5 Huge Turnkey Real Estate Investing Mistakes It Is Essential To Avoid

Posted by Chris Clothier on Mon, Dec 1, 2014

A warning on the front end - this is a longer and definitely detailed blog post on Turnkey real estate investing.  But I think you will find it worth your time....

I have been working with turnkey buyers since 2004  and Turnkey_Real_Estate_InvestingI have come to find that there are some common mistakes that many investors make when they start looking at Turnkey real estate investing. Some of these mistakes cost investors money and some cost investors time. As a company, we have made it our mission to be able to turn investors away when the investment or our company are not the right fit for the investor.  We want to tell investors "No" when we are not the right fit and often, they are making some of the listed mistakes below that helps us realize that we need to say no...  

Understand,we want to work with every investor.  But out of respect, we realize that sometimes, we have to say 'No' in order to make our current clients happy and to keep that investor from having a bad experience.

As with any list, this one is going to be subjective to our experience and without a doubt, incomplete.  This list at least gives a starting point for investors looking at turnkey investments.

Money Burning A Hole In Your Pocket?

I guess I am at a point where I should not be surprised anymore by how quickly some investors want to get moving.  It is the exact opposite of a phrase that has been around for a number of years describing investors who love research – Paralysis by Analysis!  

Too many investors continue to jump into the real estate market with no understanding of why they are investing in the first place and to make matters worse, they have no clear plan for how to manage their future investing.  Not manage their portfolio, but to manage themselves and their plan for investing going forward. 

I speak to investors on a weekly basis who are in need of assistance with a “problem” house they have bought.  Usually, they bought the house because the marketing looked slick, the picture of the house was great and the person on the other end of the line promised to handle everything.  An hour later they were under contract and after a couple of short weeks they were in the game!  Of course, they soon find out that the property is not rehabbed to a high standard, the property has a hard time keeping tenants and that company who told you there would handle everything is having a hard time finding their phone to answer or call you back.

The warning signs about bogus companies have been out there for years, but it is still up to the investor to do their own due diligence.  Proper due diligence has more to do with effort and time than it does with where you look or what you find.  Beginning your research and gathering the needed information to feel comfortable is an essential step, but that step leads to the next step and to the next step and eventually to purchasing a property.  If someone tries to tell you that all the good deals will be gone before you get around to buying, you need to keep looking.  In order for an investor to have a good and healthy turnkey investing experience, they need to have a solid understanding of who they are doing business with.

  • How long have they been in business?
  • What makes them a strong choice as a company?
  • What are the factors that make them stand out among so many choices for investors?
  • Name the two "clients' you work for today. (Hint: there are absolutely two clients in this business)
  • How do you provide me with real customer service?

These are all very important questions for an investor to ask and feel comfortable with the answers long before ever buying a property.

RELATED TOPIC:  'How To' Keep Your Real Estate Investment Team on the Same Page

Choosing "Cheap"

Through the year, we have worked with about a cheap_bargain_real_estatedozen different Turnkey companies.  As surprising as that may sound, the reason we work with these companies is to help them get a clear vision for where they are going as entrepreneurs and to navigate all the decisions they have to make as they grow.  Are they competitors?  I guess you could say yes, but we don't view it that way.  Not even the local companies we have worked with.  Memphis Invest has created such a brand awareness and specific business model, that there are few competitors in reality.  

Even if these companies develop along the same lines as Memphis Invest, which is EXACTLY what we hope they do...they would still not be considered competitors.  There is SO much business available and so many high quality real estate investors who need and want to purchase Turnkey investments.  They need and want options that are high-quality.  That is the reason we work with other companies!

Unfortunately, right now, there are a lot of investors who are attracted to "cheap" because that is what is heavily marketed.  Cheap properties, cheap work, cheap rents.  On paper, these deals are highly attractive.  They come with returns in the teens and there are enough new investors attracted to the "cheap" message that some companies continue to work in that space.  As an investor, that is the biggest mistake you can make.

These issues are going to go hand-in-hand, but when it comes to cheap, lower price points and higher paper returns DO NOT pan out in the end.  I have been there - done that!  They do not work the way we expect them to work --- especially when it comes to Turnkey Investments.  Building a company requires a willingness to build a team.  That requires spending money and spending money requires growing revenue.  Cheap properties do not allow for revenue.  The money is left for the deal for the investor which is what makes the paper return so high.

This works great for active investors, but not turnkey investors.  Turnkey investors expect everything to be done for them which requires a team.  It requires people and systems and cheap investment property do not lend themselves to allow a company to generate the needed revenue to build out a high quality team.  Avoid "cheap".  Cheap does not pay the bills and leaves turnkey investors very frustrated and with much lower returns than they expected.  

Purchasing For Yield

Whatever happened to good, old-fashioned, solid returns of 7-9%?  When did it become such a negative to have a consistent performing property in your portfolio that you could rely on year over year to produce a positive return?

Investors today have so few options when it comes to consistent rates of return and to hear someone talk about consistency in real estate may seem a bit crazy.  But consistent returns are out there and while they may not always be double-digit returns, what is wrong with a 7-9% return?  With interest rates being forced down, investors are finding it harder and harder to locate good solid rates of return that they can count on.  Many investors are turning to turnkey real estate opportunities to find higher yields without having to join the landlord game.  Unfortunately, the reach for higher yields carries a counter balance…much higher risk.

