Many people are looking for investment opportunities that are less time-consuming and require less effort. Real estate is a solid, historically proven investment. However, not many people know about turnkey real estate, which is a newer form of real estate. The question is, “What is turnkey real estate, and is it right for me?”
Turnkey real estate is our preferred method of investing in real estate passively, but isn’t widely understood. It’s really a sub, sub niche within real estate investing.
In this article, we will explore some concepts of turnkey real estate, it’s benefits, and potential downsides.
- 1 What Is Turnkey Real Estate?
- 2 The Benefits of Turnkey Real Estate
- 3 Downsides to Turnkey Real Estate Investing
- 4 Why Invest in Turnkey Real Estate?
- 5 How to Get Started with Turnkey Real Estate Investing
- 6 Is Turnkey Real Estate Investing Right for You?
What Is Turnkey Real Estate?
Turnkey real estate is one particular form of real estate investing that you, the investor purchase that is freshly rehabbed and renovated. In many cases these kinds of properties are offered by what is known as a turnkey real estate provider. Hence the name “Turn the Key.” All you need to do to start is turn the key and open the door.
Often, these types of properties are owned by companies that focus on renovating them. They sell the property to landlords after renovations to be used as a rental property.
Using turnkey real estate is a good way to enter real estate if:
- You are not very handy.
- Want to take on less risk.
- Avoid sudden repair costs.
- Want a simpler investment.
- Have less capability of watching over your properties.
To us, the biggest advantages are even a bit more nuanced. We are short of time to execute many of the renovations ourselves and would rather have someone who is an expert at finding distressed properties and rehabbing them do what they do best.
We step in with the capital for a down payment after the fact and buy their finished product.
If you are interested in starting a career in real estate, but have little experience, turnkey real estate may be a good option for you. Turnkey real estate has numerous advantages that might be appealing to you.
The Benefits of Turnkey Real Estate
There are many benefits to investing in turnkey real estate:
- You can potentially receive immediate collection of rent.
- Management and tenants may be already prepared for you.
- You will gain access to broader markets which are more cost advantaged.
Let’s get into the details of this below:
Immediate Collection of Rent
With turnkey real estate, you can own property that requires little to no immediate maintenance, meaning you could potentially start collecting rent right away.
The repairs of a property in disrepair will take an estimate of 3-6 months to complete. Missing out on 6 months of rental income and having to pay 6 months of insurance, property taxes, and other fees. If you don’t keep up with your property, you will not only miss out on money you could have earned, but you will also have to spend money to fix it.
The typical rent for a rental property should be somewhere between 0.8 and 1.1 percent of the value of the property.
If you’re looking to invest in real estate, turnkey options can help you avoid missed opportunities and potentially save you money.
Management and Tenants May Be Prepared for You
Many turnkey real estate properties come with management and even tenants prepared for you when you make your investment. All you need to focus on is investing, and that gets you into the game more quickly than with other forms of real estate.
In some cases, turnkey real estate companies even manage properties “in-house” or with a sister property management company making the transition to landlord for that property even smoother.
The real estate company that sold you the property may have a warranty for any repairs that need to be made. You do not need to worry about repairs initially. After the warranty is up, it’s up to you to fund any repairs or make-readies on the property that may be necessary.
Access To Broader Markets
With turnkey real estate, you get the opportunity to invest in market that are outside of your immediate area. One key difference is that some markets in the United States have a much better rent to value ratio than where you live.
“Live Where You Want, Invest Where It Makes Sense” goes the saying.
A turnkey property is a home that usually already lived in, without any additional work needed. Additionally, you can select in which markets you want to invest. This means that you can invest in different types of real estate, which can help you to reduce your risk.
Often times, you can even pick which kinds of sub-markets within a city or metropolitan area you’d like to invest in. A (admittedly subjective) range of neighborhoods are classified as A class, meaning mostly owners, B class, meaning a mix of owners and renters, or C class which are mostly rental neighborhoods.
This gives you the opportunity to diversify within any given area.
You can’t invest in real estate as easily as you can with turnkey real estate, and you can’t get the same level of diversification.
However, there are many potential downsides of turnkey real estate that you need to consider.
Downsides to Turnkey Real Estate Investing
Lower Returns Mean Less Wealth
If you’re looking for a provider to take care of everything for you, be prepared to pay full market rates for properties. These businesses can and will make a profit for the work they do and will be included in the price you pay at purchase.
In addition, since you’ll likely be using a Property Management company if going the turnkey route, you will likely pay between 8-10% of rent per month to that company.
The extra costs do indeed lower your return on investment. This makes going the turnkey real estate less promising for many people looking to maximize their returns. Particularly those who can either do the rehab themselves or know how to outsource that directly.
If you have more money than time, it might be worth it to spend less time and effort. Actively and quickly deploying capital is important. You may not be as interested in extremely high returns and may prefer to invest in a range of different assets. But if you want to quickly increase your wealth, this is one definite downside.
Especially given the fact that many turnkey companies are out of state for many buyers, you do need to take your own extreme due dilligince when selecting a company to work with.
Use our checklist below when vetting companies and definitely stay away from very cheap (less than $50k) houses until you are a bit more of an experienced investor.
Go through the pro-forma that they provide prior to purchase with a fine tooth comb. Sometimes companies have a way of presenting information that makes a particular deal look much more (often 20% or more) enticing than they will actually be.
Our own recommendation is to stick with larger companies that have a proven track record in the beginning.
