Should You Take A Chance and Invest In A Turnkey Property?
Turnkey properties… they have been a topic of discussion for many years. Investors have often been burned by them after buying them from scandalous companies using marketing hype to sell these properties. Since it’s still one of the great discussions with many investors curious about this type of property, it’s one that bears taking a closer look at.
With a plethora of discussions surrounding turnkey real estate, it’s important to be aware that some comments are solely uninformed opinions while some comments come from experience. Still, what’s certainly been noted in all that talk is that there’s no clear turnkey real estate definition. The other worthwhile note is that the worst investment a person can make is an inexpensive turnkey property.
Are you considering investing in a turnkey property? If so, then you should be aware that there are many prospects available. But, go into any transactions as knowing you may not get a good deal in the end. When it comes to turnkey properties, investors must exercise patience and caution. It’s usually the investors that make buying and selling turnkey properties so difficult. If you want to avoid the obstacles that you could be throwing up in your path, it’s important you learn those issues and how to avoid them.
Turnkey Real Estate: What Is It?
Turnkey real estate is a model in which investors buy a property – to hold onto for some time – before another company or investor buys it, fixes it up and then rents it out. The problem for investors is that more and more of these companies are appearing and creating their own turnkey definition.
Some companies will own every service; others will not. Some provide a complete property with a tenant included; others don’t. Some of them are completely capitalized with others needing money from an investor. Some companies work as a real estate broker, using the MLS and then broker all the renovation and management services.
Which definition is right? There is no right or wrong! The term “turnkey” does not have a true definition. The definition is made by the seller that’s then sold to the buyer. When you’re an investor, this can be rather problematic. Why? It’s because each company has a definition of turnkey that fits their particular model. Imagine if you’re working with multiple companies. That could get confusing real quick.
Here’s what you should understand: there is only one kind of investment that fails in turnkey properties. The failure is due to the continuous advertisements of turnkey investments, and the little experience these companies have. If you want to work with a turnkey provider, it’s important you are wary about the properties’ marketing and prices.
When dealing with the real estate market, these are the two true aspects of the business. These properties are sold extremely cheap and offer great returns, but are the most dangerous investments a person can make. It doesn’t matter how truthful a turnkey provider or company is, it’s not possible to have long-term relationships and super-level service and management without establishing revenue.
There are three words that cheap turnkey property sellers can use – high-quality customer service, superior-quality long-term investments and high-quality renovations. They just don’t work together.
My Worst Turnkey Investment I’ve Ever Made
I was an active real estate investors, with chances to invest in properties all across the nation. I was successful at my business, giving me plenty of capital to make some mistakes. What I didn’t know was that my prevalent mistakes were the properties I had invested in to make a passive income.
I bought a plethora of properties in Memphis, where I grew up and my family was still living. I didn’t know it then, but the properties I had invested in were deemed turnkey properties (at the time, there was no definition). What I liked about those properties were the low prices and the easy ability to get into the real estate market. I could buy inexpensive properties, do little work on them and get double-digital returns on them.
It wasn’t long before other investors were curious about my success. These are the same investors that encouraged my family to begin the turnkey company. We, unfortunately, developed the mindset that buying cheap properties that offered great returns were worthwhile investments. We thought competing with other investors meant we should stick with the low prices.
My definition of cheap properties – anything under $50,000 – is the worst kind of turnkey investment. These properties are not profitable in the least. We are now holding onto more than 3,000 turnkey investment properties and, as the management of these properties, we came up with two conclusions about them
Only two percent of turnkey properties are considered unicorns for rent ratios. While that’s two percent, you still have to contend with maintenance, and this ratio is reduced to one percent or less.
Investors with these properties tend to have two problems they must deal with. One, sometimes both, will force them to change their model or face failure in the business.
It is not conceivable to hire the right people for a turnkey company that wants attention on the customer/tenant relations when renting out low-cost properties. Little room is available to establish the revenue needed to put together the right team. In the grand scheme of things, the company is faced with problems, and the tenant and client are the end losers.
It is not possible for turnkey company owners to spend a plethora of their money on systems and teams and keep incomes low. Most of these investors go with a “stay small, keep it all” frame of mind. They opt to keep the company small while marketing like a bigger company and making sure the profit is all theirs.
Who is the loser in this situation?
Low priced real estate means renovations are not always up to code and maintenance problems are put off for as long as possible. Of course, eventually, they need to be contended with when a tenant is there. When this happens, permits are needed to fix problems, which will cost money. And, when no permits are attained, it leads to even more problems when eventually deferred maintenance must address them.
