Should You Buy Turnkey?
Buying turnkey can be an excellent purchase method for new investors but turn-key is only 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 a high overhead and significant carrying costs, marketing expense plus they must make a profit. All these costs are added on top of 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 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.
I have seen many flipped properties (flipped property + tenant = turnkey) and the most common problem I have with them is that the flipper corrected the cosmetic problems (paint, carpet, appliances) but glossed over the system problems (plumbing, HVAC, roof, etc.). How would you know if this is the case? Pay for an inspection. With the inspection you will know the actual condition of the property. Will the turnkey provider do the necessary repairs discovered during the inspection? Probably, but at an additional cost. Without the inspection report you have no idea of the property's actual condition. 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 that all the work is done and it is under management by the turnkey group's property manager. As you will learn elsewhere in this book, the property manager is the most important member of your investment team. Good property managers are not common so what are the odds that the in-house property manager is a good property manager?
Remember that the property cannot be sold without a tenant in place so the property manager is under a lot of pressure to get "someone" into the property. Good tenants are the result of careful screening by a good property manager. Also, unless you perform a proper due diligence, how do you know that the rent stated by the turnkey provider is the actual market rent for the property?
Another factor to consider with any property manager is maintenance. I will not deal with a property manager who has an in-house repair staff. An in-house repair staff is just another profit center to the property manager. This creates an inherent conflict of interest because in order to "meet the numbers," the repair center will be pressured to make repairs, even if they are not really needed.
One last point is that in some cases, using the turnkey's property manager is not an optional service. Using their property manager is part of the contract that you sign. What happens if you are dissatisfied with the property manager? Nothing. You are stuck with their property manager for some period of time. Also, what incentive does the in-house property manager have to perform if there is no penalty for not performing?
In this article I talked about items you need to consider before buying through a turnkey provider. Some of the key considerations include:
- 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. Also, the vacancy rate and time-to-rent. I have read of situations where unscrupulous turn-key providers have put tenants into the property at above market rates to make the property more attractive. Then when the lease is up, the lave and you are stuck with a much lower rent. You need to know what the market rental rate for the property.
- Sales comps - So you know you did not pay too much
- You can work with a property manager of your 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 as long as you do your own due diligence. However, I believe the small amount of time and effort saved will not justify the lower returns, higher cost, lack of critical information and being locked into their property manager will not justify buying turnkey.