Is a Turn-key Rental or Apartment Syndication Better?

by | Feb 27, 2020 | 0 comments

Turnkey rental options are one of the biggest competitors for apartment syndication, because both claim to be passive investments with great returns. Buying a rental property through a turnkey company is a great way to acquire single family real estate as long as you are still doing your due diligence on the operator, market, and on the specific property. Run all of the numbers yourself! I have looked at some offerings; my mom was about to buy three in one market with one operator that I actually introduced her to. I met them at an event and I liked them, so I thought they would be a good company to go with. When I looked at the numbers I saw that the turnkey provider took a lot of meat off the bone. Although the numbers still look decent, turnkey providers make money at least four ways—one on the purchase, one on the flip because they typically own the contracting company, then the forced appreciation when they sell it to the investor, then they are usually the property manager as well. I just felt like if they’re making income four ways, they could have been a little bit better with the price. It seemed to me like my Mom was going to be paying market value, or even a little more.

If you are looking for truly passive income, turnkey is less passive than investing in an apartment syndication as a Limited Partner. Turnkey rentals are pretty passive, but you need to make sure you’re paying your taxes, insurance, utility bills (this can creep up on you if your tenant stops paying the bills), and managing the property manager. I went through an eviction with a turnkey rental, and I will say that took a lot of work on my part. No one is going to manage your house better than you, especially if the property manager isn’t getting paid because there is no rent coming in. If you buy a turnkey rental in different market, you are putting your whole investment in the hands of the property manager. Alternatively, you are putting your investment in the hands of an operator with an apartment syndication, but the company managing a large apartment complex is a professional organization managing potentially thousands of units. Property managers of single family homes may or may not be as professional or sophisticated with in-house maintenance and on-site management like an apartment property manager would.

In general, investing in an apartment syndication is very passive as a Limited Partner. During due diligence for the operator, market, and deal, you will be somewhat active, but after wiring your money and closing on the property, it is so passive that you really don’t need to do anything. I highly suggest reading your emails when you get the updates and making sure your ACH transfer is hitting your bank account monthly or quarterly, whatever it is scheduled for. Make sure you’re getting paid and then when it is tax time, make sure you’re waiting for your K-1 so you can file it with your taxes. Other than that, there’s no activity that you are required to do. You really don’t do anything, you are truly a Limited Partner or passive investor.

The General Partners are professionals. They have done many deals and rest assured, the bank trusts them, and you know there is at least some level of underwriting by the bank. You are partnering with a professional team. When you have a 100+ unit property and they hire a property manager, they aren’t their only client. They hire a professional management company that the bank also vets.

With turn-key rentals, it is more likely you will get a call for a broken toilet or other issue if the tenant can’t reach the property manager. You are the owner and it is your responsibility at the end of the day to abide by all of the landlord tenant laws, so if your property manager isn’t doing a good job, you get stuck holding the bag. You will never get a call in the middle of the night for a broken toilet or some maintenance issue as a passive investor in an apartment syndication. You are much more hands-off with apartment syndication because someone elseis paying that tax bills, mortgage, utilities, and managing tenants.

Turnkey rentals and investing in apartment syndication are backed by real estate, so I’m supportive of both. If you must do a turnkey rental, fine, but I still think the superior investment is something professionally operated and managed and truly passive with all the benefits of real estate.

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