Turnkey Experiences: The Good, Bad and Ugly

by FI Fighter on June 22, 2015

in Guest Post, Real Estate Thoughts

turnkey - 1

I purchased my first turnkey property in 2013… Time flies! Since then, turnkeys have gained even more popularity, and many investors (especially out-of-state) utilize this method to invest in real estate.

At this time, I would like to welcome Alex from Cash flow Diaries for a guest post today on his own rental property experience!

Turnkey rental Investing!  It can be such a sweet and bitter process.  Turnkey rentals have been a hot topic of debate for many years now and to some including myself and the FI Fighter himself, it’s a great way of generating passive income and building a real estate portfolio.  For others, it’s a scary, daunting endeavor and a risky investment.

There are many sources out there that explain to you how investing in turnkey rentals work and what the process is.  The problem though is that they all come from the turnkey sellers themselves.  Can you say biased opinion!!   Well I’m writing to you today with a different outlook.  One of a turnkey buyer, right here in the flesh!  I do not sell real estate nor am I affiliated with any turnkey provider.  I am merely on the same path that you are on seeking financial freedom.

I’ve already dealt with all the struggles, pains, countless hours of research, flying to a new city to view properties all leading to acquiring successful income producing turnkey properties.   I have attempted to purchase 5 different turnkey properties with a final result of only closing on 3 of them.

What you see below is the accumulation of experiences I have gone through in my journey of buying turnkey rentals.  You will see The Good, The Bad and The Ugly!

The Ugly

There is always the potential to an ugly side of going through the process of purchasing turnkey rentals.  For me that ugly side was having to back out of two different turnkey properties I had under contract at different times.  Both of them looked good on the outside and on paper the returns looked great.  Where they all went wrong was at the inspection.  If you have ever heard of the term “slap lipstick on a pig” then you will understand the kinds of turnkey properties some companies are pitching because these were exactly that.  Choosing a third-party inspection company that is in no part affiliated with the turnkey provider is a must.  The inspection will uncover all the true issues within a house.  They reveal major and minor issues with the house in question.  When an inspection report has 2 pages full of Major issues then you know you are dealing with a “pig”.

Typically, after the inspection there is a negotiation that takes place between the buyer and seller in which it unveils what repairs are to be made based out of the findings on the inspection report.  In my case the turnkey providers were not willing to repair ALL the major repairs and even all the minor issues which led to me backing out.  I ate the cost for both inspection fees and moved on with my life searching for a reputable turnkey provider to work with.  I was however able to get my earnest money deposit back which eased my pain a bit.  Not having emotions and having your heart on a specific property is a must attribute to have folks.  Know when you to walk away!

The Bad

There is also a bad side to deal with when venturing in the due diligence phase of turnkey investing.  I have literally spent countless hours researching turnkey providers on the internet, speaking to other investors, interviewing turnkey providers and property management companies.  In order to make sure you come out with a good deal or property it is necessary to build as much knowledge as you can with all the available sources you have.  It can be very time-consuming going through this especially when you don’t have a mentor or anyone holding your hand that has previous experience with purchasing turnkey properties.

Not to mention dealing with the lender, the appraiser, the inspector, the property management company and the turnkey seller.   Finding the right team to work with is also time-consuming and takes an effort in determining who the best people are to work with.  In most cases, the turnkey provider supplies their own property management team which can be one less task however there is still the matter of asking the right questions and making sure the property management team they have in place is one you will be okay with.  Just because a turnkey seller provides property management does not mean you have to use them.  You are welcome to use any property management you can find and this can be worked out with the turnkey seller.

Once you have your team in place and have chosen a few turnkey sellers you would be willing to do business with, there is the process of searching for properties through whatever inventory the turnkey provider has.  If you have a set criteria in purchasing rentals like I do then you want to make sure the prospect houses will fit your criteria.  Some of my criteria includes at least 15% cash on cash returns, a low crime neighborhood, minimum 3 bedrooms and more than 1 bath room.  I like 3BR/2BTH houses because these types of properties are easier to sell if the time ever comes where you need to sell.  An exit plan is a critical piece of the puzzle.  Make sure to have an exit plan in place.  I have reviewed at least 40 different turnkey houses for sale by multiple providers and have only found a handful I would be willing to pull the trigger on.  Again, a very time-consuming process.

If your plan is to buy an out-of-state turnkey which is most likely the case then I would also highly recommend you visit the city in question. Meet the turnkey providers, view their operation first hand and take tours of their properties.   This can be a very costly trip and can take time away from your daily life.  I do think this is a mission critical objective because seeing the turnkey sellers operation first hand will give you the best glimpse of what it is they really do and who you are working with.  I spent 3 days in Indianapolis doing just this and I spent close to $1,500 all in while I was there with round trip flights, hotel, rental cars, etc.

