Do Turn-Key Properties Really Cost More? 
6 Reasons They Don't Always

One of the most common complaints I hear about turnkey properties is that investors leave equity on the table by overpaying. Many investors believe that they can save money and create built-in equity by buying a fixer upper and managing the renovation process themselves so why leave money on the table? But can this really be done?


To answer that question, we first need to define what it means to over-pay because the term is often misused when it comes to turn-key properties sold at market value. Over-paying occurs when one pays more than the true value of a product or service. In the case of real estate, if I pay more than market value for a property based on comparable sales of similar properties, than I have over paid. However, I have not overpaid simply because I could have saved money and done all the work myself.


I compare it to dining out at a restaurant. No one complains that they have overpaid for a meal because they could cook the same meal themselves at home for less. They know that they are paying for the convenience of having a nice meal prepared for them because they don’t have the time to shop for groceries and do the cooking themselves and perhaps their cooking skills leave something to be desired, so they leave it to someone else. Too often however, people say that you overpay for a turn-key property because it is priced at market value.


If you’re working with a good, reputable turn-key company, you don’t have to pay more than market value. That’s because good turn-key companies don’t make their money by charging a premium. They make their profit by adding value though improvements to the property. But how do you know if you’re turnkey company is charging a premium? If you’re financing, your lender will require an appraisal which will tell you what the market value is.


Most reputable turn-key companies will allow for an appraisal contingency. If they don’t, it could be an indication that they are selling over market value and know that they may have appraisal issues. Be sure to ask if you can cancel the contract if the appraisal is short or you might find yourself having to bring in the difference.


So, the real question is not whether you overpay for a turn key property, but whether you can save money by doing it yourself and keep some equity. The answer is maybe but it’s not as easy as it sounds. It depends on a number of factors including how much time you have to devote, what your skill set is and whether you are doing it locally or out of state. For a busy out of state investor with little or no experience, the risks are high and chances for success are low.


6 reasons why the individual investor can’t do it cheaper than a turnkey.


  1. Turn-key companies buy properties cheaper
    They know that the money is made going in which is why they buy distressed properties further upstream at auctions, tax sales and off market deals. They do not buy off the MLS where there are no deals

  2. They have greater economies of scale
    Turn-key companies get substantial volume discounts on materials and supplies. They standardize on their paint color, flooring, tile, fixtures etc. and buy in large quantities. They buy their HVAC systems and appliances in quantity through wholesalers rather than big box retailers.

  3. They have better control over their construction crews and labor costs.
    This is key to keeping a renovation on schedule and budget. Managing construction crews can be difficult enough when you are there locally and can oversee the progress and quality of work first-hand but is particularly challenging if you are out of state and can’t monitor the job and keep the contractor on task. Because of their volume, turnkey companies generally keep their contractors fully utilized and can therefore negotiate better labor costs and get more attention than an individual doing a 1-off project.

  4. No costly construction overruns
    It’s rare that a construction project comes in on time and on budget. Often times there are hidden surprises that couldn’t be anticipated that breaks the budget. This can happen even with seasoned, experienced investors. Inexperienced investors are even more susceptible. With a turn-key property, the turn-key company bears the risk.

  5. No holding costs during the renovation
    Mortgage payments, property taxes, insurance and utilities can all add up while you are renovating the property and marketing it for a tenant before you receive any income. A turn-key property is cash flowing the day you close.

  6. No initial tenant placement fee
    The turnkey company generally pays the lease up fee to the property manager which can amount to as much as 1 months rent.

Often times, the cost savings that investors are hoping for by doing it themselves quickly evaporate and they find they are left with little to no equity after taking on all the risk.


When Does it Make Sense to Buy Turnkey?


There is no one size fits all approach to real estate investment. While the DIY approach may work for some, turn-key is better suited for others.

Before deciding which approach is right for you, ask yourself the following questions:

  1. What is your risk tolerance?
    Doing it yourself is much riskier and the returns might not justify it. You’ll need to have a high level of risk tolerance and know your risk/reward trade off.

  2. Are you an active or passive investor?
    Do you enjoy being actively involved on a day-to-day basis or do you prefer less hassle? If you’re someone that doesn’t open your 401K statements, you’re probably not an active investor.

  3. How much time do you have to devote?
    Most people are not full-time investors. They do it on the side. If you have a demanding job that requires long hours and a busy family life, you probably don’t have the necessary time to successfully evaluate markets, learn the neighborhoods, build a team, find properties and fix them up. There are a lot of moving parts that go into successful investment and all require a substantial amount of time.


Before jumping into a DIY project, be sure to understand what you’re getting yourself in to and know the risks. It isn’t as easy as some make it out to be. Be realistic in assessing your time and ability. There are a lot of moving parts and It takes a great deal of time, effort and luck to be successful.


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