Looking back over the last few years, there is one thing we all can agree on when it comes to real estate investing... This has been one helluva ride for the real estate market and investors alike!
What we find really interesting though is that even with such a wild ride, there are still lists out there of things you need to avoid. Especially as those lists relate to Turnkey real estate investing. Oddly enough, there are still many investors who are choosing to not learn from history. Or maybe they don't know what this history is that they need to avoid. Although any list is going to be subjective and without a doubt, incomplete, this list at least gives a starting point for investors looking at turnkey investments.
1. Understand That Price And Value Are Not The Same
Too often, we as consumers can get caught up in the price of things. That can be things we want or services we need, but either way, we focus heavily on price. Unfortunately, that helps to take our eye off of value. The two areas where Turnkey real estate investors get hurt the most are at the highest and lowest price points of a typical turnkey real estate investment.
At the lower price point, you have the lowest barrier of entry in the the turnkey business. Are there good companies at the lower price points? Perhaps. However, much more often, the lower price point Turnkey properties are filled with companies that are under-funded and lack the necessary entrepreneurial skills to take risks. The mind tells an entrepreneur to use low prices as an attractive inducement for a buyer. It is a tried and true sales tactic that has been around as long as time.
Unfortunately, as it relates to Turnkey, low price points are extremely dangerous. No matter the size of the house, it still can cost between $10 and $16 per square foot to properly renovate a property. Sometimes that price can go much higher. On an average 1,200 square foot property, to properly renovate the systems, walls, flooring, it should cost between $12,000 (on the very low end - cheap work!) to $24,000 for everything done at a higher quality and without much deferred maintenance.
When a turnkey operator decides they are going to sell cheap properties to investors, they have to keep prices low. If they sell properties for $50,000 and spent $20,000 properly fixing them up...well, you can see that the math does not leave a lot of money for purchasing, holding, closing and in the end profiting from a deal.
There is not enough spread in low cost homes for the investor and the company to make a profit and have a high quality home. There are too many competing interests for too few dollars. Someone always loses and unfortunately, even when the Turnkey company loses - the investor ends up losing as well because that turnkey company, the one the investor expected to be there for the long-term, is no longer in business. It has happened dozens if not hundreds of times around the country over the last few years and our experience tells us that it will continue to happen into the future.
Avoid the Cheap Houses and the Cheap Turnkey Companies!!
On the other hand, there are companies out there who want to fool investors into thinking that because it is more expensive it must be better. That is not the case! Just as with cheap properties, investors must be wary that higher price does not mean that the property or the company is better. Due diligence for one thing can certainly help sniff out bad actors in this space. But more importantly, an investor has to remember to ask themselves about the value of their over-all investment.
The question should always be, what am I receiving in return for the dollars or the signature that I am putting on this paper. What is the real value. Am I receiving comfort of mind? Am I receiving a fair return for a fair service? These are very important questions and ones that go beyond the simple price. If the turnkey is making money, that is a good thing. More important to the investor, what is that company doing with that money? Are they offering services that provide me with a safe and reliable investment? Are they taking actions to make tenants want to occupy a property longer? Are they fully staffed where they can watch over my investment?
These are all questions that are extremely important and they matter most on the edges. At the higher and lower price points, where the line between price and value is easiest for a turnkey company to blur.
2. Be Patient! Don't Let Money Burn A Hole In Your Pocket?
I guess we are at a point where we 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. We 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.
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. Sometimes, that requires a little patience.
3. Don't Focus Solely On 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.
Again, we 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?
4. Be Careful Using Promoters To Find Properties
We 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 is to point a client in the direction of an opportunity to buy. Because of the size of our 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 grey 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. Such as – are you getting paid by the vendor that you are referring me to? That is a simple straight forward answer and their full disclosure should be expected. Second, ask the promoter if they have a real estate license and how they accept funds. Third, ask the promoter 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.
5. Avoid Shiny Object Syndrome
Being attracted to the shiny bell and the loud whistle that are hung around the neck of a pending disaster house, is a very, very common occurrence for buyers of turnkey properties. For us, this is the easiest one to address and we 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. We are 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 we said, this was not going to be an exhaustive list. But we get the chance to hear from a lot of investors and there is still a healthy mix of investors who are attracted to these five mistakes. We 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.