Disadvantages Of Buying Turnkey Rental Properties

 

DISADVANTAGES OF BUYING TURNKEY RENTALS - infographic

Turnkey rental properties have really been popular the last few years especially among people wanting to invest in real estate but do not have the time to flip, rehab or find a great deal on a distressed home.  And sometimes it’s not even about having the time, it’s about not living in a market where you can actually find decent deals.  I know where I live it is extremely difficult to find a good cash flowing property.  That is the main reason why I started investing in turnkey rental properties.   I always knew and will always want to invest in real estate because in my opinion, that is the easiest way to generate passive income and at really good returns.

If you have been reading my blog then you know that so far, I am doing a pretty darn good job of buying these properties and generating passive income.  In November alone I made over $2400 in passive income which was great.  All that done through my real estate properties in which 4 of them were purchased via the turnkey model.    Right now I am officially in savings mode and am looking to build more reserves so that I can put a down payment on the next one while maintaining sufficient reserves on all my properties.   If you start buying rental properties and do not keep cash reserves handy to handle surprise situations then you are increasing your chances of failure.  And you do  not want that now do you?  I know I don’t.  I like to keep at least $3k for each rental property just in case.   Hey you never know when something can go wrong and its better to be safe then sorry.

So on to my main topic here, I would like to let you all know that turnkey rentals are not all fun and games.   Yes if purchased properly you can generate some decent passive income however there are disadvantages of buying turnkey rental properties.   These disadvantages may not apply to ALL turnkey houses or turnkey sellers but for the most part, they do!    If you are considering buying a turnkey rental house just keep these in mind and make sure you are okay with these before you proceed.

 

What are the disadvantages of buying turnkey rentals?

 

1) You are buying at retail price

  • If you know anything about investing in real estate or have read countless books like I have on the topic you will know that you make money when you buy.  It is always best to buy a property below retail value.  That is how most real estate investors make such good money.  Unfortunately when buying a turnkey property, chances are super high you will be paying retail value.  It is very rare to purchase from a turnkey provider at below retail.   I personally am okay with this because I am buying these strictly for the cash flow, not the equity or appreciation.  There are some turnkey providers who will try to sell you a house for MORE than retail value.  I highly recommend you do not waste your time with these guys and walk away from that deal if you ever come across one like that.

2) There is little appreciation if any

  • Most turnkey providers are selling these turnkey rentals in the mid-western united states.  Cities like Memphis, Indianapolis, Kansas City, Birmingham, St Louis, Columbus are all cities in which you will find turnkey providers.   If you pay attention to the real estate markets across the united states you will see that these are cities in which very little appreciation takes place.  Most of these cities however are stable and you will not see a decline in appreciation either.   If you buy a turnkey, it is best to go into it without expecting much appreciation.   As mentioned before though, this is not the case for ALL providers or houses.   You may just get lucky and be able to experience appreciation on your turnkey.  This would be icing on the cake.

3) There are many bad turnkey providers/sellers

  • Like any industry or profession, you will have people who are good at what they do, people who are bad at what they do, and people always looking to screw you over.  This is the same case when dealing with turnkey providers.  There are new companies popping up left and right all the time wanting to sell “turnkey” houses.  Some of them will have horrible rehabs, horrible property management, horrible customer service, horrible pricing and some of them will flat out just try to sell you a pig of a house with zero chances of ever being able to make a profit from it.   It is wise to properly vet and research your turnkey provider before going under contract on a new rental property.

4)  They don’t always come with good Property Management

  • Just because you buy a turnkey property does not mean it will automatically come with a good property manager.  I personally have my own criteria for what constitutes a good PM and you should too.   There are ways to interview a property manager to see if they are good but in some cases, the company is just to new or there just is not enough data to determine if they will be good or not.  Sometimes you don’t find out until months and months later that they are no good.   The good news is that it is always possible to fire a PM and hire a new one but that is one extra hassle that you may come across.

5) You will buy in an unknown territory

  • If you are buying out of state rental properties like I am then chances are you are purchasing in  new city in which you are not familiar with.  It can be quite scary buying property in areas you do not know about intimately like your own back yard or where you grew up at.  This is part of the risk involved when buying via a turnkey model.  To counter this, it is best to visit the new city you are going to like I did when I bought my first one and get to know the area.  Another way is to find other investors online from that new city and pick their brains.  Ask them to give you their thoughts and opinions on any house you might be interested in.  This is what I do and you will be amazed at what some of them say to you sometimes.  Things that only a local would know.

6)  Tougher exit strategy

  • When buying a turnkey rental or just any real estate property it is always good to have an exit strategy planned out for when and if you ever need to sell.  In many cases, the turkey properties being offered are in C class neighborhoods with a larger amount of renters then occupant owners.  These types of houses are harder to sell via traditional methods.   In many cases, only investors are willing to buy these types of properties which will limit your pool of buyers.   Hopefully you won’t ever have to sell but in the rare chance that you do, just make sure you keep this in mind.  I personally do not ever plan on selling any of my houses because the whole purpose of me getting them, is to live off of the passive income that they generate.  I want that passive income until the day I die!

