Should You Buy Turnkey?
Buying turnkey can be an excellent purchase method for new investors but turn-key is merely a purchase method. It in no way reduces your time, effort or responsibility to perform a proper due diligence on the location, property, process, tenant selection criteria and, the turnkey provider. So unless you are willing to gamble with your savings, the time you will actually save buying turnkey is limited. Below is a diagram illustrating the difference between a direct purchase and a turnkey purchase.
In general, turnkey properties will almost always be more expensive than a direct purchase. Turnkey providers have high overheads and significant carrying costs, marketing expense plus they must make a profit. All these costs are additional to the normal acquisition cost which you would pay if you bought the property directly. Below is a diagram illustrating the cost component difference between direct purchase and turnkey purchase.
As the above diagram shows, you are paying more for a turnkey property but getting the same rent as you would if you did a direct purchase. If you increase the acquisition cost but the income remains the same, the result will be a lower return.
Flipped properties (flipped property + tenant = turnkey) tend to be cosmetically appealing (new paint, carpet, appliances), but hide problems (plumbing, HVAC, roof, etc.). Unless you receive an independent inspection report by a licensed property inspector, how would you know if the critical (and expensive) issues were repaired? Items such as foundation repair, roof damage, mold, water damage, code violations and other such expenses can turn what appears to be a sound investment into a financial nightmare.
The Property Manager
One of the selling points for turnkey properties is that all the work is done and it is under management by the turnkey group's property manager.
The property manager is the most important member of your investment team.
Since the property cannot be sold without a tenant in place, the property manager is under a lot of pressure to get "someone" into the property, and may not have the time for the careful screening required. Also, unless you perform a proper due diligence, how do you know that the turnkey provider is charging the actual market rent for the property?
Furthermore, if the turnkey property manager has an in-house repair staff, there is an inherent conflict of interest. To "meet the profit numbers," the repair center may be pressured to make repairs, even if they are not really needed.
Finally, in some cases, using the turnkey's property manager is part of the contract signed. What if you are dissatisfied with the property manager? You are stuck with them for a period of time, and the property manager has no incentive to perform since there is no penalty.
Before buying through a turnkey provider, be sure to obtain the following:
- An inspection report from a licensed property inspector.
- A list of all repairs made so you know all the key items from the inspection report were corrected.
- Rental comps - so you know what market rent is for similar properties in the area, the vacancy rate and time-to-rent.
- Sales comps - so you know you did not pay too much.
- The right to work with a property manager of your own choosing if you are not satisfied with their property manager.
- Results from code inspections.
- The disclosures from the prior owner of the property.
- A written statement from the property manager with specifics on the time and cost to evict a non-paying tenant.
Turnkey can be a viable purchase option once you do your own due diligence. Without it, the small amount of time and effort saved will not justify the lower returns, higher cost, lack of critical information and being locked into a property manager.