meat on the bone” for a decent return on investment (ROI) for the investor as well.

Typically, these companies will estimate an ROI of 7-12%, although that’s if nothing ever goes wrong (stuff always goes wrong).

Let’s show the numbers on what a turnkey property might do:

TURNKEY PROPERTY NUMBERS

They buy a house for $35,000 that needs lots of work.

They fix it up for $15,000

They sell it to you for $100,000

It rents out for $1000 a month.

As you can see, they profited $50,000 on the flip to you, but you still got a house that rents for $1000 a month.  Doing some very simple math, you could estimate this ROI to be about 6%.

A simple version of the math I did was, the house is renting for 1% of the purchase price monthly, so it makes about 12% a year.  We are estimating the total expenses on this property to be about 50% of rents.  This is a common estimate, and it includes property management.

So an investor living in a really expensive city like NYC could just call up this turnkey property company, buy a made-ready real estate investment, and be making 6% ROI long term without having any knowledge of the area, and without having to do any renovation or landlord work.

Not bad.

Or is it???

Now it’s time for me to pick this apart.

I’m in the military, and I’ve been doing long distance real estate investing my whole career.  In other words, I’ve found a way to do what the turnkey company is doing myself, even though I’m moving every 1 to 3 years and living mostly overseas.  Let’s look at how the math on this transaction would go for me:

MY NUMBERS ON SAME PROPERTY

I buy the house for $35,000 that needs a lot of work.

I get the work done for $15,000.

I rent the property out for $1,000 a month.

There are some HUGE differences here.  I paid $50,000 less for this property.  It’s just money I get to keep.  It’s money to buy a second property with.

Also, my ROI on this property is 12% instead of 6%.  I bought the property much cheaper, but the house still rents for the same price.  I didn’t have to give a cut to the turnkey property company.

Now, to be fair, the turnkey property provider may not necessarily mark up prices that much, but you will have a rough timing knowing whether or not that’s the case.

Here’s the other issue.  What do you know about the management company that they used? How good are they?

What do you know about the quality of the tenant you’re getting?

These things may or may not work out for you once the turnkey property company has their money.  They may or may not remain involved when you have disputes with your property management company.

Also, how good a job did they do rehabbing the property for you?

I’m going to now give two negative examples of turnkey property companies.  Granted, this doesn’t mean it will necessarily happen to you.

RICH ON MONEY READER

I had a reader recently leave me a comment.  He told me he lives in some expensive city, and he bought a turnkey property sight unseen in Montgomery, Alabama.  This happens to be where I invest.  He noted to himself when he heard me on a podcast that he would keep my name in mind in case things went sour with his investment and he needed help.

Well, guess what?

He said it turned out his management company was bad, his tenant was gone after trashing the place, and several renovations on the property had been done poorly.  He didn’t know a soul in Montgomery, as he had never been there before, and was unable to handle this issue himself because of his full-time job.

He was essentially asking me if I could fix this for him.

So what went wrong?  Almost everything that could:

• Renovations done poorly
• Bad management company
• Bad tenant
• Turnkey company not taking responsibility

The turnkey company got their profit when the house was flipped to the investor, and wasn’t interested in helping anymore.

MORRIS INVEST

This is a turnkey property company issue on a slightly larger scale.

Clayton Morris is a well-known real estate investor who has a successful youtube channel where him and his wife dispense real estate advice.  He’s very photogenic, as he had a career on Fox & Friends before doing real estate.  His wife was also on TV.

They were both guests on the Biggerpockets podcast  separately and just seem like great people!

They referred hundreds of people to turnkey properties that they were somehow affiliated with.  On a large scale, these turned out being bad investments and the number of people that felt cheated became high.  Google it.

CONCLUSION

I am not saying that it is impossible to find a good turnkey property company that is run by honest people that want to do the right thing.

I’m sure there are some out there somewhere maybe.  Probably.

Even if there are, however, I’m not so sure I want to give them that huge extra cut of money that I would rather keep for myself.  I also don’t want to dilute my ROI on the property.

Also, when it comes to property management, rehab, and finding tenants, I want to know very well the quality of that process and be involved in finding the right company.

If you read my blog thoroughly, I will show you how to do this yourself.

My blog covers this in several different posts, but a great place to start is 5 Secrets to Finding the Best Property Manager.  In my particular case, my management company also manages my rehab projects for me.

Some bloggers make a lot of money referring people to turnkey property companies, but I guess I won’t be able to do that until I sell out and delete this post.

Maybe someday.

Was I unfair?

Do you agree or disagree with my assessment.

I want to hear about your experiences or opinions in the comments below.

RICH ON MONEY

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