Downside of Buying Turnkey Real Estate

Downside of Buying Turnkey Real Estate


The downsides of buying
turnkey rental properties. That’s today’s video. Let’s dive in. Hey there. I’m Clayton Morris, longtime
real estate investor and founder of Morris Invest. Thanks so much for dialing up
our channel and subscribing. I’m thrilled that you’re here. And today, we’re going to talk
about the downsides of buying turnkey rental properties. So let’s dive into it. When you’re getting
started and you want to build your
portfolio quickly, turnkey rentals can be a really
attractive way to do that. It’s hands off, you
don’t have to be there It’s fully managed for you. You just put up the
cash for the property and you’ve got a
tenant in place. Cash flowing rental property. Fully done for you, from
A to Z. That’s great, but there are some
downsides to buying turnkey rental properties. Let’s dive into it. Number one downside to buying
turnkey rental properties– it’s hands off. So if you like to
get your hands dirty, if you really like to control
the whole process, that is, you like to manage contractors. You like to cut drywall. You like to put up siding. You like to manage
roofers, electricians. You like to nitpick and
follow every little thing along the way. What kind of paint color,
carpet, all of those things. The hardwood floors. All of those things. If you like a hands-on approach
to real estate investing, then doing turnkey rentals and
buying from a turnkey provider is not going to be for you. Absolutely not. If you are a control
freak, and let’s be honest, if you’re
honest with yourself. Are you a control freak? If you are, then buying
turnkey is probably not the solution for you. Because if you’re going to want
to be on the phone every day managing your rentals
like that, then you should probably do it yourself. Take it from somebody who knows. I know individuals who
are control freaks. They like to do
everything themselves. They like to be
out there everyday. They like to meet
with the contractors. They like to see that
this is happening. If you are a control freak, then
turnkey real estate investing is not for you. Stay away from it. You will not be happy, I’m
telling you, stay away. Number two downside to buying
turnkey rental properties. Number two is that
not all turnkey providers are reputable. You need to do your homework. I recently heard a
story about a group of investors out of Hawaii. They purchased a bunch of
properties about a year ago from a turnkey provider
or an alleged turnkey provider and after about
five or six months of owning these properties,
they were sitting vacant, and they were wondering
where their rent checks were. And basically, this little
phony company sort of folded up and disappeared and
these Hawaiian investors were left holding these
properties that ended up not producing cash flow. They paid too much
for those properties, and they couldn’t get
tenants in those properties. What are they going to do? Unfortunately, I ended up
buying them from the Hawaiians, and at a loss. They actually took a
loss on the properties. They paid more than
they were worth. They didn’t cash flow. They couldn’t find
tenants for it. So you need to be
careful and make sure that you’re working with a
reputable turnkey provider. So you absolutely want
to ask for testimonials. You want to hear from
people who have actually purchased properties
from the company before. Ask for some testimonials. Make sure that the
company actually does what it says it’s going to do. Hear from happy
customers, right? There’s no better way than to
find out if a company actually exists and is doing
real work then the talk from people who actually own
properties from that company and who are receiving rent
checks on a regular basis. No one wants to work
with a phony company. So don’t do it. Don’t get suckered into
that kind of stuff. Work with reputable
companies that have testimonials that
they can share. Number three. Downside to buying
turnkey rentals is ROI– Return On Investment. A lot of people have
money in the stock market. They make a 3% or 4% or
5% return on their money. That is OK. It’s kind of low. But when you work with
a turnkey provider, ask them what is the typical
net ROI on the property that I’m going to buy. Net, not gross. Gross is before expenses and
other things are removed. What is the net ROI? If they’re giving you
a gross ROI number. They’re telling you it’s
going to be 20% or 25% and you ask them
is that gross ROI? Yeah, that’s gross ROI. That’s a red flag. You want to know what the net
is after expenses, insurance, taxes, those types of things. If they tell you
2%, 3% net, that’s basically what you’re getting
in the stock market, or even a little bit lower. Make sure that your ROI is high. The whole point of getting
into real estate investing is for ROI. I have so many
videos here where I talk about the power
of return on investment and why that’s the most
important thing, not the four walls and a roof. Just return on investment. That’s the whole reason
we’re doing this, right? So find out, make
sure that ROI is high. Personally, I don’t
buy properties unless I can hit a
10% to 12% net ROI. Net ROI. Why would you settle for
anything less than that? So make sure when you’re
talking to a turnkey provider that their net ROI is high. If it’s not, why not just
invest in the stock market? Four on the list. Number four on the list. The downsides of buying from
a turnkey rental provider. Find out the costs. Costs. Very often, turnkey providers
will nickel and dime you and they don’t
tell you about it. They’ll kind of hide it
and you’ll find out later. I’ve heard horror
stories from people that found out later after
they bought turnkey properties. For instance, here’s a scenario. If you get a maintenance call
on your house and a plumber has to go out and
fix the toilet. Happens, right? Something gets a clog. Are you going to
just pay the plumber? You should. Why then would you pay an
additional percentage or fee to the turnkey company
to call the plumber to go out to the property? So certain companies will charge
you additional maintenance fees, 10% or so, on top
of the fee that you’re going to pay for maintenance. So watch out for
little fiddly costs, hidden costs to go out to your
property to check on things. Let’s say there’s a
storm, thunderstorm. Is your team that you work
with, your property management team or your turnkey
provider, are they going to go out and
check on your property? I’ve heard from another
investor who told me that one of their teams went
out and charged them $70 just to drive and look at the house. They call that a site visit. And charged them
for a site visit. Be aware of those little
fiddly costs that can add up. Make sure you ask those
questions upfront. Does your team charge an
additional fee for maintenance? Do you charge for site visits? Are all of those
things extra that we are paying a turnkey provider? So look for those
little hidden costs. It’s kind of like
the phone company. See those things
adding up on your bill? And they can be costly. So ask about them. Number five downside from
buying from a turnkey provider. OK, maybe you’re in
California and you hear that certain cities
have a turnkey service. Great, but you need to be
aware of the vacancy rate. No turnkey company is
better or much better than the vacancy rate of
the city that you’re buying. So make sure you ask
your turnkey provider what the vacancy rate
is for that area. And they cannot beat
the vacancy rate. It’s going to be very
difficult for them to fill that property
with a tenant if their vacancy rate
is above 10% or 12%. There are certain cities
where the crime is very high and the vacancies are
very high and they have one employer in the town. Great that there is a
turnkey provider there, but if the vacancy rate
is through the roof, you probably want to avoid that. It’s going to be very
difficult for them to get a tenant in the property. So that can be a downside. Vacancy rate. Make sure that you know
what the vacancy rates are and that you’re getting
a low vacancy rate. So those are five downsides to
working with a turnkey rental provider. I hope this was helpful. I want to protect you, make
sure you have the education to go out there and
make great decisions about your real estate
investing future. We have other great
videos in this series on turnkey providers. We also have getting
started videos. We have a whole playlist. Just go down in the description
below in this video. Click on the Show More tab,
and you’ll see the links to other videos in this series. Please subscribe
also to this channel. Just click the button
over here to subscribe, and we’ll see you back here we
publish videos multiple times a week, everyone. I want you to go out there,
take action, and become a real estate investor. It’s the best way to
create passive income. We’ll see you next time.

