Do you ever hear those radio commercials touting the virtues of turn key real estate investing ? That’s just about all I hear these days. They do make the concept sound appealing. But is it all they promise? Above all else, is this safe or just a real estate scam?
To be frank, I’ve actually been investing in real estate using a turn key company for about 4 years. In my experience, it’s been a good way to diversify, create some nice income and invest in (what I believe) is an undervalued asset. I’ll share my experience with you but first, let’s define our terms.
What is turn key real estate investing?
Turn key programs allow you to buy property rentals without the headache. This is when you allow someone else to identify which properties to buy, how to manage them, find renters, evict tenants, decide when to raise rents and when to sell the property. The whole idea is to divorce yourself from every part of the business. That’s why I like it so much.
In my case, the investment works exactly as promised. In fact, the only thing I have to do is write the check to pay for the property and rehab (if required) and cash the monthly checks the management company sends. It’s one of the easiest ways to own rental property there is.
What are the differences between the various turn key investing companies?
There are huge differences between companies that offer this service. To begin, most deal in one market in one state. Very few work nationally. Second, each company differs in what they charge you to buy, manage and sell the real estate. Another differentiator is the experience and longevity of the company you are dealing with. Many are new with almost no experience while other companies are seasoned veterans. And most companies deal with one kind of property (residential, commercial or office). Last, despite the fact every company will promise to make this a turnkey situation, they don’t all deliver the same level of service.
I am using a company that specializes in a market that is highly undervalued. Also, there is not much room to build in this area. Finally, they focus solely on single-family homes. This really works for me and as I’ve said, my experience has been positive. Of course you might be interested in other kinds of real estate in other locations. The most important aspect of success is location. Is real estate recovering in your market? You need to do your best to get a feel for this.
Are turn key real estate programs profitable and safe?
While my experience has been good so far these kinds of programs can also turn into disasters. The worst case is that an unscrupulous manager could take off with your money. Even if that doesn’t happen, you could get stuck with real estate that loses value and remains vacant. Alternatively, you could use a manager who doesn’t take steps to minimize landlord liability risks and you end up paying for his or her mistakes. Ouchie Ouch.
What to look for.
It goes without saying that the very first thing you want to look into is the reputation and background of the principals of the company. Next, consider the region this company invests in. Also think about the kind of real estate they work with and the corresponding demand.
Do your due diligence. Ask the firm you are speaking with to talk about the positives and the negatives. If the person you speak with can’t come up with any potential downsides, you know you aren’t talking to an honest person. Nothing is perfect and if the company can’t admit that just move on citizen. In any case, do your own leg work and confirm what you hear.
What kinds of fees are involved?
Depending on the company you do business with, there are any number of fees involved. Besides paying for the property, that list might include:
1. Rehab of the real estate
Besides paying for the contractors and materials, some turn key managers charge you a mark-up for their work in managing the rehab.
2. Property Management
Some companies charge you a percentage (up to 10%) of the gross rents collected. Some don’t do this but instead participate in the bottom line profits. For example, some might not charge a management fee per se but they would have some share of the net income. This could be much more than the percentage of gross rent – but it also gives the manager a strong incentive to perform and stay on top of the situation.
3. Tenant Management
Separate and apart from the property management, find out if the company charges for locating and evicting tenants.
4. Buying and Selling The Property
Some companies charge you commissions to buy and/or sell the real estate. Some will share in the profits when the property is sold. And some companies do both.
Are the fees worth it?
You are going to have to decide this for yourself. The program I use is expensive – but their returns are worth it to me. I was talking to a CPA who had a cow when I told him how much I was paying. But I think he was a bit short-sighted because he didn’t ask about the returns.
He suggested I consider another program with much lower fees. But when we compared both programs and the net returns (after all fees) the return I received was 50% higher than the lower cost program he suggested. In Your Face Mr. CPA Man!
In my opinion, the fees don’t matter as long as you are dealing with people who have a proven track record and the after-expense returns are there.
Who is turn key real estate investing for?
This is a good fit for investors who love real estate but hate spending time with it. It’s good for people who are happy to pay more for the convenience of having a professional to handle the dirty work. It’s good for people who have a long-term time horizon and don’t want to micro-manage. Finally, it’s good for people who do a lot of due diligence on the person running the firm. At the end of the day, you are going to have to put some faith and trust into these people. Make sure they warrant it.
Who turn key investing doesn’t work for.
If you don’t do your homework and blindly put faith in someone who tells you stories about big returns, you will likely be very disappointed. You might even be taken advantage of. If you aren’t willing to do your homework, don’t even get started.
If you like making your own decisions about what to buy, who to rent to and when to sell, you don’t need a turn key real estate company. You might just need a property management company instead.
The bottom line is that turnkey property programs can be fantastic but you have to put some work in upfront.
Have you ever considered using a program like this? Are you currently involved in turn key real estate investing? How is it working for you?
Solon says
April 22, 2013 at 7:54 AMI have enjoyed reading your blog on real estate and now I have a comment and a question. I deal in real estate in Costa Rica, both commercial and residential and we have many projects that we can take on but we lack the capital to move forward. We actually have 7 on going and we need financing to get the others on, where do you suggest are good sources to get working capital.
Neal Frankle says
April 22, 2013 at 2:55 PMIf I was in your shoes I’d go back to happy investors from the past. How long have you been doing this? Do you have such contacts?