There Is Still Alot of Pre-Work Involved.
Before working with anyone, do a thorough check on them, both from referrals and the internet.
Interview any company you plan to work with. Ask for references. Call the references. Ask to see their previous deals. Make sure they are good. And most importantly, verify everything they are telling you.
To verify the claims made by rental companies, you can look for rentals in the area yourself. If it’s your first time investing with a company, I recommend visiting the area and company itself and doing a face to face meeting with some of the principals involved.
Complete a tour of some of their rehabs as well to get a feel for what they quality of their work is.
I’ve had friends who’ve had both great and negative experiences with turnkey properties. The first step in ensuring you will be satisfied with your investment is to vet the company.
With all of that said, why would you still want to invest in turnkey real estate.
Why Invest in Turnkey Real Estate?
To many outsiders, the goal in real estate is to make money from the rental property by purchasing it for less than its value. However, many of these properties require maintenance and repairs.
Investors who are looking for a way to have most of the advantages of real estate, but not as much of the hassle may want to consider turnkey real estate. Instead of spending money repairing your property, you can buy a property that doesn’t need repairs.
As a general rule of thumb, you should plan on at least a 40% of your rent to go towards expenses on top of your mortgage. This prior financial planning will help you get started on a safe footing and give you a quick estimate if the property will work as an investment.
How to Get Started with Turnkey Real Estate Investing
OK, so you’ve heard all the pros and cons and made your decision. You need to learn how to invest money in order to make a profit.
1. Choose a location and a budget.
One city focus is common among the companies I have observed with only a few companies venturing into multiple cities. The area you want to invest in will have a large impact on your search for the right property.
I recommend finding a place you like and that you could see yourself visiting on a yearly basis. One benefit of real estate investing is that you can write off travel expenses, as long as you meet certain conditions. A city with friends or family can provide support when you need it, like when you go to your cousin’s birthday party, or when you need help maintaining your property.
Knowing about upcoming changes in the city where you invest will always be beneficial to you. People who are close to you can give you a different perspective on local events. If the local steel mill shuts down, it will have a negative effect on the local economy and you want to avoid that.
Keep in mind that not all cities or metro areas will have turnkey companies operating in them so you’ll have to do a bit of back and forth between where you want to invest and the availability of a company.
A budget is just that, a budget.
Keep in mind that you’ll need a down payment that is at least 20% of the purchase price of the house, as well as at least two months’ worth of your monthly costs for a cushion, in case you get a sudden vacancy or have a surprise expense.
2. Find some turnkey companies.
Once you’ve decided on a location, start your search for turnkey real estate companies. Rather than just turn to the internet, here are some great places to get started on your research: GRE Real Estate, BiggerPockets.com.
I personally recommend starting with GRE real estate since they are more focused specifically on turnkey real estate investing.
3. Interview the companies.
Ensure that you speak to a human employee of the company. Ask hard questions about their homes and their clients. Ask for references and check on them.
This is a life lesson for anyone who you are giving large sums of money. Make sure that you are taking the text seriously and that the person who is behind the business is reputable. Beware of anyone who is too pushy or who promises that you will be able to buy a house for cheap or make a lot of money from investing.
One book I recommend which has a great set of questions to vet Turnkey Providers is “The Turnkey Revolution. How to Passively Build Your Real Estate Portfolio for More Income, Freedom, and Peace of Mind” It’s written by a turnkey company owner, but is a fantastic intro to the whole concept of this kind of real estate investing.
4. Research the deals.
Even if a company you interviewed and vetted says a deal is good, it might not be. The websites Zillow and Redfin can give you an idea of how much rent you can expect to charge, as well as estimates of how much homes are worth. Zillow will also estimate how much the value of the home and neighborhood will increase over time.
My personal favorite for rent research is Hotpads.com
5. Buy it.
If you are new to the home-buying process, there is a lot to learn and consider before making a purchase. The process shouldn’t be solely about the interest rate. Here are a few quick tips for getting a mortgage: -Talk to several different banks to compare options. -Don’t make your decision solely based on the interest rate. Although the company may have a suggestion, it’s beneficial to do your research and consult with other banks. If you’re able to reduce your mortgage rate by just 0.5%, you could potentially save tens of thousands of dollars over the life of your loan.
Personally I recommend working with a Mortgage Broker who instead of a bank as they can give you the widest range of mortgage options.
Is Turnkey Real Estate Investing Right for You?
Now you know enough to decide if a turnkey property is a good investment to add to your portfolio. The only opinion that matters is yours.
One place I recommend for learning more about the whole concept of how to successfully invest in turnkey real estate is Cashflow Tactics. That is where I started out and they have a fantastic frame work on not only investing, but financial freedom as well.
Make sure to check out my Cashflow Tactics review as well here on the site.
Real estate investing is difficult and risky. If you’re not interested in being hands-on with your property investment, turnkey real estate may be a good option for you.
Investors should not believe that if they are less involved in the management of their investments, it will be less risky. With turnkey real estate investments, you will not need to repair the property as much as you would with traditional real estate investments. However, you will still be taking on many risks. The risks of investing in a company include having less control over your investment and the possibility of higher costs.
There are risks and costs associated with turnkey real estate investing, but there are also situations where it could be beneficial. If you are too busy or you travel too much, you might not be able to be as hands-on with your investments. If you’re thinking about investing in turnkey real estate, you need to decide if it’s the right fit for you.