Lately, we’re seeing a major trend in “turn-key” offerings for real estate investors. When folks want to invest in real estate, but don’t want the headaches of every day management, they find “turn-key” investing to be a viable option for them. But there are things you should be aware of about these programs before deciding to invest.
A turn-key investment company will find the property for you, renovate it for you, find a tenant for you, manage the rental of the property for you, collect your rent for you, and send you a check at the end of the month.
The idea is that you collect a regular return on your investment, while someone else does all of the work related to managing the property. Over the years I’ve supplied properties to several turn key operations and have been part of a large turn key operation as well. I’ve witnessed many of the turn key challenges, mistakes and outright scams first hand.
First of all, consider the fact that the company is selling you a property. They are the SELLER
Generally speaking, a seller is not typically motivated to act in the buyer’s best interest. Most turn-key operations make their real profit by selling the property at a substantial mark up. As such, the deal may not be as good as it looks in the documentation that the seller provides to the investor buyer.
I’d check out the company and their “deals” as thoroughly as possible before investing. I’ve seen fraudulent appraisals used to fool absentee owners into believing that the property value was much higher than it actually was. If you are not there in person, you have no way of knowing whether the information you are being given is correct. Pay a local real estate professional who can check out the details for you. Have them verify the property and appraisal information provided by the company.
Verify that the cash flow will actually be enough to generate the advertised return on investment
This is important when paying all cash, and is incredibly important if you are going to be carrying a mortgage on the property. It’s not unusual for rental rates to go up or down over time. Make sure the rental income projections are accurate.
Ask how your property taxes and insurance will be managed
Make sure that you or your investment entity is shown on the insurance as the “Loss Payee”. And don’t forget that property taxes can increase quickly in some areas, this can reduce your cash flow over time, and can be critical in a market where rent rates are flat.
In some counties liens can be placed on the property for unpaid items like a former tenant’s water bills. I’ve seen a county attempt to collect a $5,000 unpaid water bill from an investor buyer who bought the property after it had been vacant for several years.
What about home owners association dues? Be sure that the income can cover the expenses adequately. A turn-key company should have a complete and accurate income and expense statement. But keep in mind that their numbers may be, shall we say, “generous” when it comes to making the cash flow look good. These items can often be verified with a quick phone call to the appropriate entity, or via online public records. Be sure you know who is personally responsible for paying these items, and request copies of paid receipts for critical items such as taxes and insurance, if these are being handled by the turn key company.
Consider this: How can you be sure that the income you are earning on your investment is actually being produced by the cash flow on your investment property?
Is your property really going to generate the advertised return, or will your “profits” be paid with other investors money? What happens if your property is vacant for an extended period of time? Everyone thought Bernie Madoff was a brilliant investor, but we now know that all he did was pay one investor with money from another investor. I’ve seen this happen several times where the company meant well, but did not have enough experience to generate the promised returns, and faked it as long as they could. Trust but verify.
Ask the turn key company for references from existing customers
Talk to the investors. Are they making money? Are their properties staying rented? How long have they been doing business with this company? Where specifically are their properties located? What proof can you gather to prove that the investor reference is really a customer of the company and not someone who is pretending to be a buyer? Is this investor showing as the owner of record in the public records?
The moral of the story is this:
No one cares more about your money than you do. Real estate investing is a “buyer beware” business. If the company makes mistakes, even if there are good intentions, it can still cost you a lot of money.
Turn-key companies are subject to the same challenges and problems that any investor faces when managing rental properties. And when they are managing dozens of them, it’s even more difficult. It’s still up to you as the investor to do a proper investigation of the details to insure that everything is just as represented, BEFORE you invest.
Donna S. Robinson is a real estate industry veteran, and residential investment consultant located in Atlanta, GA. She has provided hundreds of investment property evaluations to professional investors. Follow her on twitter at donnaconsults, Facebook.com/RealtyBizConsulting and watch her videos on youtube. Her latest book, Basics of Real Estate Investing, is now available for Kindle on Amazon.com