42 thoughts on “Downside of Buying Turnkey Real Estate

  1. You made some good points. I wish I was younger, I would be buying all the properties I could handle. Also, have enough now and need to set up exit plan.

  2. i live in California it's very expensive to invest here what are some markets you would recommend? Tampa? Las Vegas? can you make a video about this topic and how $ is needed

  3. Morris –

    Would you personally invest in Chicago or Philly? Ali Boone is an investor at "Hipster Investments" a turnkey provider who pushes these areas heavily. How do I verify that?

    She bashes Detroit as well, but also recommends KC and Indiana (which I believe are better options than Philly/Chicago and probably metro Detroit too). I look at Philly/Chicago and see high barrier markets… In contrast, Redford, Dearborn, Hazel Park, Livonia, and Oak Park MI (southeast MI metro) have HUGE deals for rentals with lower barriers to entry but worse population growth and industry strength. I don't know if I should invest locally where I am in metro Detroit, or try other places with larger population growth/industry.

    So, how do you analyze several cities against each other personally? What websites and metrics do you use to gather and assess such information? And how can I tell if a turnkey provider is trying to take advantage of my lack of knowledge on an area/property?

    Thank you,
    Brad

  4. Clayton, do you personally work directly with any new investors to handhold them on their first? Also, do you do financing or the first property needs to be paid in cash? Have you had unsuccessful investors and why aren't they successful?

  5. My husband and I were fortunate to buy our first home in Daly City right next to San Francisco and we are actually looking into buying another home once the market goes down a bit and use it as a rental. Our plan is to continue buying rental properties in California since it's such a desired place to live, how come you don't recommend investing in California/the peninsula?

  6. Getting all my ducks in a row before i give you guys a call. I really enjoyed this video ( as my wife and I do all your videos!) we are eager to invest out of state through your company even though we are a bit nervous bout not being any where near our investment. You and your wife remind me of us with our hopes to build a legacy for our kids all while sticking it to "the man"! lol You'll be hearing from us soon once we decide on a local lender. we dont have the two you mentioned prior in your other videos down here in miami so we are looking for local banks in our area.

