Turnkey real estate investment is one of those things that a lot of people want to get into but a lot of people don’t really understand.
This is one of the most important articles you will read if you want to passively invest in real estate...Period!
How do it work? What’s the process? Where do I start? Is it really passive? Can I trust someone else to handle my investments?
There’s a lot of soul-searching to do when deciding whether or not you want to turn to turnkey real estate investment, but even more important than the questions you ask yourself are the questions you ask your potential turnkey investment partner.
The company that you choose to work with is paramount to your success in turnkey investing! Their success, their reputation, their experience, their expertise—it all matters!
Want to learn all about turnkey real estate investment? Read our white paper.
When you’ve discovered a turnkey company, don’t dive in right away. There are some crucial questions to ask first so that you know exactly what you’re getting into:
9 Key Questions to Ask Your Turnkey Investment Company
1. Does your company actually own the properties?
Beware! Most companies that market with the word turnkey aren’t actually what you think they are. Some are actually just marketing companies acting as a go-between between investors and the companies or even individuals that actually own the properties. They markup the properties so that they get a cut—and that’s something you’d rather avoid.
Still, other companies that market themselves with the word Turnkey are actually just agents pushing properties from the MLS. They do not actually own any properties and worse, they are not in control of the properties.
Lastly, many of these companies need the buyer to actually purchase the property and pay for the full renovation. This is NOT a Turnkey investment! No matter how it is marketed nor the slick sales pitch, companies that operate in this manner are absolutely hurting the investor they are working with by using the term "turnkey" and taking advantage of investors who do not know what they should expect.
If an investor is talking to a company and they market themselves as a Turnkey company or opportunity, but they do not actually own properties...then the investor should hang up the phone and move on.
2. How long has your company been in the turnkey real estate business?
While new companies in and of themselves aren’t a bad thing, this is your money and your financial future we’re talking about. You want a company that has experience in this business and a proven record of success.
I know of many companies who market themselves as having been in business for a lengthy period of time, are actually new to the service industry, but may have been in real estate longer. They understand that length of time in business is important and they are willing to fudge the numbers to make their company look better.
Simply being in real estate is not enough. You want to do business with companies that understand what it means to provide service and can demonstrate that they have been in business for a lengthy period of time providing service to customers, clients, tenants or investors.
This is an important point and make sure you ask questions of each company you talk to. Really dig in to find out how long a company has been in business and if they have actually been in the "business" of serving investors.
3. How does your company handle the renovation process?
Most turnkey real estate companies have some sort of process to deal with property renovations for you. Does that mean that actually handle the renovation process or even do a good job? Absolutely not!
How exactly should that process work?
What are the time lines like?
What renovation items are the focus?
How will they affect your property values?
Learn how they will take care of your properties, what companies and contractors they partner with, and other details about renovating acquired properties.
Unfortunately, investors will find that the normal for the industry is to do the minimum amount of work to hold the price of the project down. Deferring maintenance is the normal for the industry as is maximizing the life of roofs, exteriors, and major systems such as HVAC, furnace and water heater. That in itself is not all bad.
The problem occurs when an investors expectations are not met. A true Turnkey investment, what Memphis Invest refers to a truly passive investment, is going to be fully renovated and prepared as a property to withstand tenancy. An investor should reasonably expect to not face capital expenditures for the first few early years. That comes with a front-end cost that is higher. But a back end expectation that major issues and upcoming costs have been covered.
The alternative is getting in at a lower cost on the front-end, but having to replace major systems, roofs and even basics like fascia and sophet, because those maintenance items are deferred by the company selling the property.
It is VERY IMPORTANT for an investor to know and understand the difference. Not just in costs, but in how you are going to feel as an investor to have major maintenance issues that can begin sometimes within the first year on lower-level renovations and lower cost properties. You may not feel it is very turnkey nor passive!
4. Can I speak to any investor referrals that have purchased properties for your company that I can speak to?
Nothing speaks more poignantly than another investor’s experience. If a company isn’t willing to connect you with their clients so that you can learn about their experiences, it’s definitely a red flag. Just having testimonials isn’t enough—you need to be able to talk to them.
When you speak with most investors, you will get all of the cookies, cake, ice cream and rainbows. There is nothing wrong with that, yet in most cases, there have been hiccups. Ask about them. If a company has hiccups and clients are willing to rave about how they were handled, then you have may have found a good partner.
If clients are either not willing or claim to have never had an issue, you probably want to keep looking. They either have not been in business long enough or the investor you are speaking with has not been investing long enough to truly give you a testimonial. There will always be issues. The differentiator you are looking for is how are issues handled and how good is the companies communication.
