What you are really buying
Three things bundled: a renovated house, a signed lease, and a relationship with a management company. The bundle has real value — a first rental in a distant market with none of the contractor risk, none of the leasing lag, and a system already running. It also has a real cost, because every one of those services was priced into what you paid. Turnkey is best understood as buying an operating business at market value rather than buying a property at a discount, and it should be judged on the returns it produces, not on the equity it does not.
How the margin works
The provider buys distressed, renovates at trade cost, places a tenant, and sells at or near retail to an investor. The spread between their all-in basis and your purchase price is their profit, and it is where the forced equity went. That is a legitimate business when the renovation is genuine and the price is defensible. It becomes a problem when the rehab is cosmetic over deferred systems, when the appraisal leans on comparable sales that are themselves other turnkey trades, or when projected rent exceeds what the submarket actually pays. In the worst cases the buyer discovers both problems in year two, at the first turnover.
Diligence that separates good from bad
Order your own inspection from an inspector you found, not one the seller recommended. Pull your own comparable sales and your own rent comps instead of accepting the packet. Ask what was permitted, and ask specifically about roof, HVAC, electrical panel, plumbing supply lines, and sewer. Review the actual lease, the tenant’s payment history, and how the deposit is held. Read the management agreement for fees, leasing and renewal charges, maintenance markups, and the termination clause. Then run the numbers with a full capex reserve, since a two-year-old renovation is not a permanent one.
When it makes sense
For investors whose time is worth more than the spread, who want geographic diversification without building a local team, or who are starting out and would rather learn on a stabilized asset. It makes far less sense for anyone whose plan depends on forcing appreciation, because at retail there is nothing left to force.
Put it to work
Real estate investing strategies →
Related terms
- BRRRR — Buy, Rehab, Rent, Refinance, Repeat — a strategy for recycling one pool of capital across multiple rentals.
- Absentee owner — A property owner whose mailing address on the tax roll differs from the property address — an out-of-state landlord, an heir, or someone who moved and kept the house.
- Rent roll — A unit-by-unit schedule of who rents what, for how much, on what lease term, with deposits and move-in dates.
- Cash-on-cash return — Annual pre-tax cash flow divided by the total cash you actually invested — down payment, closing costs, and rehab.
- Pro forma — A projected income and expense statement for a property — what it should do, not what it has done.