The Problem With Turnkey Real Estate (& What To Do Instead)

Turnkey real estate is exactly what it sounds like -- too good to be true. Turnkey properties are often marketed as the ultimate shortcut to passive income. The pitch is seductive: buy a fully renovated property with a tenant already in place, and start collecting rent checks from day one. No renovation headaches, no tenant screening, no property management woes – just turn the key and watch your bank account grow. For out-of-state investors or those new to real estate, this proposition can seem irresistible. After all, who wouldn't want all the benefits of real estate ownership without the traditional hassles? In this article, we'll peel back the layers of turnkey real estate investing, expose its significant drawbacks, and explore more effective strategies for building long-term wealth through property investment. [embed]https://youtu.be/z0xKh5e_FG4?si=6Glx-hw9zHBOrv1X[/embed]

What is Turnkey Real Estate... Actually?

Turnkey real estate, in theory, is a hands-off approach to property investing. Here's how it typically works:

1. A turnkey provider acquires a property, often at a discount through foreclosures, tax auctions, or from local wholesalers.
2. They renovate the property, ideally bringing it up to rentable condition.
3. A tenant is placed in the property.
4. The turnkey provider then sells the property to an investor – usually someone from out of state or even out of the country.
5. The property is then managed by either the turnkey provider or a recommended property management company.

The idea is that you, the investor, can purchase a cash-flowing rental property without ever having to visit it in person or deal with the nitty-gritty of property management.

It's sold as a way for investors to diversify into markets they don't live in, particularly for those in high-cost areas looking to invest in more affordable regions.

However, the reality often diverges from this rosy picture.

While turnkey properties are marketed as "move-in ready" investments, they frequently come with hidden issues:

• The renovations may be cosmetic rather than comprehensive.
• The tenant might not be as thoroughly screened as you'd do yourself.
• The property's location might be less than ideal.
• The price you pay is often at or above market value, leaving little room for appreciation.

In essence, you're paying a premium for convenience, often at the cost of long-term profitability. The turnkey provider and property management company are typically the ones reaping the most benefits, while you, the investor, may be left with an under performing asset in a market you don't fully understand.

The Three Pillars of Good Real Estate Investments

There are three crucial factors to consider when evaluating any real estate investment.

Let's examine these pillars and see how turnkey real estate often falls short:

1. Location

What it should be: The property should be in an area with strong fundamentals - good schools, amenities, job opportunities, and potential for appreciation. Ideally, it's a place where people want to live and where demand is likely to increase over time.

Turnkey reality: Turnkey properties can be found in a variety of neighborhoods, from up-and-coming areas to more established locations. However, the main issue isn't necessarily the location itself, but rather the investor's lack of local market knowledge. Without boots on the ground, it's challenging to truly understand the nuances of the neighborhood, its growth potential, and how it fits into the larger market dynamics.

2. Valuation

What it should be: As an investor, you want to purchase properties below market value. This gives you instant equity and provides a cushion for appreciation. The golden rule many investors follow is to buy at 75% of market value minus repair costs.

Turnkey reality: This is where turnkey properties often fall significantly short. These properties are typically sold at retail price or even above market value. The turnkey provider has already "found the deal," renovated the property, and is now selling it to you at a premium. This markup often eliminates any potential for forced appreciation or instant equity.

3. Long-term Outlook

What it should be: The area where you invest should have positive long-term prospects. This includes factors like population growth, job market expansion, and overall economic health.

Turnkey reality: Many turnkey properties are in areas with uncertain or even negative long-term outlooks. These might be neighborhoods where homeowners are moving out and being replaced by renters, or areas with stagnant job markets and declining populations.

In contrast to these pillars, turnkey real estate often prioritizes:

1. Immediate cash flow: Properties are marketed based on pro forma rents, which may be optimistic.
2. Hands-off management: The convenience of not having to actively manage the property is a key selling point.
3. Lower price point: Turnkey properties in the Midwest or South are often marketed to investors from high-cost coastal areas, who see the lower prices as attractive without fully understanding the local market dynamics.