Although going through this can be long and tedious process, it is a very important that you don’t cut any corners as it can lead to a bad investment.

The Good

Ahhh! How we all love the good!  Cash flow city baby!!  The whole purpose of purchasing turnkey rentals is about creating passive income.  This by far is the best aspect of turnkey investing and when done property it can pay off well.  For example, overall on all three turnkeys I own I have spent a total of $5,0526.86 of my actual cash.  This number even includes all the travel costs, money lost on inspections, down payments and your standard projected expenses of having a rental property.  I am still getting a projected 21% cash on cash yearly returns.

Where in the world can you find that kind of ROI?  To give you a keen idea of the standard expenses I have for each of my rental properties it includes all principal/interest/taxes/insurance, 10% property management fees, 10% estimated vacancy rates and 10% for future estimated repairs.  (The percentage for vacancy and repairs is equal to 20% of your monthly rent income for each property).

Not to mention I intentionally left out all the added benefits of owning these properties which include potential appreciation, yearly tax benefits and the principal pay down occurring each month increasing my equity and net worth.  If I were to be able to calculate those numbers in my ROI the returns would be way higher.  Since I’m not a math genius and can’t predict the future I don’t calculate these in my numbers but I know they are there.  And it makes feel warm and fuzzy inside!  I will continue buying turnkey rentals as long as I can continue getting the kinds of deals I have been getting.

So there you have it folks, a brief rundown of The Good, The Bad and The Ugly that I have experienced with my journey to financial freedom by purchasing turnkey properties.  If you haven’t yet experienced the process of purchasing a turnkey rental I truly hope my experiences will help you in achieving this goal.  Only time will tell if these investments will continue with the current projections however taking calculated risks and putting in extra effort and due diligence in this process is vital to success.

 

Have you considered purchasing a turnkey rental?  Or have you already?  I would love to know your experiences.

{ 9 comments… read them below or add one }

1 CashFlowDiaries June 22, 2015 at 11:47 am

Thanks for posting! Its been a heck of a ride. Cant wait for my next one!

Reply

2 No Nonsense Landlord June 23, 2015 at 5:47 am

I prefer to get the property and turnkey it myself. Then, I get the immediate appreciation and the long term rental prospects.

You have to look hard for properties, but when you do, you can capture 20%+ ROIs.

Reply

3 CashFlowDiaries June 23, 2015 at 7:32 am

Hey NNL! To be honest, I would also prefer to buy the property and turnkey it myself and If I could do that in my local market I would. It really all comes down to where you live and if the numbers make sense there.

20% ROIs are GOLD!!

Reply

4 No Nonsense Landlord June 23, 2015 at 1:27 pm

There are turnkey people in every market and they make money. Find a bird dog. Understand the foreclosure process inside and out. Every state is different, every state has it’s ways to get property wholesale. Every state and city has distressed properties.

That’s what “We buy Ugly properties” does. And many investors do it too. Buy at the sheriff’s sale. Redeem as a junior lien-holder. Buy a property without a commission. Find a landlord that wants out. There are literally 100s of ways to get deals in every market. You might have to be a cash buyer to make it work.

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5 Even Steven June 23, 2015 at 12:52 pm

I’m always a little skeptical of turnkey investments, my first thought is always scam followed by timeshare. I don’t get much past that.

I can see turning to this strategy where the barrier to entry in your city is high, the amount of research I would do probably would be close to a cia investigation.

Reply

6 CashFlowDiaries June 23, 2015 at 1:09 pm

haha! Yes for sure Steven. CIA investigative techniques are needed no doubt. The good news is, once you do that research and finally find a turnkey company you can trust, it makes life a whole lot easier for the next ones. The first one can be hard.

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7 Frugal Fit Money July 1, 2015 at 1:50 pm

My wife and I have been thinking about getting into real estate to diversify our stock holdings. At the moment, I feel a lot more comfortable investing that way than with real estate. Perhaps I will start with REITS to get my feet wet than move towards actually owning one outright!

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8 Keith August 25, 2015 at 12:36 pm

“For example, overall on all three turnkeys I own I have spent a total of $5,0526.86 of my actual cash.”

Strategic comma placement there! I wonder how many readers interpret that as $5k instead of $50k.

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9 Alexander @ CashFlowDiaries August 28, 2015 at 9:16 am

Hey Keith! Yeah I noticed that too. Hopefully Jay will fix it when he gets back from hiatus.

Its definitely not 5k. On my blog I post actual numbers of each of them breaking them down and you can see they are all 25% down plus closing costs etc…

Wasn’t done strategically at all though, not sure what benefit that would do for anyone.

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