While the internet can be extremely helpful in teaching real estate investing (especially since we didn’t learn anything about it in school!), it can also be very misleading and cause confusion as you’re trying to get started. While we’re sure people have the best of intentions (we can only hope), a lot of things people say on the internet are just not accurate. In support of helping you on your turnkey journey, we thought we’d debunk a recent turnkey comment we saw on BiggerPockets. Here’s the comment-
Here’s Ali’s full analysis of this comment and how much of it she believes to be accurate or not:
I think the time for turnkeys is over.
There are still turnkeys out there, and they aren’t horrible deals. However, the turnkey industry as a whole has taken a major hit with the foreclosure moratoriums, low inventory, higher property values, and high construction prices. It’s now extremely hard to get a turnkey- wait lists are months long or more with most providers. So, while it’s not over, turnkeys have trickled down to more minimal levels right now.
The market is too hot and if you add on TK premiums there is very little chance for you to turn a profit.
There are couple things wrong with this statement:
- Turnkeys don’t have premiums; they are priced at market, which is what they’re worth after rehab. People have a misunderstanding about pricing and value when they say things like “turnkeys are overpriced” or “you’re going to pay a premium for a turnkey.” People are comparing it to buying value-add deals for cheaper, in which case yes, turnkeys are more expensive. That does not, however, mean they’re overpriced or priced at a premium.
- The commenter obviously doesn’t understand how rental properties make money. More on that later…
Back in 2010-2015 the prices allowed TK companies to acquire, rehab and mark up properties and still leave enough meat on the bone for a buyer.
It’s accurate that back in those days, property prices were much more conducive to being marked up and still leaving a lot of cash flow on the table. What’s not accurate is the insinuation that it can’t be done today. It’s more limited, yes, but it’s not undoable. There is still cash flow on turnkeys.
Now I see absurd things like less than 1% rent ratios on midwest C class properties, even duplexes!
So many comments… where to start?
- Less than 1% rent ratios isn’t absurd, for a couple of reasons: the 1% rule isn’t the only guarantee of cash flow–you may still be able to get perfectly fine cash flow if the 1% rule isn’t met (run the actual numbers to find out rather than basing your analysis off of a “rule” that isn’t actually a rule), and we’ve been spoiled over the last 10-12 years with being able to meet the 1% and 2% rules.
- You can very easily still meet the 1% rule in certain markets. St. Louis, for example, has properties that almost all meet or exceed the 1% rule.
- No real estate mogul has ever made their fortune strictly from cash flow. Cash flow alone doesn’t make you rich! Therefore, low cash flow isn’t a guarantee of failure either.
There is NO WAY you can turn a profit on those properties at those prices.
Here we go… now this gets fun. There is absolutely a way you can turn a profit on those properties. The first place to start is in understanding how a rental property actually makes money. Check out this video where Ali breaks it down-
To take that one step further, you can then learn how to analyze a potential rental property based on understanding those profit centers. Ali explains that too!
You can’t base the worth of an investment just off whether it meets a cash flow “rule” (which isn’t even a rule) or not. To suggest that meeting the 1% rule is the only way to make money on a rental property is, quite frankly, ignorant. It’s also misleading.
With that said, it is true that you should be careful what neighborhood you invest in if you are going to be dealing with lower cash flow numbers. Some C neighborhoods may still be great despite lower cash flow numbers, but some may not and you really could end up taking a hit to your bottom line. Work with the turnkey provider to learn more about particular deals so you can better gauge for yourself what risk level you’re taking on.
At best you will eke out a 4% return with tons of stress along the way.
- First of all, where did 4% come from? Is that the presumed cash-on-cash return? What’s that based on? Sure, the nicer, newer properties may come in at a 4% cash-on-cash, but certainly not all of the properties.
- Given the nature of the whole comment, we can only assume that the commenter is still only referring to the cash flow. In that case, the “4%” would only be the cash flow returns, and it doesn’t take into account the other profit centers of a property.
- Why would there be tons of stress along the way? Sure, rental properties can be a pain sometimes, but why would these be any more stressful than anything else? And it’s turnkey… turnkeys aren’t perfect, but the idea is to have less stress.
Better buy some index funds and forget about it.
Yeah, because anyone has ever become a millionaire just on index funds. Again, this goes back to all of the ways a rental property makes money, which happens to be more ways than how index funds make money. As an aside, of those profit centers, the one that is overlooked the most tends to be the hedge against inflation. That one should most certainly not be overlooked right now–in fact, it should be one of the highlights–because of where the economy is right now and the perceived [insane] rise of inflation we’re in the middle of. The more inflation–the more profitable a rental property!
So, what’s the right answer? The right answer is that while real estate deals certainly aren’t what they have been over the last decade, and turnkeys won’t always put as high of a cash flow in your pocket as some other deals, there’s no reason for anyone to say 100% turnkeys can’t work. They can actually, in certain situations, lend to higher long-term returns than if you try to go at it all yourself.
Questions about investing in turnkeys in 2021? Reach out and ask!