In case you didn’t know, I’m a turnkey real estate provider. I buy distressed properties, rehab them, get tenants in place, and then sell the property to an investor along with property management services. It’s an investment strategy I stand behind 100%, and I’m proud to say I’ve connected a lot of investors with a lot of excellent, cashflowing properties.
However, this isn’t the only type of turnkey strategy you’ll find out there. There’s another method that is also being billed as turnkey, and while I don’t have any personal experience with it because it’s not what I do, it’s still one you should be aware of so you know all of your options.
In this other method, everything is the same except the turnkey provider does not offer a fully rehabbed property. Instead, they sell distressed properties directly to the investor, who then provides the funds to make the repairs. The turnkey provider coordinates the repairs with their contractors and oversees the rehab process, but they don’t have any money in the game. Once the property is ready for tenants, the turnkey company lines them up and then may or may not offer property management services from there.
So you can see there are a few huge differences between these two strategies, even though both fall under the umbrella of “turnkey.” Let’s talk about those differences.
- Rehab – The most obvious difference between the two options is that with one, you’re buying a fully rehabbed house, and with the other, you’re buying a distressed property. To me, a distressed property doesn’t really qualify as turnkey, but whatever. People are calling it that and I’m not going to argue semantics. What I will argue, though, is when you invest in a property that hasn’t been rehabbed, that company that sold you the property has put hardly anything into it. They have no skin in the game, so to speak. Sure, they bought the place, but they got it super cheap and they’re selling it to you for more than what they bought it for, and you STILL have to fund the improvements.
- Cost – And that brings me to my next point: cost. With the turnkey strategy I use, you will pay more for the property. Not going to argue that. But you’re also getting a 100% move-in ready home that is being sold at or very near market value. The repairs are done, you can have the home inspected to be sure of its quality, and there’s no downtime while you wait on repairs to be completed before tenants can move in. With the non-rehabbed option, you may think you’re saving money because you can buy-in cheaper and force appreciation through repairs that you decide on rather than another company, but I don’t believe you’ll actually cut costs this way. In fact, I wouldn’t be surprised if you spend MORE, simply because of unforeseen repairs and the enormous cost of vacancy while you wait on the renovation to be completed.
- Risk – So what does all this add up to? Increased risk with the second option. Again, with a true turnkey property (rehabbed), you know the actual value of the home, you can have it inspected, and it’s already cashflowing because tenants are in place. With the other strategy, you have nothing but a vacant, distressed home in need of repairs and tenants. This is a huge risk, and you need to ask yourself if it’s really worth saving a bit of money upfront.
So which one will you use? Of course I’m biased, but I really do believe that the best option – and the only one that truly qualifies as turnkey – is the one where you get a rehabbed property that is already generating income through its tenants. When you consider the cost, time, and considerable risk with the other strategy, it just seems like a no-brainer to me.