Sometime in the future, that work will need to be done, and the owner must handle the maintenance on that property.
The reality is that tenants won’t stay in properties where deferred maintenance is a problem. Management companies don’t thrive when their properties are not properly taken care of, and they’re not making enough of a profit. They fail to deliver on the marketing promises of the owners.
It’s a never-ending cycle – a company can’t make enough profit to handle the permits or hire and keep a team together. By trying to ensure prices are low, more work is constantly needing to be done. It’s not long before a turnkey company owner understands that they need to alter their business model or close down. They’re just not earning what their time is worth.
Guarantees of Turnkey Companies
Many novice turnkey companies have incorporated the phrase “guarantees.” It came about after companies failed to realize their own value to a client or community then try to sell the product by offering guarantees.
This was a trend noted a few years back. It started with companies providing one-year guarantees for maintenance and rent. Basically, they were promising a set return. While it was a potential FEC rules violation, it was definitely a bait and switch approach for novice investors. What happened after the year was up? Where did the return on investment go after the guarantee is no longer active?
We have seen investors purchase properties that involved guaranteed returns, only to learn just how bad the property would do after the first year was over. Many investors were stung by deferred maintenance and poor makeovers. And, believe it or not, the scenario can get even worse.
How so? Remember, tenants will not stay in a property that has to have work done to it. The investor may have a one-year guarantee on a property, but it’s the only year they’re liable to have an occupant. Real estate investors need to steer clear of guaranteed properties.
Remember this: an experienced turnkey property is one that doesn’t need to work and offer guarantees. The quality speaks for itself. They know what their value is and what they can offer their clients.
Memphis Invest Created A New Way Of Thinking For Turnkey Properties
Memphis Invest made a conscious decision to come up with a new way of thinking and performing. In the past, it was about making sales just to make sales. While a service was rendered, the benefit was focused on low cost. There was no way for a profitable company to last.
The focus turned to offering high-quality property with amazing customer service. It then turned to developing a property management company that was intent on bettering tenant relations and keeping them inside properties. With more attention put on improving and maintaining property, a new style of turnkey investment came about.
This new thought process was focused on long-term investors who were happy about the process, and focusing on buying properties to build their portfolio. These were investors who know that maintenance and vacancy are part of the rental process. As an investor, their job was focused on picking a team that would reduce the number of vacancies and deals with maintenance.
With this change in mindset, it’s also changed the way in which a turnkey company is now defined. It’s also helped investors to pick the company that’s best for them to do business with.
Who Should Be Purchasing Turnkey Properties
Investors who are more concerned about service and quality than overestimated returns should consider turnkey properties that will give them a constant return on investment for their passive income. This will, exclude many investors who were sold on these investments in the first place.
Novice investors who cannot get together the down payment needed on investment properties do not need to invest in this kind of property. These investors are the ones that will be lured into offerings seen with the cheaper properties. It’s important to remember that turnkey investments are regarded as passive. There are a vast array of ways you can start your real estate investment portfolio that doesn’t include the purchase of cheap turnkey properties that don’t perform as you want.
What performance level should you be anticipating? First off, you don’t want to deal with deferred maintenance. Renovation costs for a 1,500 square foot property will run around $25,000 and will include issues such as the roof, electrical, permits, flooring, plumbing, etc.
You want a property management company that owns the turnkey property to be 100 percent accountable for its performance. You want them to be staffed that ensures that tenants and investors are provided with quick replies and service. Customer service is deemed an important aspect of property management since communication for investors and property management generally takes place after they buy a property.
Customer service doesn’t have to include an answering service for incoming calls. It means offering the best possible service for when an investor 2,000 miles away buys the property and feels certain their investments are safe and secure. These investors want to work with companies who’ve made customer service a priority – hiring employees that work to communicate with the clients.
This has enabled companies to address issues such as move-outs and maintenance. For these things to take place, the company must have the proper systems and employees.
Passive income, especially when it comes to turnkey investments, need to be about offering high levels of service, constant returns and an easy experience when possible. You can get this from purchasing really cheap properties from distant locations.
In the beginning, I wasn’t concerned with the issues that came with turnkey properties – just wanted to make a profit. Many investors don’t see these problems today. By keeping a high standard of these turnkey properties, investors can turn a good profit.
Memphis Buy And Hold is specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses over 12 years of experience in real estate investing and property management in the Memphis and Nashville markets… Learn More…… www.memphisbuyandhold.com