5. How long have they been in business?
Different turnkey companies will have their hands in different markets—and local experience is vital! Turnkey investors are often investing in remote markets and need to be able to lean on the expertise of their turnkey partners. You need to be sure that your partners actually have that experience.
Even if they haven’t been in a particular market for very long, does their team reflect a solid number of years of real estate industry experience to safely and smartly navigate the business? This industry is littered with two things.
1. New investors, new business owners who have had a taste of success and wildly over-exaggerate the ease of this business and their limited success.
2. Failed new investors and new business owners who took down many investors and their hard-earned savings with them!
Be careful about making sure the company you choose to work with has a demonstrated amount of time and success in business. Experience matters. A little grey hair matters. You want to do business with people that may know a thing or two about business cycles and the ups and downs that come with any industry.
6. Are properties already tenant-occupied when you close?
Different turnkey companies operate differently—while not necessarily a red flag, you’ll want to know going in so there are no surprises! Sometimes you’ll be buying properties that the turnkey company has completely renovated and placed a tenant into before closing. Most of the time Turnkey companies will fully complete a renovation, but there may not be a tenant on day 1 when you close.
This is usually a timing issue, but a buyer has to be fully informed on what they can reasonably expect as an occupied date on a property. Sometimes issues occur and properties take longer to get occupied. Be sure to ask what happens then!
Are you charged a lease-up fee?
What is the process for keeping you up-to-date?
A property being rented is not a pre-requisite when buying a Turnkey property. Many teams are supplying a smooth process and part of the process means that certain pieces can fall in different orders. Like closing before a new tenant has moved in. It takes an exceptionally good team with an excellent reputation to be able to justify why a client should move forward. Luckily for many passive investors, there are exceptionally good teams out there who have earned the reputation for getting properties rented quickly and keeping them rented.
Make sure you are dealing with one of those teams.
7. Is your property management team in-house?
Some turnkey investment companies have their own in-house property management team, which is ideal. It means there are fewer costs involved, for one. It also means one less company to vet! If property management is outsourced, it’s another company to investigate.
In my eyes, this is an absolute deal breaker every time. I have never seen a good example of a company who does excellent work and then outsources the main ingredient in an investors' success. Not one!
It is imperative as an investor that when you choose to work with a truly passive investment company, they have in house property management and an intact, solid reputation. You must know as an investor exactly whom you are dealing with and what to expect. You want the same person you are talking to on the phone when buying a property, to be the same person you talk to on the phone when there is a problem down the line.
There is nothing worse for an investor than to be shuffled around after you close and need answers. Nothing worse than to be told your issue is "someone else's problem....call them".
8. How is tenant turnover handled? What is a typical vacancy length?
Naturally, you’ll want to know how well your turnkey partner will handle any hiccups that are bound to come along. What’s their history with handling evictions? What’s their history with vacancies and tenant turnovers? How long is a typical vacancy? Ask about the process of dealing with challenges: evictions, late payments, and unruly tenants, so on and so forth.
A great company will already have this data and they will have historical references to see how they perform over time. It is important that you only deal with companies who fanatically track data. How else are they going to improve? IF they are not tracking, they are not worth talking to.
This illustrates my point about the need for property management to be in house. If it is not, a company will not be able to give you true numbers and show you how those numbers stack up over time. They are simply selling houses and handing you off as an investor to someone else. You only want to deal with companies who understand the importance of tracking key performance indicators and sharing that with possible clients.
9. What is the process for receiving payment and property information?
Here’s the big question: how are you going to get paid? As a real estate investor, you want to make sure that you’re seeing your money on time and getting regular updates on the progress of your investments on time! Very few companies are set up to handle communication with clients on a monthly basis the way Memphis Invest is set up. It is simply too expensive and time consuming and most business owners do not care enough about clients to go through the hassle.
The real question comes down to this. What are your expectations as an investor? Do you expect to be kept informed on the performance of you property on a consistent basis? Do you expect the turnkey company you work with the be accountable to the performance of your property? Do you expect that whether a company has good news, bad news or no news, they should be contacting you and updating you?
If you answer yes, then you are thinking clearly and raising the bar of expectations! It is sad that the bar was allowed to get so low.
There are, of course, a thousand other questions you should ask your turnkey real estate investment company. Don’t neglect due diligence in vetting a turnkey company! Your investment future is worth the time and effort it takes to be thorough. Ask the tough questions. Be rigorous. You don’t want to make the mistake of ending up tangled up with a company that is inexperienced or worse, deceitful.
Instead, take the time to ask good questions so that you can make the right decision for your financial future.