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Turnkey Diligence: Evaluating a Turnkey Provider

Turnkey real estate investing is an appealing option for self-directed IRA investors.  The ability to place IRA capital into a rental property that is ready-to-rent makes a lot of sense and aligns well with the needs of busy investors.

For investors who live in high-cost coastal metros, the ability to purchase affordable properties that cash flow in out-of-state markets is a plus.  There are many advantages of turnkey investing, to be sure.

Finding a quality provider can be a challenge, however.

The horror stories are out there.  You need to beware of shady operators who over-promise and under-deliver or just flat-out lie about the condition of properties.  If property management is not done well, you can end up with the liability risks of neglected property on the one hand or getting nickeled and dimed for unnecessary repairs on the other.  Poorly vetted tenants can also cause all kinds of problems and kill the hopes of a profitable investment.

With the right operator, you can truly experience a turn-key investment and watch the monthly checks land in your self-directed IRA or Solo 401(k) plan.

Fortunately, there are plenty of quality operators out there.  Your job is to find them.

Know What you Want

Turnkey property investing covers a broad range of services.  Do you simply want a ready-to-rent property and plan to put your own management in place?  Would you prefer that the property team also provide full-service property management?  Are you more interested in acquiring a property in need of work and having a team bring it into serviceable condition first?

Different firms offer different levels of service.  You want to start by finding a provider who offers what you are looking for.

Know Your Target Market

It helps to know the market you want to invest in.  If you spent time in a city growing up or while in school, you may know the neighborhoods that are better to invest in and what drives the local economy.

If you have family or a trusted friend who lives nearby, they can be a valuable resource to help you understand the current pulse of the city and perhaps help you oversee a property and your property management team in the future.

You are much better off selecting a city to invest in based on your own research and connections than being “sold” on a city by a turnkey provider who operates in that city.

Trusted Referrals

Perhaps the best way to find a quality provider is via the referral of someone you know and trust who has had success working with them.

Network in your local real estate investor community or other social circles.  Ask questions.  Not everyone will simply volunteer that they own investment property out of town, so it can take a little digging.  Mention that you are considering such an investment and see what someone says.

Ask your CPA or attorney if they know anyone having success with turnkey investing.

Avoid Too-Good-To-Be-True

Properties that are too cheap, promises of excessive returns, and rosy financial projections that don’t allow adequate amounts for vacancies and repair costs are all red flags.  Bargain basement property management fees could also be a concern.

If you are planning to invest in B class neighborhoods and the pictures of properties look like they came out of a design magazine, something may not be right.

Before you can invest in a market, you need to know what the numbers “should” look like for a certain type of neighborhood and class of property.

You need to do your own research or get the help of a seasoned real estate agent/investor other than the provider to help you make sure the numbers make sense.

Avoid Too Much “Hustle”

Volume is the name of the game for many turnkey operators.  They make money when they sell a house, and want to sell as many as possible with as little work as possible.  You just have to know this going in, and work to find an operator who will take the time to work with you and let you do your research.

Your evaluation of a provider may not be directly tied to a property.  You can often take a slower pace when looking at projects they have completed or are in process on.  When it comes time to look at a specific property, time may be of the essence.

Most any quality provider will have a list of potential buyers and good properties do go fast.  Even so, you should never accept being rushed and having to skip crucial aspects of property diligence.

If the process is too fast paced, simply move on.

Check References

Checking references at several levels is a necessity.

You should absolutely speak with more than one person who has invested with the provider.  Of course, providers are going to cherry pick someone who loves what they do.  Sometimes you may want to verify the person is actually an investor and may be able to do so with a property title search.

If you can find non-investor references, that can also be helpful.  Speaking with a 3rd party contractor, appraiser, lender, etc. who the team works with is a good idea and can give you a sense of character.  While some folks who may be involved in deals and have a financial interest of their own may give a provider a little benefit of the doubt, it is pretty easy to tell when someone really likes working with someone as opposed to just doing business with them.

The internet is also a great resource for checking out the reputation of a provider.

Make Sure You Can Get Independent Diligence

When you get to the point of performing diligence on a specific property, you will want to bring in your own resources to supplement and verify what the turnkey provider is offering.

As you get to know a team, make sure you will be able to see the scope of work for property repairs if applicable.  You should be able to get a third-party property inspection or appraisal as well.

If a provider is unwilling to let you bring in such outside resources, they either have something to hide or only want to work with investors who make their life easier.  Either way, they are probably not a good fit.

An In-Person Visit is Crucial

While the internet allows for investors to purchase properties sight-unseen, that is not always the best approach.

If you can meet the team and view properties they have completed or are in the process of working on, you are more likely to succeed in your investment.

Getting an idea of how they manage their rehab process can be a great indicator of quality.  Is there a professional team working off checklists and keeping the jobsite clean and organized, or does the driveway look like the aftermath of a tornado?

Whether the property management team is in-house or outsourced, you will want to make sure to get to know them.  Once a property has been purchased, you will be working with the property manager almost exclusively.  You need to be able to communicate clearly with them and feel like you can have a good working relationship.

Unfortunately, when your IRA is the investor the travel cost is on you.  Your IRA should not pay your travel expenses.  And since the IRA is the investor and not creating taxable income, there is no place to deduct those expenses.

Take Your Time and Get it Right

Some investors spend more time researching their next vacation or car purchase than a property investment.  When you consider that you are making a long-term decision about where to place your retirement savings, it is important to take time and be diligent.

Turnkey property investing can be a very good way to protect and grow your nest egg.  It takes a team to create success, so finding the right team to work with is important.

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