What does turnkey mean in real estate? Navigating the world of turnkey real estate can be challenging, especially if this is your first foray into the property world. Buying a turn key property is very different than purchasing a home or condo for your own use. In essence, you’re purchasing a business rather than just a place to live. However, armed with the right knowledge, and the same critical eye you’d use on any investment, you’ve got the ability to separate the wheat from the chaff just like any seasoned vet in the property biz, so what differentiates one turn key operation from the next? Let’s find out.
What does “turnkey” mean?
The term “turnkey” refers to any fully renovated property that an investor can buy and rent out immediately. Turnkey properties are often purchased from companies that specialize in rehabbing, renovating, and selling these properties to investors. Some turn key operations also offer all encompassing management services, which allow investors to “set it and forget it” and minimize their required time involvement in the investment.
Why many companies consider themselves to be “turnkey” aka Their Model
However, as with most sectors of the real estate business, there are different levels of service, depending on the specific company or firm within the “turnkey” space.
There are several qualifiers that you can use to determine whether or not a company is turnkey. Typically, they’ll purchase homes at below market prices, often seeking out distressed or foreclosed properties to maximize profits with a value-add strategy.
Obviously, this requires some level of property renovation or rehabilitation, and it again depends on the company, but:
Most of the time this process includes the repainting of the interior/exterior and the addition of new flooring.
Sometimes it includes updates to the plumbing, renovations to the electrical system, new tile installation, and a small HVAC overhaul.
Rarely will companies focus on properties with large capital expenditures, like new HVAC systems, substantial roof repairs or replacements, new water heaters, flooring, countertops, etc.
Additionally, roughly half of companies will place a tenant into the home before handing the turnkey property over. Once the property is sold, it is passed over to a third party property management company who they refer to as property management “partners.”
What we consider to be truly “full-service turnkey” aka Our Model
While there is no governing body or organization that determines what exactly constitutes a turnkey operation, we believe that truly full service turnkey firms should:
Be a one-stop-shop for real estate investing, providing clients with value, both in terms of time savings as well as monetary value.
Existing under one roof, with the same ownership, a single firm must handle all aspects of the property.
Be laser-focused on the primary goals of a turn key operation: property renovation, property management, and most importantly, paying investors.
Benefits of Their Model
Turnkey on a budget?
Although we firmly believe in our model, we’d be remiss to say there are no benefits offered by the first model we mentioned. If you’re on a limited budget or want to avoid allocating too much of your portfolio into a single asset, like a turn key property, you may be able to work with one of these firms for a budget solution.
Additionally, if you’re keen to “get your hands dirty” and learn the business from the ground up, making calls to property managers, scoping out potential acquisitions, and dealing with the day to day grind of running a portfolio of homes, then their model might be right for you.
Negatives of Their Model
However, as with anything, you’ve got to take the good with the bad. There are several areas in which the standard turn key operation fails investors, which is why we’ve embraced our all encompassing model. At the end of the day, it comes down to responsibility and the length of your relationship with the firm in question.
With the traditional model, the company that sold you the property doesn’t really have a stake in your success or failure. They typically do not offer any warranties on work performed and have little incentive to ensure that your turn key property continues to generate profit. Additionally, the company is not incentivized to care for the future of your property in regards to repairs, appliances, and the direction of the neighborhood.
If the property management company is not the one to place the tenant, they are not incentivized to place a qualified tenant. Property management companies make their management fees from collected rents, which typically makes them very cautious about who they place in a unit or property. If the tenant is placed before a flip, the seller has no real incentive to seek out the best tenants.
Benefits of Our Model
As we mentioned earlier, misaligned interests between buyers and sellers of turn key properties can lead to pain, at least for the investor. Conversely, when these interests are aligned they can be a powerful driver of growth for your portfolio. We typically offer warranties on work completed, and our ongoing relationship means that we are accountable to investors after the sale of the property. What’s the value of success if you can’t share it?
Negatives of the Our Model
Of course, no model or approach is perfect- we’ll be the first to admit that. As with almost any other good or service, quality comes at a premium. Properties we offer reflect this and are typically sold at a commensurate price. However, we’ve all heard the saying, “penny wise and pound foolish,” which is an antiquated way of saying “you get what you pay for. While you will pay a premium upfront, you’ll receive a premium “product,” with all the time and cost savings that come along with it.
So, What’s the Move?
At this point, you might be wondering what you should do, and how you should make your decision. It comes down to choosing the model you’re most comfortable with. Each investor has a different risk tolerance, and different benchmarks and goals they need to hit. You also need to take into account your level of desired involvement, and how much time you want to invest in your property portfolio.
To determine the answer to these questions, you should have a few of your own for any prospective turn key property company, including:
Who handles your property management?
Are they a partner? In house?
Can I speak with someone in your property management department? If they don’t have an in-house department, ask if you can speak with your current property management partner.
What happens if something that was renovated by you goes wrong immediately after purchase?
These are just a few of the questions you should ask. Choose the right turnkey firm in the same manner you’d take in hiring a new employee, and always, always do your due diligence, just like you would before buying a hot stock or other investment assets.