SS153: What Does Turnkey Mean in Real Estate?

SS153 What Does Turnkey Mean in Real Estate

Many real estate investments are sold as “turnkey” investments. But what does that actually mean? In this episode, Charles discusses what turnkey means, and why would a property be considered a turnkey investment.

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Talking Points:

  • A turnkey property is a property that an investor purchases that has already been renovated and is ready for immediate occupancy by a tenant. In most scenarios, you are purchasing the property from a “turnkey operator.” Yes, you can purchase a “turnkey” property off the MLS but, I have walked many properties that were considered turnkey by the listing agent that in all actuality needed work. When you purchase a property from a turnkey operator, the property (usually a single-family home) should require little time and effort to rent out, and manage.
  • Turnkey investing grew in popularity after the real estate market decline of 2008-2010; when it became less expensive to purchase a property than to rent one.
  • It allows new real estate investors the ability to invest in real estate without the hard work and hassle usually required with actively investing in rental properties.
  • Some advantages of investing in a turnkey property.
    • Purchasing an already renovated property that is ready for a tenant to move in or maybe there is already a tenant living in the property. Your cash flow will start as soon as the property is rented.
    • You actually own the property 100%. This allows you to have more control. Some busy investors might count this as a disadvantage since you are the one cutting checks, and making decisions when there are issues.
    • Turnkey rentals allow you to easily and quickly diversify outside of your local market.
    • No renovation hassles or cost overruns. The property is (should be) fully renovated when the turnkey investor purchases it. No contractors to deal with and there should be no cost overruns.
    • Dealing with one party; the operator. When you invest in a turnkey property, you are purchasing the property from an operator who is also managing the property after the sale. The investor is tapping into the operator’s on-the-ground team for their own property. If the operator is good, this can be very powerful. If they are not, the investor will need to sell their property or develop their own team in the market, which will be even more difficult with just 1 property.
  • Some possible disadvantages of investing in a turnkey property.
    • Turnkey properties are not passive investments, at best, they are semi-passive investments. Turnkey owners are asset managers who need to consistently review the performance of the property, and the property manager.
    • Inexperienced operators: If an investor does not properly vet the operator; the operator might actually be learning on the job, with your money. No matter how good a deal it is or how nice the neighborhood is; if the property is mismanaged, it can turn into a nightmare very quickly.
    • Overpaying: Overpaying for a turnkey property is very common since many investors are not totally knowledgeable about real estate investing or the particular market. When the properties are advertised to potential investors; they are typically just advertised as the price of the house and the potential rental amount. Investors will need to do their own research to verify that the price is reasonable. It is important to be aware that the operator is also making a profit once the property is sold to the investor.
    • Less than ideal areas: Many turnkey investors do not live in the market where they are investing. If investors are unfamiliar with the market, it makes it harder to verify that they are investing in a good area.
    • Small properties = inconsistent cashflow. If you are purchasing 1 or 2 houses; you have only 1- or 2-income streams. If both of those units are not rented, and paying; you are probably losing money.
    • Subpar renovations: Most turnkey investors never see the property they are investing in. If the operator did a poor renovation of the property, or they didn’t fully renovate the property, there could be expensive future repairs that may be required.
    • Value has already been created: Turnkey operators are basically renovating and flipping the property to the turnkey investor. Once the property is sold to the investor, the majority, if not all, of the value has already been created. It doesn’t mean it is a poor investment but, one of the main benefits of investing in real estate is the value-add strategy. This allows investors to earn double-digit returns.
    • Overall, the largest potential drawback I see of purchasing a turnkey property is the reliance on the turnkey operator and the fact that most turnkey investors do not perform proper due diligence on the operator or the property itself.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what does turnkey mean in real estate?

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
A turnkey property is a property that an investor purchases that has already been renovated and is ready for immediate occupancy by a tenant. In most scenarios, you’re purchasing property from a turnkey operator. Yes, you can purchase a turnkey property off the MLS, but I’ve walked many properties that were considered turnkey by the listing agent. Then all actuality needed work. When you purchase a property from a turnkey operator, the property, usually a single family home, should require a little time and effort to rent out and manage. Turnkey investing grew in popularity after the real estate market decline of 2008 to 2010 when it became less expensive to purchase a property than to rent one. Turnkey investing allows new real estate investors the ability to invest in real estate without the hard work and hassle usually required when actively investing in rental properties. So some advantages of investing in turnkey property. One would be purchasing and already renovated property that is ready for a tenant to move in, or maybe there’s already a tenant living in the property.

Charles:
Your cash level start as soon as the property is rented, you actually own the property 100%. This allows you to have more control. Some busy investors might count this as a disadvantage since you are the one cutting checks and making decisions when there are issues. Turnkey rentals allow you to easily and quickly diversify outside of your local market. No renovation hassles or cost overruns. The property is or should be fully renovated when the turnkey investor purchases it, so no contractors to deal with, and there should be no cost overruns. You’re dealing with one partner if a turnkey operator. When you invest in a turnkey property, you are purchasing the property from an operator who is also managing the property after sale. The investor is tapping into the operator’s on the ground team for their own property. If the operator is good, this can be very powerful.

Charles:
If they’re not, the investor will need to sell their property or develop their own management team or hire another management team, which will be even more difficult with just one property. Now, some possible disadvantages of investing in turnkey properties would be turnkey Properties are not passive investments. At best, they’re semi-passive investments. Turnkey owners are asset managers who need to consistently review the performance of the property and the property manager, inexperienced operators. So if an investor does not properly vet the operator, the operator might be actually be learning on the job with your money. No matter how good a deal is or how nice the neighborhood is, if the property is mismanaged, it can turn into a nightmare very quickly. Overpaying. Overpaying for turnkey property is very common since many investors are not totally knowledgeable about real estate investing or the particular market. When properties are advertised to potential investors, they’re typically just advertised as the price of the house and the potential rental amount.

Charles:
Investors will need to do their own research and due diligence to verify the price is reasonable. It’s important to be aware that the operator’s also making a profit once the property is sold to the investor. Less than ideal areas, many turnkey investors do not live in the market where they’re investing. And if investors are unfamiliar with the market, it makes it harder to verify that what they’re investing into is a good area. Small properties equal inconsistent cash flow. If you’re purchasing one or two houses, you only have one or two income sources. If both of those units are not rented and paying, you’re probably losing money. Next would be subpar renovations. Most turnkey operators never, or investors never see the property they’re investing in. If the operator did a poor renovation job of the property or they didn’t fully renovate the property, they just did partial things here and there, there could be expensive future repairs that may be required.

Charles:
Of course, that investor, turnkey investor should be sending in team for doing due diligence. However, if you don’t know exactly about the property or construction and you’re doing the due diligence yourself, you could find some costly repairs on the road. Value has already been created, and this is one of my huge things that I think negatively for turnkey properties, is that turnkey operators are best basically renovating and flipping the property to the turnkey investor. Once the property is sold to the investor, the majority, if not all the value has already been created. It doesn’t mean it is a poor investment, but one of the main benefits of investing in real estate is a value add strategy. This allows the investors to earn double digit returns. It’s difficult for investors to earn double digit returns when they are yield investors, not value add investors, and a yield investor is just someone that purchase a property has already stabilized and just rents it out for returns.

Charles:
The value add investor goes in, invests money, time, energy to get that property to the next level and be able to increase not only the rental amount coming in, the net operating income, but also the value overall. The largest potential drawback I see at purchasing a turnkey property is a reliance on the turnkey operator and the fact that most turnkey investors do not perform property due diligence on the operator or the property itself. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show [email protected]. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Speaker 2:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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