The Real PROS & CONS of Investing in Turnkey Properties!
This week on the Weekly Wrap-Up I dive into what are the TRUE PROS & CONS of buying turnkey investments!
The following information is my opinion which I have developed since moving to the U.S. I have purchased, and sold, a few turnkey properties over the past 4 years. There are both pros and cons to this type of investing.
I also must preface this by saying I have seen a lot of people burnt when buying turnkey properties, especially international investors, as that is who I deal with mostly.
Lets start at the beginning:
What are turnkey (TK) properties?
Turnkey (TK) providers find discounted and distressed properties which are significantly lower than market value. These provides will renovate the properties and make the necessary repairs, and they will find tenants for these properties. They will sell an investor essentially a cash-flowing property; the end buyer, which is the investor shouldn’t have to do much.
The first question an investor must ask themselves is; “what do I want?” and “how much time do I have?”
Typically the answer to these two questions are, “cashlfow”, and “limited time”, respectively. Establishing this is very important when deciding if a turnkey investment is the right choice.
Here are my pros and cons for TK investments.
1. Investors that want cashflow, but have limited time, will love the potential ‘hands off” investing that TK investments provide.
2. Investors don’t have to get their ‘hands dirty” rehabbing the property, or finding tenants.
3. Typically a TK provider will be a one-stop-shop for the investor (deal flow, rehabber and property manager).
1. As the property has typically been purchased well under market value, and rehabbed, the TK provide will obviously be making a profit. Investor need to remember all profits have been stripped out.
2. The ‘on paper’ returns look a lot better than the actual returns: Be very careful who you work with. I know a lot of international investors that purchased TK properties back in 2012 and they never saw any decent cashflow as the type of tenants were leaving the properties in a state and any profit was eaten up bringing the property back up to par.
3. Market Turns: As profits have been taken when the TK provider sells the property there is a higher risk of losing equity in the deal if the market turns.
4. Limited strategies to further increase income, or decrease expenses (increasing NOI), as the the TK provider would have implemented all possibilities.
5. TK investment are never “hands-off”: there will be some management which investors will need to oversee.
1. If you are considering a TK investment remember that TK provides make money selling you the property.
2. Always be purchasing a TK investment in a good area that attracts good tenants; these areas will typically mean lower cashflow but lower risk.
3. Make sure there is enough cashflow projected per month (not less than $300 profit per month).
4. Never use the ‘on paper’ profits given to you by the TK provider: all ways do your own due diligence and analysis.
5. Investors shouldn’t make their decisions based how cheap a property costs
The most common mistake I see investors make when buying a TK property is they go for the cheapest property available. Fact is, those who have cheap deals are not legitimate turnkey providers. Since recurring maintenance cost, tenants’ background check, and added modifications to the property tends to raise the holding costs, so available assets are highly unlikely to vary in terms of cost. Within some cases ‘cheap’ houses can mean a lower quality tenant; I know from experience that positive cash-flow can be eaten up very quickly in repairs and maintenance once a tenant moves out.
Ex: Property A –
Purchase Price: $45,000
Monthly Income: $700
Monthly Expenses (tax, insurance etc.): $300
Yearly Income: $8,400
Yearly Expenses: $3,600
Cashflow: $4,800 per year.
This seems good on paper but just simple things like painting walls and replacing damaged walls/cabinets once a tenant moves out can eat up most of, or potentially even all, of your profit.
Takeaway advice: Just because the property is cheap doesn’t mean it will be a good investment. The type of tenant that moves in to your property directly affects how much you will spend on yearly repairs and maintenance.
7. Investors must do their homework and due diligence
Bad turnkey purchases can be avoided by thoroughly researching the company they are purchasing from. The Internet is the first place to go, and see reviews. Check out responses/feedback from past investors or the providers’ activities online.
If an investor must buy from the providers, they must visit the property they are buying. Investor must know, if the company provides property management services, do they do it themselves? or do they seek an outside company?. In either case, they must have a license and it must checked if they are operating according to the state laws.
Until Next Week,