Turnkey real estate is a term that has a big problem. And that problem is that there is no accepted definition of what “turnkey” actually means! Here at RealWealth, we know what WE define it as (more on that later), but there are many people in the industry that throw the term around so loosely that it has become almost meaningless. So, when asking yourself “what is turnkey real estate investing” just realize that there is no standard accepted definition, and that you have to be careful to know that who you are working with may have a much lower definition than you do.
What is Turnkey Real Estate Investing?
Turnkey real estate investing means that if an investor buys a property, everything has been done and all that investor needs to do after buying it is show up, insert the brand new key into the brand new lock, turn it, and TA-DAAH – they are in their shiny rehabbed investment property! Wouldn’t that be nice, were it always to be the case.
Turnkey SHOULD mean that all major systems have been looked at, repaired well, or replaced, or at a minimum checked out and determined to be in good working order with a minimum of several years of life left. Plumbing, electrical, HVAC, and roofing all fit in that category. In addition, items such as flooring, finishes, countertops, door hardware and faucets should have all been replaced if they don’t work well and look good.
Turnkey real estate should also include property management in place from a good and reputable property manager, with years of experience and a reputation to protect.
The overall issue is that you have to know who you are dealing with when choosing a turnkey operator. It’s important that they have experience, ethics, and know-how of the industry, but even more importantly you need to know whose best interest they are concerned about most – yours or their own? Unfortunately, the real estate industry is full of shysters who are looking out for themselves more than for you. There is a way to avoid all of that, however, so fret not. Of course, working with RealWealth is one way, as we have vetted and screened the turnkey teams we work with as much as we can. But to help you be aware of some of the potential pitfalls of working with turnkey providers, I have put together a list of the top eight signs of dangerous turnkey real estate operators.
8 Signs of Dangerous Turnkey Real Estate Operators
1 – Inexperienced Operators
2 – Talking the Talk, but Not Walking it
Do they own several rental properties of their own, personally? And have they for many years? There is a lot more to this business than simply buying some property and renting it out. The right ‘hoods, price point, and tenants are crucial to a successful endeavor, and the people you work with have to be able to articulate that easily and well. If they cannot, that’s a big red flag.
This is also why I don’t recommend that people buy rental property from any garden-variety real estate agent. Because most real estate agents don’t own rental property. They specialize in selling primary residences, and many don’t even own their own primary residence. So always only get your advice from people who have done exactly what you want to do, over and over again…for many, many years. If you do work with an agent, make sure they own and have experience with their own rental properties.
3 – Lack of Systems
Any good turnkey real estate operation has to have a proven system that they replicate over and over, ensuring consistency and quality. Do they have a system? What software do you use in conjunction with your operation? This applies of course to both the renovation team as well as property managers.
4 – Inability or Unwillingness to Scale
One issue I have seen a few times, unfortunately, and especially with property managers, is the inability or unwillingness for them to scale their business as it grows. They are great at what they do, so they attract more business, but they don’t want to hire new people because they feel they will then lose control. Or they WANT to hire new people, but are terrible at it and end up hiring the wrong people. The newbies end up not doing well, which reinforces their original reluctance to scale! So they try to do it all themselves, service slips, clients (of course) notice, and then they start losing business! With property managers always ask how they handle their client load, and at what point do they bring on new people.
5 - Bad Areas
Be careful if a potential turnkey real estate company operates predominantly in a C or D neighborhood. Here’s why: C and D properties can look great on paper – great ROI, great cash flow. But reality is a different story. A perfect example is Kansas City. There’s the really, really nice part of Kansas City, and then just a mile away is the worst part of Kansas City. And the worst part of Kansas City photographs pretty well, during the day…but at night, the scene changes dramatically – your properties get vandalized – it’s almost guaranteed. Or your tenant, if you can even find a local person willing to live there – is going to be terrified.
6 - Sub Par Renovations
How do you know if a supposed turnkey company is not fully renovating the properties they sell? How can you tell if they’re just trying to make a profit, overcharging you and leaving you with the repairs?
The way to protect yourself is simple: you don’t pay them. Never send money up front for renovations, until they’re done. More specifically, don’t pay anything until you can get inspections on a property – to make sure the renovations have been done. Especially if you don’t live there. You can have someone you know go in, check it out and get pictures taken. But never, never send money for repairs before the repairs have been done. Part of our REAL Income Property™ Standards are that we demand all plumbing, roofing, HVAC, boilers, foundations and electrical to be upgraded to code, and we get inspections to verify that that’s been done.
7 – Over Market Pricing
Do you think that ethically challenged turnkey real estate operators might try to get away with pricing their properties well above market, because they know that to the Seattle chiropractor, any price will seem like a bargain? Answer: Yes! The problem is, that if that operator is big enough, they can sell their own properties to another company that they work with at a higher price, which lifts their comps above reality, which means that when YOU get a comp, it may not be 100% reflective of reality, because enough of the properties in the area have been “sold” at artificial rates. This does happen. I think that appraisers for the most part are fairly accurate, but that doesn’t prevent many unscrupulous operators from trying to affect their market this way.
8 - A History of Fraud
At RealWealth, when we bring on a new turnkey real estate team, we always do our due diligence first. In the process, if we find a history of mortgage fraud, or anything shady in the real estate world, we usually end our due diligence there and don’t proceed. However, if it was a looooong time ago, we ask them if there is anything we should know about them, before we (potentially) roll them out to our membership. If they don’t tell us what we already know, they have just sealed their fate. If they do, then okay – we keep going on our process.
How To Get into Turnkey Real Estate Investing with a Trustworthy Company
Now that you know the signs to avoid, it’s important to understand how to get into turnkey real estate investing wisely, so you can enjoy the benefits of passive investing without the risk of getting scammed or having a subpar experience.
First of all, avoid any of the eight signs above. That goes without saying. Secondly, speak to references of that company. Travel to the market just once to meet with them, see their operation, visit a few properties, look at their operation – both the rehab operation, and the property management operation. Many people are reluctant to travel, but it’s well worth the effort, at least once. You certainly don’t need to go there every time you add to your portfolio after you have worked with someone for a bit, but I feel the first time it makes sense. For some, that isn’t possible, and that is certainly fine; but if you can, do it.
Once you feel good about the references they provided – the operation, the rehabber team, the PM team, and the overall areas they invest in, then you are in a good place to proceed.
Of course, the numbers need to make sense to you. On that note, a word about today’s market – cash flow is not nearly as good as it used to be. Properties have appreciated faster than the rents have in many areas, although rents have also skyrocketed in others. But typically, in appreciating markets the rents take a while to catch up. But remember – you will have a 30 year fixed mortgage, in most cases. Your costs will for the most part stay flat, where the property value and the rents will most likely go UP. So, the numbers will look the worst now, and improve over time. AND, even if they do not, as long as your revenue exceeds your costs, you will most likely be okay.
The danger comes when people don’t invest, they speculate, counting on future appreciation to cover their costs. Make sure the numbers work NOW before you jump in, even if they don’t work as well as you want them to. Most likely, they will get there.
The turnkey real estate operators and property managers RealWealth recommends have all been thoroughly checked out and we stand behind them, but if you do want to chart your own course, you can find decent turnkey real estate investment properties throughout the U.S.. Just remember it is always important to do your own due diligence to the degree that you feel comfortable with. Just please look for the eight signs of a dangerous turnkey provider above and go with your gut feeling whenever you can!