The Truth: Investing in Turnkey Houses

Investing in turnkey houses seems like the perfect way for people to enter the property market with cheap prices, a rent-ready and fully rehabbed residential dwelling, and the promise of high returns on your invested money.

Sounds too good to be true? Well, yes and no....

Here's a real-life experience from a seasoned investor who's seen it all!

Firstly, what exactly is a turnkey house?

Basically, a turnkey house is a property that is supposedly already fully rehabbed, rent-ready for a tenant to move in, and usually with management in place. The idea is that a buyer can purchase a turnkey house and on closing day, can expect the property to be operational without having to do any extra work to it. It should also be ready to generate rental income immediately. The seller usually is the rehabber themselves. They generally have their own team of workers who get the house repaired and prepared.

The turnkey company first acquires the property at a very cheap price because it is often severely neglected or damaged. These properties are also commonly bought as foreclosures at the courthouse steps, auctions or at a bank. After the house is fixed up, the seller will put their commission on top, and try to sell the house at a wholesale price to an investor.

When it comes to "fully rehabbed" houses, not all properties are created equal. Some companies really do offer houses that are completely fixed and ready for rent, which includes a brand new roof, floor, kitchen, bathroom, plumbing, and electrical. Companies that demonstrate this kind of integrity in the preparation of their product, make turnkey investing the perfect fit for people who want to build a portfolio of rental properties without the hassle of managing a rehab project themselves.

Unfortunately, these turnkey providers are a very rare diamond in the rough. Instead, many so-called turnkey sellers become experts at putting lipstick on a pig, and on the surface, it can be hard to see the difference.

My first experience with a turnkey provider was not bad, but not that great either. It was in Indiana, and I purchased the 3 bedroom 2 bath single family house for $72,000. There was already a tenant paying rent there for $850 per month. That's a pretty good ROI by anyone's standards. However, the seller's definition of a fully rehabbed property meant new tiles, a new roof and furnace, and not much else. The water heater was barely operational, and there were ongoing minor plumbing issues that had to be dealt with every few months. Overall, I could accept these problems as they didn't eat into my profits too much, and my expectation of turnkey properties wasn't very high when I first started looking into buying one.

My second and third turnkey properties were supplied by the same provider, and my experience was even better than the first one, despite some minor hiccups such as a broken garage door and a leaking pipe under the sink. By this time, I had come to the conclusion (and acceptance) that turnkey houses were not going to be perfect, but workable. Overall, I was very happy with the idea of turnkey investing, and was getting more confident about the whole idea of putting money in this up and coming asset class.

And then came the fourth house...

This one was cheaper than all the others, which in hindsight, should have been a clue that something was going to go wrong. Terribly wrong. It was a 3 bed room 1 bath single family home that I bought for $52,000. I had a property inspector in to examine the house like all my properties. He said the house looks good but was unable to look at the foundation because the crawlspace was too small. However, the floor seemed level and stable, and showed no sign of deterioration. I was satisfied with his assessment, and had built a good relationship with the turnkey provider that I grew to trust, and bought the house.

Things with House 4 were going fine at first. However, the turnkey provider suddenly stopped answering my calls, or replying to emails. Prior to buying House 4, he had sent me new listings on a weekly basis. And now, nothing.

At the time, I didn't think much of it. I just thought perhaps business was slow, or he was taking a break. However, eight months later, I received a call from the property manager and she told me that there was an infestation of very hungry termites.

Termites had eaten the wooden base of the floor away!

The family who was living there at the time had begun stepping through the cheap laminated floor. The walls were starting to lean, and door frames were no longer vertically upright throughout the house. The pest inspector said that the termites looked like they had been feasting on the house for years, and the person who did the rehab covered it up with cheap wooden boards underneath the floor. He covered the underneath of the floor thick enough so that the crawlspace was simply too tight to fit in, and therefore, the house inspector wouldn't notice the termites!

This $52,000 investment cost me $31,000 to fix.

Needless to say, my enthusiasm for turnkey houses was diminished, but I did love investing in rental properties. I decided to do a nationwide search for the best turnkey providers in areas that make sense to invest. It wasn't easy to find trustworthy turnkey providers. Hundreds didn't pass the integrity test. But, I eventually found a company that delivered on what they promised.

Can investing in turnkey properties work?

Yes, but not all turnkey providers are created equal.