The Turnkey Myth Exposed
Turnkey real estate is often a mythological real estate being of which only a few investors reap the benefits of its massive life changing monetary offerings. Because of these disproportionately glowing views of this type of investing, turnkey opportunities are often rife with scams that only result in networks of money pits that end up costing investors everything in some cases. In the case of preventing scams, knowledge is everything, so it is important that people educate themselves on the hazards contained in this type of investing in particular. However, if only a few certain rules are followed, generally these types of properties can produce wealth for those that choose to invest in this sector of real estate. If they are not followed, an investor can become part of the myriad horror stories online about turnkey property investments and about their real link to long term financial demise.
In-House Property Management is Important
Turnkey companies have to contain an in-house property management component because it is a must that the company is vested in the success of those purchasing turnkey properties from their company as real link between the two. This also means that their in-house property management must produce so that the property is successful. If this occurs, the client will continue to purchase properties from the company, and the client will also give word-of-mouth referrals based on that success. However, if the property management is not successful, not only will the client no longer purchase properties, but they also will certainly not give glowing reviews or any referrals. Additionally, if this component is effective, tenant placement, leasing renewal and maintenance fees will be minimal compared accessing these services in the open market because there is a negotiated cap in place.
Outside property management companies may asses a fee of only 10 percent on the monthly collections. Most of the money that these companies will make is the money that they retain from tenant replacement fees, so these companies have no incentive to maintain a tenant in any situation that would allow the property owner to cultivate a long term relationship. These outside companies merely adhere to a stringent set of rental rules, and if these rules are not followed or the rent is not paid by a certain time, these companies file evictions quickly and succinctly. These outside companies are incentivized to remove clients summarily because they will make the lion share of their money off of the property owner when they lease that property to a new client. This fee can be as high as the equivalent of a month and a half’s rent when they replace a client.
Additionally, when these outside management companies receive maintenance complaints, they are able to glean money from property owners by up charging on supplies and sometimes even receiving kickbacks from contractors that they incentivize to inflate bills and add unnecessary man hours to fix problems that an in house management company who is incentivized to make their client money and keep prices low could fix for pennies on the dollar. This occurs because outside management companies have constructed their fee structure based on these maintenance up charges and tenant placement fees, and this conflict of interest can cause those that purchase turnkey properties without an internal management company. The only method by which these outside management companies could be effective is if they come with iron clad and very specific contracts.