Turnkey Management Vs. Traditional Management
Why You Should Pop the Hood Before Investing in Turnkey Properties
To newer real estate investors, turnkey properties often pose an irresistible temptation. After all, who wouldn’t want to boost their cash flow while doing basically zero work?
There are two problems with this line of thought.
First, investing in turnkey properties hurts your bottom line. Naturally, a company that claims to do everything for you is going to charge higher rates, and in the long run, that will show in your bank account.
Second, and more importantly, you still have to do work. Sure, the turnkey company will take care of renovations, maintenance, and other issues. But you still have to do research, and a lot of the time, you’ll have to keep an eye on them to make sure everything is going smoothly.
Ali Boone, an awesome blogger on BiggerPockets, goes over some of the pros and cons of turnkey investing in a recent article. I don’t want to regurgitate too much, but her main argument is that only experienced investors should use turnkey providers. Due to higher fees, turnkey agencies offer lower profit margins, which works great for people buying properties in bulk, but not so well for those with smaller portfolios. Turnkey providers also have huge inventories, which can result in subpar service, a big no-no if you want to meet and stay on good terms with your tenants.
This seems to present a catch-22: either you earn cash flow by managing your rental property yourself, or you hire someone to take care of it and lose out on most of the profits. Yet you have another option, a third path which will save you work and preserve most of your cash flow. You can (and, in my opinion, should) seek out a third party property manager.
What’s the difference?
Traditionally, turnkey companies contain both real estate agents and property managers. By nature, they’re designed to buy quickly and efficiently with minimal questions. This means that, upon buying the property, maintenance will be up to date, and you’ll often have a tenant and property manager already in place. Typically, this will cost you a bit more per month — around 10–12% for a turnkey company compared to 7–10% for a third party property manager.
Yet, for most of these third party managers, the competitive advantage doesn’t lie in the pricing. It lies in the customer service. Think about it: turnkey companies manage hundreds or even thousands of properties at a time. They’re not terribly concerned with their tenants. For them, tenant turnover is just a fact of life, an inevitability in their well-oiled real estate machine. For you, though, tenant turnover is a pretty significant dent in your checkbook.
A few extra dollars a month to ensure no hassle? Still sounds like a pretty good deal. Unfortunately, the real costs don’t lie in the rent — they lie in other miscellaneous costs that build up. Fi Fighter goes into excellent detail in their article on the hidden costs involved. The author offers couple examples that stick out in particular. First, as I mentioned earlier, turnover is costly. In addition to the cash flow lost in vacancy, rent-ready turnover, or the maintenance costs of renovation, costs about $850 for an average single-family home in Indianapolis. This cost largely consists of general repairs ($460 according to the article) which could largely be avoided with a little elbow grease.
The author also goes over some of the eviction fees, often the result of the insufficient screening on the part of turnkey companies. Depending on where you live, the legal costs involved can be outrageous — Chicago, for instance, costs $1,672 between attorney and settlement fees. Since evictions in Chicago usually take up to two months, those fees are in addition to two months of rent you’ll lose out on. With a boutique or third party property manager, your chances of getting a problem tenant (and thus dealing with an eviction) are much slimmer.
Aside from the added cost, turnkey companies generally offer little to no transparency. Ms. Boone says it best:
Turnkey sellers deal with so many buyers so quickly that if they spent that much time answering exhaustive lists of questions from every client, they would never get anything done.
This doesn’t mean that you can’t do your due diligence before investing. It just means that you have to be experienced and know how to play the game. Remember, these businesses’ primary focus is buying and selling houses, not managing them. For turnkey investors, this works — all that really matters is the bottom line.
If, however, you have any sort of personal stake in the home, third-party property managers are the way to go. Often times, the profit in a house lies in renovating or improving it, which turnkey companies do themselves before selling to you at the new price. Not only does this prevent you from making more money on the house, it also removes you from the process even further.
Companies like Chalet that exclusively operate in the property management realm give you free reign on this front. You buy the house, do what you want to it, and they take care of the rest. Yet, unlike turnkey companies, you can follow along at every step of the process.
At the end of the day, you want to know what you’re investing in. Going through a house, inspecting it, and getting a feel for it is an awesome way to do that. Naturally, we at Chalet are a bit biased, but we view houses as more than just properties. We recognize that they’re unique homes, and as such, we believe that they deserve to be taken care of.
Where do you stand on the turnkey debate? Let us know in the comments, and don’t forget to follow us on Facebook and Twitter!
