The Pros And Cons Of Turnkey Real Estate Investing

When we got serious about real estate investing starting in 2013 as a way to propel our FIRE journey, we turned to turnkey real estate companies to accelerate our growth.

Scott was working a big corporate job, and my business was in growth mode. We felt maxed out on how many cash-flowing rental properties we could find ourselves, and so turnkey was alluring because turnkey providers do a lot of the work for you.

What is turnkey real estate investing?

Turnkey real estate investing can be defined simply as buying an investment property that doesn’t require any additional work to become rent ready. You can buy the property, and then can immediately turn around and put a tenant in place. Similarly, turnkey is also a term used in the non-investing real estate world, to refer to properties that are completely move-in ready.

There is a difference though, between buying turnkey real estate, and buying real estate from a turnkey provider.

Turnkey real estate providers aim to provide the real estate investor with not only a turnkey product (the property), but also a turnkey process (everything else that goes into investing). They do all of the legwork, from locating the property, to renovating the property, selling the property, putting a tenant in place before closing, and providing ongoing property management. It is intended to be a one-stop shop and a significant time saver, because the investor can simply provide the funds, and the turnkey provider takes care of everything else.

In practice, it is not that simple, and we’ve written before about the problems we’ve encountered with turnkey real estate.

For a more detailed definition of turnkey real estate, Investopedia is a great resource.

Our history with turnkey real estate investing

We spent several years vetting six turnkey companies across five different states, ultimately buying five properties in 2015 and 2016 from two separate turnkey companies in Indianapolis, and another property in Florida. The cash flow was much stronger than the properties we sourced ourselves, but turnkey real estate investing isn’t 100% turn-key, and the annoyance factor was high.

Ultimately we sold all five Indy turnkey properties to a single buyer in 2019. With Scott leaving his corporate job, our youngest leaving for college and our move to Florida, we were moving into a slower, more flexible lifestyle. We would have time again to find our own deals, eliminating the need for turnkey real estate investing. We also decided to focus on a higher income demographic than turnkey companies typically serve.

However, at a single-family rental real estate conference a few weeks ago, a clear theme emerged about the dominance of the institutional investor over the mom-and-pop landlord. We are definitely of the mom-and-pop size. If the trending real estate landscape favors the institutional investor, should we revisit turnkey real estate investing?

There are pros and cons to turnkey real estate investing in today’s market

Pro: You can focus on what you do best, while the turnkey company handles the real estate

Toe-to-toe, we are not going to beat bigger companies who can focus 100% of their efforts and resources on real estate. We have multiple streams of income, including real estate, but also paper assets and our businesses. Our attention will be divided out of necessity.

Furthermore, Scott’s expertise is IT, and mine is HR. It makes sense to focus on our areas of expertise – i.e., pushing on our consulting and launching products relating to our knowledge and interests. Leave the turnkey companies to do the heavy lifting on the real estate front.

Con:  You still have to vet what turnkey real estate company you go with

However, turnkey real estate investing isn’t as simple as writing out a check for that perfect property. You still need to find the right turnkey company to work with.

This wasn’t straightforward when we were looking five years ago, and I imagine it’s trickier now. With run-up on real estate, there are probably more turnkey companies to sift through, and even if they have strong results to show, you’ll have to verify that these results are: 1) truthful; 2) due to the turnkey company’s performance and not the general market lifting everybody; and 3) able to withstand the now shaky economy.

Even if you find a good turnkey company, you still need to pick your geography and your criteria for what deals you are looking at. You don’t just want to buy what is available, but rather what fits with your preferences and priorities.

For example, we focus on single-family rentals in growing middle-income neighborhoods where rents are over $1,000. If you aren’t clear on your criteria, you won’t know if a deal is a good one or if a turnkey company is right for you. (One of my favorite books that has a good discussion on the importance of criteria is The Million Dollar Real Estate Investor.)

Pro: Mortgage rates are at historic lows, making now a unique time to buy

The rates in the high 2-percent and low 3-percent range are reserved for primary homebuyers. Rental investment mortgage rates are higher. That said, rental investment rates have also declined, and for the highest credit scores, you can find rates in the 4- to 5-percent range.

If you are strapped for time but want to jump on these rates, turnkey companies will save you time on scouting and prepping a rental property. The best turnkey companies are scouting all the time. They run direct mail campaigns, they have inbound leads from digital advertising and they have longstanding relationships with banks, brokers and other real estate players to hear about distressed properties faster than a mom-and-pop investor.

Con:  Those low rates may already be factored into the turnkey property prices

Of course, you pay for the turnkey service. They deliver a rent-ready property to you which is marked up to cover their costs and profit margin. If interest rates are falling, that makes the potential cash flow from a rental even better. Is the turnkey company going to price based on the former rate, and give you the extra cash flow from the better rate, or will it price based on the new, lower rate? Probably the latter.

In fact, I have seen turnkey numbers that have very optimistic assumptions. We went to one presentation where the cash flow projections were calculated based on no expenses and no vacancy. That’s unrealistic at best and misleading at worst. Many providers we’ve seen calculate 3% for expenses and a 5% vacancy rate. These numbers are too low in our experience, especially in the lower income geographies where turnkey properties are typically based.

Pro: You can shelter in place and still get geographic diversification

Speaking of geography, the geographic coverage of turnkey companies is one of their significant advantages. You can use a turnkey company that specializes in just one geography to be your boots on the ground when investing out-of-state. You can use a regional turnkey company that covers multiple states to allow you to expand outside of states you are familiar with. With the pandemic limiting travel, you can shelter in place and still expand you real estate portfolio.

Con:  Turnkey companies offer geographic diversification but little to no income diversification

The geographic diversification was a big attraction of turnkey real estate investing for us in 2015. We already had multiple properties in the two geographies we were in and weren’t sure we wanted to keep investing in the same places. However, we didn’t have boots on the ground anywhere else, so turnkey companies could fill that gap.

We certainly were able to explore different geographies (we looked at Philadelphia, Birmingham and Indianapolis), but in each geography the rental stock was focused on lower income neighborhoods. Rents are in the under-$1,000 range, and these tenants have lower incomes. These lower income jobs are less secure, and the pandemic has just exacerbated the precariousness of the situation. Your risk may be lowered from geographic diversification, but it is greatly increased from renting to a lower income pool.

We are holding off of new real estate investments, including turnkey

On a high from the IMN real estate conference a few weeks ago, I waxed nostalgic about our days scouting and putting together real estate deals. I briefly revisited the notion of turnkey real estate investing as a way of getting back in, hence this post reminding myself of the pros and cons.

In our assessment, the cons still outweigh the pros. How about you? Are you making any deals right now? Have you used turnkey companies?