While these factors can be appealing, they often come at the expense of the three fundamental pillars of sound real estate investing.

A Better Alternative To Turnkey Real Estate Investing

While turnkey real estate might seem appealing for its hands-off approach, savvy investors know that the real wealth in real estate comes from being actively involved in the process. Here's a better alternative that can lead to significantly higher returns and long-term wealth building:

1. Find Your Own Deals

Instead of relying on turnkey providers who've already marked up the property, focus on finding your own deals. This allows you to buy properties at below-market prices, instantly building equity.

• Use Direct Mail: One of the most effective ways to find off-market deals is through direct mail campaigns. You can use our service at Ballpoint Marketing (BPM) for handwritten direct mail. Our personalized approach can significantly increase response rates, helping you connect with motivated sellers before anyone else.
• Network with Local Real Estate Investors: Join local real estate investment groups and attend meetups. These connections can lead to deal referrals and partnerships.
• Drive for Dollars: Physically scout neighborhoods for distressed properties and reach out to owners directly.

2. Renovate Your Own Properties

By managing renovations yourself, you can force appreciation and maximize your returns.

• Build a Reliable Contractor Team: Develop relationships with skilled, trustworthy contractors. This team will be crucial for efficiently renovating properties.
• Learn Basic Renovation Skills: Understanding the renovation process helps you communicate effectively with contractors and spot potential issues early.
• Focus on Value-Add Improvements: Prioritize renovations that significantly increase the property's value or rental income.

3. Be Your Own Real Estate Investor

Take an active role in your real estate business. This hands-on approach gives you more control and potentially higher returns.

• Educate Yourself: Continuously learn about real estate investing through books, courses, and mentors. Knowledge is power in this business.
• Understand Your Market: Dive deep into your chosen market. Know the neighborhoods, school districts, employment trends, and future development plans.
• Manage Your Own Properties: At least initially, consider managing your own properties. This gives you invaluable experience and helps you understand the true costs and challenges of property management.
• Scale Thoughtfully: As you gain experience and build your portfolio, you can start to outsource certain tasks. But always maintain oversight and continue to make the big decisions.

By taking this more active approach, you'll be able to:

1. Buy properties at better prices, often 20-30% below market value.
2. Force appreciation through strategic renovations.
3. Truly understand your market and make informed investment decisions.
4. Build a valuable skill set and a network of real estate professionals.
5. Have more control over your investments and their performance.

While this approach requires more time and effort upfront, it typically leads to significantly better returns and faster wealth accumulation compared to turnkey investing.

If You're Still Determined to Do Turnkey... Then Read This First

While we've outlined the drawbacks of turnkey real estate investing, we understand that for some investors, the hands-off approach remains appealing.

If you're determined to pursue turnkey investments, here are some strategies to help you do it more intelligently and protect your interests:

1. Always Visit the Property and Neighborhood

Don't rely solely on photos or virtual tours. Make the effort to:

• Visit the property in person
• Walk around the neighborhood at different times of day
• Talk to local residents and business owners
• Research local economic trends and development plans

This firsthand experience is invaluable in understanding what you're really investing in.

2. Get an Independent Appraisal

Don't trust the turnkey provider's valuation. Instead:

• Hire an independent, licensed appraiser
• Consider getting a Broker's Price Opinion (BPO) from a local realtor
• Compare these valuations with recent sales of similar properties in the area

This will help ensure you're not overpaying for the property.

3. Conduct a Professional Inspection

Before purchasing, always:

• Hire a reputable, licensed home inspector
• Be present for the inspection if possible
• Review the inspection report thoroughly
• Use any issues found as negotiating points

Remember, it's easier to address problems before the sale than after.

4. Research the Turnkey Provider and Property Management Company

Do your due diligence:

• Check online reviews and testimonials
• Ask for references from other investors
• Verify their licenses and certifications
• Investigate any complaints or legal issues

Consider joining real estate investing forums to get unbiased feedback from other investors.

