Many people will say turnkey rental properties are definitely overpriced.
I don’t agree.
It’s not to say turnkey providers never overprice their properties—shady turnkey providers most definitely may overprice everything they sell. I’m not talking about the shady providers in this article. I’m talking about turnkeys as a whole.
Assuming you are dealing with normal turnkey properties (and not shady ones), I believe the most someone can truly claim is:
Turnkey properties cost more than the typical rental property investment.
Kind of a boring statement, huh? Boring maybe, but it’s weighty when you compare it to the claim that turnkeys are overpriced.
Here’s why people are tempted to say turnkeys are overpriced:
The general theory behind investing in rental properties has always been to buy a property below market value so you can force appreciation on the property. That forced appreciation, hopefully in addition to positive monthly cash flow, is one of the primary streams of returns on a rental property. Turnkeys, however, typically aren’t typically sold below market value. Therefore, that forced appreciation is no longer part of the returns equation.
This is not untrue. Turnkeys are typically sold at or around market value, and therefore forcing appreciation can be difficult or impossible.
But here’s where the clarification comes in. The properties that people buy below market value are not in perfect condition—hence why they are priced below market value. Note: There are exceptions, of course, and not every property will fit this exact equation, but I’m using this as a generic premise on how these things usually work.
So, when you buy a property under market value, typically you then fix it up to bring it up to a market value (or better) condition and then re-appraise the property, and that’s where you suddenly end up with added/forced appreciation. You forced the appreciation by improving the quality of the property. The awesome thing about real estate is that when you do this, typically the appreciation doesn’t equate to how much you had to put in for the improvements, but it ends up being more than you had to pay for the improvements. Therefore, awesome magic money gain in your pocket. Bingo.
But if you don’t get that part of the deal, like with a turnkey, does that mean you are overpaying?
With a (good) turnkey, you are paying what the property is worth. When you buy a distressed property in so-so condition (or worse), you are paying what it is worth. A turnkey property is fully rehabbed or fully redeveloped, so it only makes sense to pay what it is worth.
Does that make sense? You aren’t “overpaying” for turnkeys; you just aren’t buying a property that is priced under market value. So, if someone wanted to argue this point, the only real statement they could argue would be “are you overpaying for a rental property?” not “are you overpaying for that property?” It’s an argument of concept.
So now that we have that cleared up, what are the remaining issues? I can think of two:
- Should you pay market value for a rental property?
- Is there really no way to force appreciation on a turnkey?
Should You Pay Market Value for a Rental Property?
This will always be up for debate, and the right answer depends on two things:
- Your investment strategy (and therefore goals)
- Whether or not there is benefit to doing so
While rental properties have historically involved the buy-rehab-rent-refinance-repeat (BRRRR) method, and that particular method is a specific strategy in itself, they do not have to follow that strategy. The other strategy is to just buy and hold a property.
Does the BRRRR method get you higher returns than just buying and holding? Yes. Well then, why wouldn’t you always want to do that on a property?
- Lack of time
- Lack of knowledge and/or skills
- Lack of interest
- Aversion to risk
While the BRRRR method is fantastic and can provide fantastic returns, it’s just not for everybody.
The fact is, there is skill and knowledge required to successfully BRRRR a property (properly, for financial success), and it takes a decent amount of effort to do it.
Take me, for example. I love investing, I love real estate, but I also have absolutely no interest in knowing details on any of the skills required to BRRRR, and I also have no interest in spending one ounce of time working on any of the properties I own. I prefer to just get money, without working, while I go hang out at the beach.
Now, if you are the kind of person who has an interest in all of that and you spend the time to gain the knowledge you need for it and want to do it, I absolutely think that you should BRRRR for the added returns.
Related: The Top 4 Reasons to Never Invest in Turnkey Real Estate
If you aren’t sure which route is better for you, check out more details on each method at “Is It Better to Buy & Rehab or Purchase Turnkeys? Let’s Look at the Pros and Cons.”
If you pay more for a rental property and therefore lessen your returns, there should at least be some benefit in doing so or it wouldn’t be worth it, would it? So what are the possible benefits if you do go the route of paying more for the rent-ready property?
- Minimal time effort required
- Minimal stress required
- Less risk
- Ability to expand portfolio quicker
You’ve already heard one of the benefits of not doing the BRRRR thing—me spending time at the beach rather than swinging hammers on my properties. While I’m at the beach, I also don’t stress over my properties. So there’s the time effort and stress bullets.