Those risks include turnkey companies selling older properties – some built 60-80 years ago.  Under renovated properties is another huge risk for investors buying some of the higher yield properties as holding down renovation costs is a way to lower the entry-level for investors.  The lower the entry-level, in theory, the higher the yield can be.  Under staffing can also be a major risk for an investor as an understaffed company means a lot of work being preformed and managed by a small group of people and can lead to mistakes and sometimes costly choices where the company is forced to overlook essentials.

Investors who are buying turnkey rentals really need to fall into one or two categories of investor.  One category is an investor who is not interested so much in real estate, but likes the idea of a solid, appreciating asset that works as a good hedge against rising inflation.  Your acquisition cost remains neutral, yet as inflation rises, the opportunity for your rents to rise as well exists.  That allows you to acquire an asset at today’s prices and reap the benefit of higher rents.  Of course, everything else in your life will go up in price as well, so this is simply a hedge play.

The other category is the investor who is either looking to diversify into another area of the country, another segment of the real estate investment market or simply does not have the time to manage the investment process.  Many turnkey opportunities appeal to this type of investor because it lowers the barrier of entry for an investor and provides a chance to meet their investment goal.

However, both of these buyers are highly sought after and marketed to and one of the biggest marketing pulls is dangling 15 to 18% returns on turnkey properties.  Again, I ask the question, regardless of your reason for wanting to buy turnkey properties, what is wrong with a consistent 7%, or 8%, 9% or even 10% return on an investment property?  When did that return become one to turn your nose up at?

Using Promoters To Find Properties

I have several very good relationships with companies in the real estate industry whose main focus is to locate opportunities for other passive investors.  Many times, the opportunities they are locating are with turnkey companies.  Their only focus it to point a client in the direction of an opportunity to buy.  Because of the size of my company, we get pitched on almost a weekly basis from people who want to “promote” our company and sell our houses to their students or followers or clients.  That puts us in a pretty unique position to see both the good and definitely the bad examples of these promoter companies.

First, if you are an investor and you are having to pay someone to get access to their “exclusive” list of properties, you might want to think twice about going forward.  Are they all bad if they charge you money for their expertise?  The answer is no.  But there are definitely problems that are inherent with this model.  It is no different from foreign property promoters charging clients thousands of dollars to “tour” American cities to buy investment property.  Too often, a gray line is created that blurs black and white and makes it harder for the buyer to know exactly what they are paying for…and here is why.

Often times promoters receive a fee from the companies whose properties they are peddling.  They essentially get paid by both sides of the equation.  There is nothing wrong with that and it does not mean that you cannot trust an investment property promoter – it just means as an investor you have to do even more due diligence before buying.  Unfortunately, there are many things going on in a scenario like this and it is possible for the best interest of the final investor to be last thought calculated in the deal.

There are a few questions every investor should ask of a promoter before moving forward.  

  • Are you getting paid by the vendor that you are referring me to?  
  • Do you have a real estate license and how they accept funds?  
  • How many properties they personally own with the company they are referring you to?

You can start getting a clearer picture from this point and an understanding of whether they promote anyone and everyone that will pay them, or if they promote high quality companies that they have had a positive experience.  Believe me, there is a difference.  As I said, I have met many, many promoters and been pitched by dozens.  I have done business with two who have introduced about a dozen investors to our company through the years. 

I also have a long-standing relationship with another company that is not a promoter, but gladly tells their students about our company.  They own several million dollars worth of turnkey real estate with our company and are the type of company that puts their money where their mouth is.  They invest with us so gladly tell others about our company.  Three total companies that I feel put their clients first.  

After seeing company after company bounce around and simply look for anyone with a pulse to provide them with properties, we are sticking with a very short list of people we will enter into a referral relationship with.  On your end as an investor, I would suggest you do the same and do your due diligence before paying someone else to share their secret stash of houses.

 Shiny Object Syndrome

Being attracted to the shiny bell and the loudShiny_Object whistle that are hung around the neck of a pending disaster house, is a very, very common occurrence for buyers of turnkey properties.  For me, this is the easiest one to address and I put it very plainly.

If the best thing you can say about a turnkey property is that it comes with a 12 month guarantee that you will not have any maintenance or vacancy, then you may not have done enough homework.  I am not against any company offering guarantees on their homes.  However, if they are used as a selling tool – a reason for an investor to buy the property – then the investor should really ask the question of “why do you need the guarantee”?  How about asking what would happen if the guarantee were not in place.  That should give you about all the answer you need.

Again, there is nothing wrong with a guarantee…as long as it is not used to attract an unsuspecting buyer who does not realize how poorly the property is going to perform when the guarantee is over.

Like I said, this was not going to be an exhaustive list.  But I get the chance to hear from a lot of investors and there is still a healthy mix of investors who are attracted to these 5 mistakes.  I have never seen a group of investors more excited to spend money than today’s brand new investor attracted to turnkey.  Investors like chasing yield and LOVE to tell others  about the great buy they just made – while it is still a paper return.  Too many continue to outsource the front end work to promoters without understanding the whole relationship and doing their own due diligence and lastly the attraction and pull of a guarantee still holds a heavy sway over buyers and some turnkey companies are quick to use them as an attractive selling tool.

This was a short list, but it is an important one.  I would love to share with you a real estate investing e-Book that goes into even greater detail and we wrote the book just for investors looking to buy Turnkey investments - especially those buying out of town.  If you are careful before you get started, pay attention to this article and the e-book and you will find a great deal of success just by avoiding the above mistakes!

 

image credit: Shiny Object Syndrome

Topics: turnkey real estate