5. Understand All Costs and Fees

Make sure you have a clear picture of:

• All upfront costs
• Ongoing management fees
• Potential hidden charges
• Projected maintenance and repair costs

Factor these into your calculations to get a true picture of your potential returns.

6. Negotiate Better Terms

Don't accept the first offer. Try to:

• Negotiate the purchase price
• Ask for seller concessions
• Discuss more favorable management terms
• Request a warranty on recent renovations

Remember, everything is negotiable in real estate.

7. Have an Exit Strategy

Before buying, consider:

• How long you plan to hold the property
• Potential resale value and appreciation
• Local market trends that could affect your exit
• Options for refinancing or leveraging equity

A clear exit strategy can help you make better investment decisions from the start.

8. Start Small and Diversify

Instead of putting all your capital into one turnkey property:

• Consider starting with a smaller, less expensive property
• Invest in multiple markets to spread risk
• Look into real estate investment trusts (REITs) for additional diversification

This approach can help you learn the ropes while minimizing risk.

By following these guidelines, you can approach turnkey real estate investing more strategically. However, remember that these steps require time and effort – often as much as finding your own deals. If you're willing to put in this work, you might find that taking a more active role in your real estate investments, as discussed in the previous section, could yield even better results.

How To Find Your First Deal (The Right Way)

Ryan Dossey shares his strategy for finding his first investment property - a strategy he still uses today. Here's how you can follow in his footsteps and become a true investor:

[embed]https://youtu.be/b8f3Bp8NzoU?si=wyQSuTPEbCYhRK69[/embed]

Ryan's Story: Finding His First Duplex

Ryan's journey began with a simple yet effective approach to finding off-market properties:

1. He accessed the Multiple Listing Service (MLS) to search for expired listings.
2. He focused on small multi-family properties, particularly duplexes.
3. He looked for listings that had been off the market for 6 months to 5+ years.
4. He then used skip tracing to contact property owners directly.

This method led him to find his first duplex in Indianapolis, setting the foundation for his real estate investing career.

Tips for Aspiring Investors

If you're ready to become a true investor and find your first deal, here's how you can apply Ryan's strategy:

1. Get MLS Access:
   • Partner with a licensed realtor
   • Consider getting your own real estate license
   • Find a realtor willing to run searches for you
2. Focus on Expired Listings:
   • Look for properties that have been off the market for 6 months to 5 years
   • These are often motivated sellers who couldn't sell for various reasons
3. Target Small Multi-Family Properties:
   • Duplexes, triplexes, and fourplexes are great starting points
   • Look for units with 2-3 bedrooms and 800-1000+ square feet for better tenant retention
4. Use Skip Tracing:
   • Invest in a skip tracing service like Skip Genie
   • This allows you to find contact information for property owners
5. Make Direct Contact:
   • Reach out to owners personally
   • Be straightforward but respectful in your approach
6. Be Prepared to Analyze Deals Quickly:
   • Look at factors like rental income, property condition, and location
   • Have your criteria and numbers ready before making calls
7. Start in Areas You Know:
   • Begin your search in neighborhoods you're familiar with
   • This local knowledge can give you an edge in negotiations and property management
8. Be Patient and Persistent:
   • Not every lead will pan out, but consistency is key
   • Keep refining your search criteria and approach
9. Build Relationships:
   • Even if an owner isn't ready to sell now, maintain contact
   • They might be ready in the future or know someone who is

Remember, becoming a successful real estate investor isn't about finding that one perfect deal from a wholesaler or on the MLS. It's about consistently applying strategies like Ryan's to uncover opportunities others might miss.

Final Thoughts

Turnkey real estate investing might seem like an easy path to passive income, but as we've explored, it often falls short of its promises. The real key to success in real estate lies in taking a more active role in your investments.

By finding your own deals, managing renovations, and truly understanding your market, you set yourself up for greater returns and long-term wealth building. Yes, it requires more effort upfront, but the rewards are well worth it.