You also dodge a lot of risk by not taking on such a heavy load of work on a property. There are just more moving components, and with every added component in a real estate investment, there is an added layer of risk. And then for expansion and mobility, if you aren’t tied up with one specific property (i.e. having to be there and having to focus on it while it’s being worked on), you can buy properties really anywhere you want to and you can buy more properties more quickly. Yes, more capital is required for that if you are buying up front and not waiting on profits from a BRRRR appreciation force, but it’s an option for many investors.
For more thoughts about whether there is benefit to paying market price for (good) properties or not, check out “Do the Markups on Turnkey Properties Kill the Deal?”
Can You Force Appreciation on a Turnkey Property?
The answer is yes.
For the most part, forcing appreciation on a turnkey is not really a thing. The other factor is that turnkeys are not sold on the basis of appreciation; they are sold on the basis of cash flow. However, if appreciation is of major desire with your turnkey and you really want to make it happen, there are a couple options for it.
1. Buy only in certain stages of market cycles.
Unfortunately, this one is not always an option. However, when it is an option, it’s an awesome option.
The part of this one that can’t be controlled is when certain markets, or the whole real estate economy, are in advantageous positions.
The most advantageous time to buy in a real estate market is when it is on the brink of a major boom. Now, a “major boom” should not be interpreted by just anybody; it should be a very solid thing based on positive market fundamentals. These booms can often be predicted. What goes into those predictions is above my pay-grade, but know they can happen. Don’t be tricked by people saying that some market is “certainly about to hit a boom” when it’s really not, though. There are some markets out there that people have been saying are on the brink of a boom for like the last 20 years. That’s not so solid. So be sure the boom is really coming.
If you buy right then, at the beginning of the boom, the market boom itself will force appreciation on your turnkey. I did exactly this with a lot of my Atlanta properties. I strategically bought them in 2011 and 2012, right when the impending boom was first starting. Because I bought right then, all of those properties increased in value by over $40,000 each in about three years or so, give or take. Considering they were all priced between $55k-95k at the time, that’s not too shabby of appreciation numbers! But now that boom in Atlanta has ended. It’s over. So if you buy in Atlanta now, you can expect extremely minimal forced appreciation on a market value property just due to change in market phase.
Each market will be in its own phase in the growth cycle, so when to buy in each market is specific to each market itself.
More generally, however, the real estate economy as a whole can have a big impact on the ability to see a lot of appreciation in a short amount of time. For example, right now as I write this article it is 2017 and the real estate economy as a whole is at extremely high prices all across the board and because prices are so high, there are really no major markets expecting any crazy amount of appreciation. So right now, the option of using the market to force appreciation on a market value property is very limited, if an option at all. This is the downside to this method—it isn’t always an option. But like I said, when it is an option, it’s a great one.
Related: The #1 Indicator That You’ll Have a Successful Experience When Investing in Turnkeys
2. Combine the BRRRR strategy with the turnkey strategy.
Whoa, what? Yep, you can do it. There are turnkey companies out there who sell straight-up turnkeys, but there are also companies out there who give you the option to end up with one of their normal turnkey properties, but you finance the work along the way (rather than not paying anything for it until you buy it at market value), and when you do that, you are the one to gain the equity from the BRRRR on the other end.
For more information on how this can work, check out “What Are The Different Kinds of Turnkey Properties?”
My only caveat to suggesting this method of forcing appreciation with a turnkey is that you must be very cognizant of the company you choose to do this through. Because you are assuming the majority of the risk during the purchase and rehab and all that jazz, it is ten times more important to make sure you are working with someone legit. Regular turnkeys can be fully verified before you put any money down on them, but the BRRRR versions of them usually can’t be. Because your money is going in before everything is officially verified, the risk is on you.
There are several companies around who offer this kind of setup, and currently I am only working with one. My team and I only trusted this company with their BRRRR+turnkey offerings after a) working with investors who bought their regular turnkeys for several years and b) watching and tracking their success with the BRRRR and turnkey buyers for almost two years.
So, be diligent on who you work with, but if you find the right company, combining the BRRRR method with the turnkey experts is a fantastic way to force appreciation off the bat but also still reap the benefits of not having to swing the hammer yourself, while reducing risk (because they are experts in doing all that stuff and you aren’t).
Are turnkeys overpriced? Absolutely not. They are priced at exactly what they are worth. You pay more to save yourself hassle, work, and risk. But are they for everyone or do they fit into everyone’s strategy? Nope.
What’s more important to you—extra returns or ease of process?
Every investor is different! Chime in and let everyone know which side of the fence you are on.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.