Ok, wait, that was a little rash. It’s kind of hard to yell about something without at least offering a justification for the statement. So I’m going to offer you an analysis on turnkey prices so you can understand what is really behind the prices of these properties.
The two biggest objections I hear to buying turnkey rental properties are:
- The margin between the listed price and what the seller actually bought it for is way too much!
- I could buy a similar property for much cheaper!
Before I counter both of these, you need to understand that I don’t believe turnkeys are for everyone. If you are extremely handy, or have a phenomenal team of folks who can handle properties for you, or if you just want to be more involved in the process than totally hands-off, turnkeys are not for you. It makes much more sense that you go get cheaper houses and do the work yourself. I may even be envious of you that you are in a position to do that, so congratulations and go have fun with it. For those of you without those resources (or desires) though, hopefully I can make you feel better about paying more but not feel like you are getting ripped off.
Yes, turnkey properties are more expensive. And yes, people involved in the process are making money off of your purchase. Hello, it’s business. Without business, none of us would eat or have a place to live. The guys selling the turnkeys, that is their business. But other than making money, what else does a business do? They provide a service. So before you worry about how much everyone is making, you need to understand what service you are getting for your money. Only then can you make an educated decision about whether a turnkey is for you. Lucky for you, I can break it all down.
Dissecting a Turnkey Rental Property
If a property is labeled “turnkey”, it means (or it should mean) that the property has been fully rehabbed, tenants are already in and paying rent, and property management is in place to handle the property. Sounds easy, right? Anyone can do that, right? Yes, technically anyone can do that. Let’s compare how you can do this yourself versus what the turnkey guys can do.
- Task: Find a property.
If you don’t find a property at a good deal, you’re wasting your time. Making money is the point, right? Preferably you find an excellent deal, not even a good deal.
What you do: Common methods for finding a good deal on a property are: buying foreclosures, buying short sales, shopping at auction, or finding motivated buyers willing to sell at a discount for whatever reason. You might resort to the MLS to look for properties.
What the turnkey guys do: Most often, turnkey providers buy properties in bulk. Meaning they don’t buy one house, they buy 500. Anything bought in bulk tends to be priced lower per unit, so you can get a house for much cheaper when you buy 499 more of them instead of just that one. Turnkey providers also shop at the auctions as do the individuals. Lastly, when buying discounted properties is your full-time job, you tend to have a lot of connections in that field. Turnkey guys know people who know people who know people, and therefore they can snag good deals no one else ever knew about.
- Task: Rehab the property.
The extent of the rehab necessary to make the property functional and/or nice will vary. It could vary from only needing cosmetic work to a property having to be completely gutted and redone. Anything over just cosmetic work is going to require professionals.
What you do: If the work is only cosmetic, you probably do it yourself. No biggie there. For bigger jobs, you will most likely need a general contractor so multiple jobs can get done.
What the turnkey guys do: The turnkey providers have crews who work only on the properties bought by that provider. Essentially all of the work is done in-house.
- Task: Find tenants and property managers.
This task is broken down a little differently because you have two choices of doing this yourself: 1. Be the landlord yourself or 2. Hire your own property manager to do all of this for you. Versus the turnkey provider who does the finding of a property manager for you. But to keep going with our flow of differentiating, I’ll compare you doing all the work yourself (not hiring a property manager) versus the turnkey guys having management do it.
What you do: You advertise for tenants, screen them which may include credit checks, reference checks, background and criminal checks, and income verification. You provide all of the legal documents for the tenants to sign and must make sure you are in compliance with all state rules. Then you collect rent each month, respond to repair calls as necessary, handle the turnover of a move-out, and if an eviction has to occur at any point, you have to handle the legal process for that.
What the turnkey guys do: The property managers do all of the above for you. The cost is usually 10% of the monthly rent. So for a house collecting $1000/month in rent, you’re looking at $1200/year. There is no extra fee for using the turnkey provider’s manager over your own.
Have a preference yet? You may be able to judge just from that breakdown whether you prefer to buy a turnkey property or do everything yourself. Maybe you are still unsure, so let me really drive this one home and then address the costs.
The Bang You Are Getting For Your Buck
What I didn’t point out in the above comparisons are the good and the bad of each. A quick summary of each of the same tasks mentioned above: