Turnkey Property Investing – Is It Safe?

Turnkey property investing holds out the promise of high returns, great cash flow, undervalued asset investing and all this without the headaches normally associated with being a landlord. Sounds good….right? I agree.

I have to admit, I found this offer to appealing to pass up and I took the plunge into turnkey property investing about 4 years ago. Over that time I’ve learned (the hard way) what does and doesn’t work with this kind of investment in rental real estate. Here’s what I’ve learned:

1. Understanding

The first rule of investment success is to know what you are doing – at least a little bit. This might be turnkey but it’s not black box investing. You have to understand the basics of turnkey real estate investing and be comfortable with it.

This is a long-term approach where you delegate the duties of locating the properties, finding renters, managing the rehab, paying the taxes and insurance and maintaining your property. No matter how smart your manager is, there will be times when you’ll have to spend money maintaining the property and there will be times when the manager won’t be able to find a tenant.

Keep in mind that this is a long-term deal and you there is no way of knowing when the manager will decide to sell. This is not a liquid investment. Given the state of the economy today, your hold time may be substantially longer than you anticipate now. If you can stand the heat, get out of the turnkey real estate kitchen I always say.

By understanding how this works, you won’t want to jump ship whenever the sea gets a little rocky. This protects your money because it allows you to stay invested long-term – which is the best way to maximize the potential of these ventures.

2. Management

Don’t go bargain hunting for cheap managers. I’ll be frank. The people managing my property are very expensive – but they earn it. I never get a call. My properties stay rented. The managers make sure they protect me from the liabilities of owning property. I keep getting checks and I never have to worry.

Only work with a turnkey system that use in-house management that is robust and developed. And make sure they’ve been around for a while and have a great track record. Talk to existing customers who had some problems and find out how they were resolved.

I don’t care how great the real estate is – a good real estate investment requires top flight management. You’ll have to pay for it but it’s worth it.

3. Title

This is where you want to be careful. In most turnkey deals, you hold the property in your name (or the name of your trust) 100%. That is how it should be. Some companies put the property in the name of an LLC and they become general partners of this LLC. I don’t like this option because it gives them too much control.

Why some turnkey real estate companies do this.

First, if the firm participates in profits on operations and capital gains on the sale of the property, they hold the real estate in an LLC in order to safeguard their interests. This titling also helps them make it easier to manage the property and maintain it. They don’t have to come back to you every time there is an expense.

But you should not accept this argument. Hold the title in your name only since you are the person putting up the money to buy the real estate. You can always set up an expense account and give them access to it so they can pay for minor repairs without bothering you.

4. Fees

I am sure you are a great guy or gal, but nobody works for free. The turnkey manager needs to get paid. Just make sure you understand all the fees before you get started. Those fees might include any and all of the following:

• Commissions to buy and sell
• Participation in the gains on sale
• Management Fees
• Participation in the net income on a monthly basis
• Fees to place tenants into the property

There is nothing wrong with paying for service rendered. Just make sure you understand the nature of those fees before leaving the starting block.

5. Reports

The property manager sends you monthly reports. You need a balance sheet, income statement and general ledger. Most managers use QuickBooks which makes it easy for them to prepare reports that compare the current month to each of the previous months over the last year or running 12 months. Nice.

Make sure you review the General Ledger to get a real feel for how money is being spent. If you have any questions – just ask the property manager to go thru it with you.

6. Insurance, Tax and Title

Once a year, at least, confirm that the property insurance and taxes have been paid. If you don’t know how to do this, ask the manager how to confirm this information. They should have no problem doing so. Next, do a little research to confirm that nobody has placed on lien on your property for any reason without you knowing about it.

Turnkey real estate can be a great opportunity but it’s not something you do blindly. Take these few extra precautions to protect all you’ve worked so hard to accumulate.

Is turnkey property investing for you? What other precautious make sense?