Should I Invest In Wholesale, Retail or Turnkey Properties?
As a real estate investing decision, figuring out whether to invest in wholesale, retail or turnkey properties will be easier if you first have a definition of each. As part of your real estate investment strategy, you want to decide how you want to actually purchase the properties. Of course you know you want to do your proper due diligence and purchase in the correct locations that can provide you with the sustained returns you desire. You also want to determine how you want to buy the properties. Do you wish to purchase them as a wholesale property, as a retail property or as a turnkey property?
Let’s look at the difference between the three types (wholesale, retail and turnkey) as there tends to be much confusion about the correct meaning of each!
Wholesale real estate investment properties
Short description: It is the purchase of distressed property. Often the property will be in need of much repair, have title issues that need to be corrected. These properties are bought cheap and often times VERY cheap. The tradeoff for the low prices is the amount of work and risk you take in acquiring these properties.
Who typically buys wholesale properties? Local investors with an understanding of the local market, title issues and, with a desire to flip or maybe fix and flip for a profit.
These are properties bought as a massive distressed sale. The people who truly purchase a wholesale property spend hours sending out post cards to people with challenges as it relates to their ownership of the properties. These sellers tend to want to sell quickly.
Another way of acquiring properties wholesale is through court house steps, or being on the short list of a bank who wants to liquidate properties. Contrary to popular belief, buying property wholesale does indeed get you properties at a great price but requires much ongoing diligence, relationship building and being in the inner circle of the real estate world (many people call this the “good ole boys network”).
Buying wholesale is not for the person looking to buy one property or who occasionally wants to buy a property. This requires developing and maintaining ongoing relationships and keeping up with real estate laws, principals and a great understanding of liens, encumbrances and clouds on the title. If you struggle to understand what this last sentence means, then you probably are not a wholesale type of investor because it takes much ongoing work to know your way around the wholesale market. Also to purchase wholesale, you need to be present, know the area and view the property as you will want to personally assess it to establish the cost required to bring the property to clean and marketable title.
Retail real estate investment properties
Short description: Properties purchased from the seller (typically sold through the aid of a real estate professional). These sellers want to get fair market price for the property and the property is typically move in ready.
Who typically buys a retail property? Owner occupied minded people looking for a home or a second home.
These properties are usually acquired by the person who is looking for the simplicity of buying a move in ready property without having to do any work with maybe the exception of personal decorating changes. Lifestyle and location near their favorite locations which they frequent such as restaurants, entertainment spots, beaches, and of course near where they may work.
Turnkey real estate investment properties
Short description: A property that is often sold below retail pricing after having been freshly rehabbed, rented with a lease in place, property management in place and a power team of insurance agents, service providers and tradesman who offer economies of scale pricing based on the extensive network that has been established.
Who typically buys Turnkey properties? Investors who are looking for a hands off passive investment, typically investors who live out of the area, out of state or maybe out of the country. Investors who understand the benefits of investing in the right location and have an understanding of the wealth building principals. These investors are typically passive investors who are not interested in dealing with the day to day operations of real estate.
Turnkey properties typically are purchased originally by a wholesale investor. These wholesale investors usually have one of two exit strategies, either to sell retail (as identified above) or to sell as a turnkey property.
In a turnkey property, the wholesale buyer will typically make their profits through the service they provide. They burden the risk associated with some unknown circumstances as they are not provided with a seller’s disclosure and have to perform their own due diligence to understand what clouds may be on the title that they need to clean. Though some wholesaler investors simply resell the properties to the next investor for the profit, many will convert the property to retail or turnkey property. In either case the wholesaler will:
- Scrub the title and correct any challenges, such as removing liens which may be costly and time consuming to remove - by doing so, they will be able to sell with clean and marketable title.
- Removing any code violations to the property.
- Rehab or renovate the property. As these properties are typically purchased as distressed sales, they most often need work to make them move in ready. So, any work that needs to be done to make the home move in ready is taken care of. Anything from new roofs and kitchens or baths, to carpet and paint. There may be a need for new heating and air conditioning units, electrical or plumbing repairs
At this point some wholesale investors will simply resell the property for fair market value to the retail buyer.
The wholesaler who utilizes the exit strategy to sell the property to the turnkey investor has a few more tasks to perform, in addition to the above mentioned tasks:
- The properties are then assigned to property management divisions or to outside management companies to place a tenant in them and acquire a one year lease. In essence, converting the property to a performing asset.
- As a performing asset, expenses to maintain the properties are established and pro- formas are computed.
- Relationships that have been established (known as the real estate Powerteam) are offered as a tool for the turnkey property provider to utilize, adding additional value to the property. Relationships that offer economy of scale pricing for things like insurance, property management and repair services.
The turnkey properties offer two key elements to an investor that the retail properties cannot compete with:
- Clarity: the pro-forma, as it is now a performing asset, now has performance of a business model. As an investor, you do not have to assume what income and expenses will be, the cloud of mystery has been removed. You now know what it will rent for as it has a lease in place verifying what someone is willing to pay for rent. You also have expenses established at a reduced cost since you are able to utilize the economies of scale pricing established by the turnkey property seller and the power team they established.
- Below retail pricing: (giving you built in equity day one)This may be the best benefit of them all. When wholesale investors sell their inventory on the retail market they typically do so on a much smaller scale. They may buy just a few properties a year. However the turnkey property provider does everything based on economies of scale. They buy several homes a month and they pay cash for the properties. This gives incentives for the banks to sell to them cheaper. They have their own rehab crews which allow them to remodel homes more economically. They buy their remodeling material at a discount as they buy in bulk. All these economies of scale purchases allow them to keep their expenses down while offering a turnkey property with a real estate power team in place at a price discounted below retail (often as much as 10 percent or better). You see the turnkey property provider does everything based on economies of scale. As they purchase and rehab between 20 to 40 properties per month, they must also sell 20 to 40 properties per month. They tend to work on a smaller profit margin than the retail market as they understand selling a property quickly and re-investing that money into the next property is more profitable than letting the property sit on the market for a long time looking for a retail buyer.
Armed now with perfect clarity as to the true meaning of the three ways to purchase a property you can conclude which is the best strategy for your particular investment style, wholesale, retail or turnkey property investing.