 

As you can see there are many cons and disadvantages that come with purchasing turnkey rentals.  Not all of course will have these disadvantages but it is very important to be aware that these do exist.   Have you thought about buying a turnkey rental but are held back because of one of these disadvantages?

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22 Comments

    • HI Carol. Indeed it is not for everyone. It takes discipline and knowledge to land good properties.

    • I would say they are not for MOST people for sure. There are a select group out there willing to take the risks like me of course 🙂 The cash flow and position I am creating for myself in the future far outweighs any of these cons.

  1. I’ve never bought a turnkey rental before. I don’t think I ever will after reading this article. Thanks for the details and making me understand more of it.

  2. I think property management is key. You’re trusting these guys to manage your asset to perform as best as it can.. ie… marketing the property and screening tenants, performing the appropriate repairs, collecting rents and keeping vacancies low.

    In my opinion, I think it’s the most important aspect of turnkey investing. A top-notch property management company can make a mediocre property shine. The trick is finding a good one. I’m okay with the ones I have right now, I have 3 rentals, and two of them are turnkey.. The first property I bought was not turnkey, and I’ve gone through 3 property managers and about 5 tenants so far since I bought it in 2006.

    The previous property managers were sort of lame, and the tenants weren’t property vetted. I’ve had several late-pays and no-pays and one eviction. Throughout this time of a few years, it was also vacant for a few months.. Talk about killing your cash flow. The property manager now is pretty good, and I’ve had a wonderful tenant who she found for almost 3 years. Lessons learned. These guys are absolutely worth the percentage of rent that they take per month.

    • You are absolutely correct jm. Property management is key and can make or break you. Another key component of course is picking the right house. Some houses are so bad that a good PM will do you no good. As long as the house is in great condition in a good low crime area then you should have no problem finding great tenants as long as you have a great PM.

      Sorry to hear about your bad experience with that PM, I personally have not had to deal with issues like that yet but I do have one PM who is worse then the others as far as communication goes which I am considering dropping just for that reason alone.

  3. I have properties and no appreciation markets and appreciation markets. My wealth will be generated in the appreciation markets. My non w-2 lifestyle may come from either, I’m not sure yet. I’m thinking it will be easier to turn the appreciation houses into cashflow rather than build up cashflow in non appreciating markets. Your thoughts?

    I know you don’t plan on selling, but what if you have to? Life happens, do you have a plan in place just in case? We have car insurance not because we plan on getting into a wreck.

    • Hey Bilge!!

      I also have properties in an appreciating market (where I live) and its great to be able to increase rents and build additional equity but at the end of the day, all I am really looking for is cash flow to replace my w-2. I am perfectly happy with owning both and cash flowing from both. I just make sure everything I buy is cash flowing from day 1. I got lucky with the appreciation in my current market, when I bought them originally it was not for appreciation gains but strictly for cash flow.

      If I ever get to the point where I have to sell then I will sell. The houses I own are all strong cash flow and not in high crime areas so I personally do not think I would have a problem selling to at least another investor as long as I can prove the cash flow has been coming in.

    • I too have met others doing really well with real estate and I have also met a few who did bad but because they bought at the wrong time. So far I do think I am doing very well with it and I don’t want to stop buying!

  4. I very much agree that turnkey rental properties can never be everyone’s choice. I love how you have explained it clearly with so much of information that could help others to decide.

  5. Question for you…
    Do you have any opinions on purchasing turnkeys that you plan to manage yourself (either immediately or in the future)? We are planning on moving to a decent turnkey city and I’ve thought about buying a turnkey or two there and then keeping the mgmt company if they are good and if not, take over management myself.
    Am I right in saying that buying a turnkey is not related to hiring a property manager? I think (from what I gather from your blog) that I should separate the process of picking a property manager from the process of buying a turnkey.
    Any tips on transitioning to self-management? If not I’ll dive into the forums on BP. It seems like a terrifying prospect.
    Mr. Benny @Stuff That Pig recently posted…12 Tips to Save Thousands on Holiday TravelMy Profile

    • Hi Mr Benny!

      I think if you are planning to PM the property for yourself then that is actually better as far as getting a higher return and one huge step of vetting a PM that you won’t have to do. Its really all about the house only if you are buying like that and that can give you more options.

      You are correct in that buying a turnkey is not related to hiring a property manager for the most part. Most turnkey companies will offer you a property manager that they do business with however it is up to you to decide if you actually want to use that PM. Since you will PM your own, you can just tell the turnkey provider upfront that you will not be needing their PM.

      As for transitioning to self management, the biggest factor of all is learn how to property screen a tenant and be super selective when choosing a tenant. Everything else can be learned through trial and error as it it really isnt difficult. Make sure to do as much research as you can for screening tenants and you should be fine.

      Youre lucky to be moving a city that has decent turnkey inventory. I would open up my search to the MLS if I were you when you move and see if you can find a good deal just normal buying through the MLS as well as looking at turnkey providers.

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