  7. Thank you for posting. I always learn a lot from your videos. Just started the process with F&G, but once all that's settled rest assure I'm investing through your company. Many, many, many thanks!!!

  8. Hello Clayton,

    One question I have is that if I buy an already rehabbed property from your company do I get information on things like; what the property was like before the rehab (possibly the inspection report & some pictures), what items were rehabbed in the process and which were not, and also, on the things that were rehabbed, what is the warranty (if any) on those components of the house?

    -Dyllan

  9. I talked one of your guy last week; he was really nice. I am planning to work with you for my first investment property. How do I know the data or testimonials of any turn key providers are authentic and how can I contact the people who got service from them? Lastly, will you suggest to buy any property with less than 5% equity?

  10. Hi, Clayton. If I'm investing in a turnkey rental and I'm financing the investment, do I ask what's the net cash on cash ROI? The net ROI is for cash only investments, right?

  11. I did my research and found out people are moving to the south at a very fast rate. Should I think about investing there, even though I live on the west coast?

  12. What is your commission percentage if I were to use your company to purchase a turnkey property, I'm assuming there is a percentage for property management. But according to your videos and your site, hands off for me means that you handle all the logistics. So if say the renovated total price before closing is $40k what would be your front end?

  13. Hi Clayton, love the videos. I'm curious as to what Up front and on going fees your firm charges the investor? I live in the Los Angeles area and want to invest with your company but I'm unclear of the agreement between the Investor (me) and the TurnKey provider (you). Perhaps you can shed some light on this. Thanks!

  14. Phil, do you have an uncle in the Seattle area? You have such a reasonable demeanor. I need a guy like you to be my partner. You would be fun to be married to and work with.

  15. Wondering why 3br/1bath homes, instead of tgat nice 3br/2ba for ma and pa to enjoy a "master suite" with a private bath. Is it that 3/1's are less expensive than 3/2's but LIVE similarly because the 3 bedrooms are there?

  16. How do we deal with those companies that have those hidden cost??? Do we leave them alone or have our own team to resolve matters??

  17. Hi Clayton,
    I live in Indy and I see that you have some properties in my area. If we purchased a house from you, do you manage our property just like a property management company or do we just buy the house from you and have to find a property management company ourselves?

  18. Thank you for the great questions to ask. I am looking into using a Turn-Key REI Company for my first investment. I am looking at Norada, heard some of the best reviews from this company compared to others.

  19. Hello, love all your videos thanks so much for sharing. Can you please explain how you make money from this turn key process? Is it just the property management fee? Or are your profits built into the all in fee the customer agrees to with Morris invest? Thanks in advance.

  20. Clayton, I really love your channel and your advice but I am confused why you keep on quoting a 3% return in the stock market when the average annual return for the s&p 500 is actually around 8%

  21. I would like to email you to tell you my story about how I have acquired 35 properties in 18 months. I do not come money, actually I work 12 hr swing shift and invest in real estate in my free time. Look forward to speaking with you

  22. "If you like to do hands-on real estate…then making millions in passive income by doing nothing is not for you."

    Fixed it.

  23. What's a good way for looking for tenants? Is there a way to look at vacancy rates? What's a good vacancy rate like in percentage?

  24. Hi Clayton, This video is very helpful like all of your other videos. I watched your podcast on how your turnkey program works. Sounds like a great program! I have a few questions since I'm completely new at Turnkey programs. 1) Why are you selling these properties and not keeping them for yourself? 2) What is the average NET Annual ROI for the investor with your program? 4) What are the additional costs to the investor outside of the acquisition price? 3) What is your company's role with the property after the rehab is complete and the property is turned over to the investor? I appreciate this information as my husband and I try to figure out what the best approach is for us to get started. Thank you for all you and your wife do to help others reach financial freedom!

  25. I've seen some video of unhappy investors of your company on turn key. Can you do a video of you looking over the work done on the home with your unhappy investors

  26. #2 is a lesson for all investors to thoroughly investigate any turnkey company. Look at databases for pending or current civil litigation. Talk to current investors with that company. Reputable outfits have nothing to hide.

  27. Clayton, What is considered low, medium, and high vacancy rates in your opinion? What is the maximum rate for an area you invest in? Is there any reason why you would accept a higher vacancy rate in one area vs another?

  28. Turn key properties:
    -find out vacancy rate of a city
    -find out if management company charges for maintenance calls or site visits.

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