What is Turnkey Real Estate Investing and Is It Right for You?
If you have been spending any time on real estate blogs in the last several years, you have probably heard of Turnkey real estate investing, Turnkey providers, and/or Turnkey properties. So by now you're probably wondering “What is Turnkey Real Estate?”
To start, the word Turnkey means that you're buying a completed product - this the same as if you buy a primary residence that is "turnkey." It likely has new paint, new blinds, new carpet, and needs no real work to move in, you just turn the key and you're home! The same concept applies in the investment real estate market also in that the property you're buying is cleaned up and ready to rent out.
Turnkey real estate is a segment of real estate investing that is geared more towards the hands off investor (or newbies like us a few years ago). This is because a turnkey provider does pretty much all of the work for you - you just have to buy the property. Turnkey providers are a one-stop shop. They buy distressed properties, rehab them to a rent-ready condition, sell the properties to investors (like you), find tenants, and provide property management. Turnkey real estate investing can be a great way to get into real estate investing when you have a busy schedule or a full time job and simply do not have time to do all of that work on your own. While investing in turnkey properties can be a great way to invest more passively in real estate, that doesn’t mean you can blindly buy a property without a little bit of due diligence. You need to understand exactly what you are getting into.
For example, turnkey investing is a long term strategy and it is not a get rich quick scheme. With this investment type, your goals would include:
Buying and holding property to get steady amounts of monthly cash flow from rent
Having a tenant pay your mortgage off
Gaining some tax benefits to offset your rental income
Hopefully gaining some appreciation on the home value down the road
Click here to read more details the 4 Ways You Can Make Money Through Investment Properties.
Another important thing to remember is that investing in turnkey real estate doesn’t get you out of performing your own due diligence on a property or investment. You need to make sure the investment makes sense from day one financially, and that you consider all of the risks (and rewards) involved to make sure it is the right investment for you.
For now, let's focus on some of the pros and cons of turnkey investing. This is not meant to be an exhaustive list, but hopefully by the end you will have a good understanding of what it is and have an idea if it is something you may want to look into more.
Pros of Investing in Turnkey Real Estate
A One-Stop-Shop for Real Estate Investing
As mentioned above, when we started investing in real estate we had (and still have for the moment) full time Corporate America jobs. It’s one of those catch-22’s where it feels like you need some free time to start investing in real estate, but you don’t have time until profits from your real estate portfolio allow you to quit your job! This is where focusing on turnkey investments can help a lot.
By investing in turnkey real estate, the provider handles much of the leg work to get you started. You typically will get a move-in-ready property when you make the purchase, many times with a tenant in place. You still need to put in some time to perform due diligence on properties before you buy, review owner's statements every month, and keep on top of your property managers, but trust us, it is very manageable and we are able to squeeze the required phone calls and statement review into our busy schedules.
You Don't Have to Know How to do Construction
While a little bit of experience or knowledge of home renovation can always be valuable, having someone else take care of the upfront rehab saves you a lot of headaches and liability. You still need to do your homework and make sure you are getting a good deal, but one of the big question marks has already been taken care of. If you have ever watched any flipping show on TV, you have probably seen the part where they buy a home and find major hidden issues which cause them to take a bath on the construction costs. So dramatic!!
Since someone has already performed this work, and you will get a home inspection and appraisal, you have a pretty good idea of the condition of the property in its rehabbed condition before you sign the closing documents.
It Allows You to Invest Far From Where You Live
It used to be said years ago that you should always invest in real estate that is within 30 minutes of where you live. And that probably still makes sense if you're wanting to be involved with your investment hands-on, like literally, swinging a hammer. Believe it or not, we looked into that first. We had settled in Southern California and had caught the investment property bug, and kept seeing run-down houses for sale. But in this region, even run-down houses are really expensive and wouldn't cash flow with tenants, and we didn't have the time, expertise, or energy to take on all the work ourselves. Not to mention the idea of finding the tenants, performing maintenance, collecting rent, knocking on doors when rent is late, with our full-time jobs, etc... was just too much. Fortunately, we soon learned more about turnkey providers, most of whom deal with out-of-state investors, just like us. It didn't matter if we were 30 minutes or 2000 miles away! A good turnkey provider and property manager will do all of the time-consuming and annoying work for you, which essentially makes anywhere in the country a possible investment location.
You Can Leverage Your Future Business with the Turnkey Provider
Since the turnkey provider will be doing all of the up-front work to get the house ready to rent and then continuing to manage your property after you own it, they have some stake in making sure that the rehab is done properly.
First, they need to be able to find tenants because they don’t make much money on the Property Management side if you, the owner, aren’t getting paid rent. They have a vested interest in making the home rentable and within the standards of the neighborhood.
Second, you can use the suggestion of return business as leverage to make sure the management company stays on top of things. The management company and sales team are not always in communication with each other, so don’t be afraid to let the sales team know if you aren’t happy with something on the management side. They might just have some pull to help you out if the going gets tough.
Cons of Investing in Turnkey Real Estate
If it was too easy, everyone would be doing it! Don’t expect perfection out of any kind of real estate investing (or any investment for that matter!). The key is know the pitfalls before you get into it so you can understand and mitigate your risks.
Higher Purchase Prices
One of the most common negatives you see on investing forums is that turnkey real estate costs too much. For this reason, your margins are smaller. But let’s not forget that the turnkey provider took on a lot of the risk and expense at the beginning to acquire and fix up the property. This was risk that you didn’t have to take on. You have the luxury of seeing how the property turns out before you buy it. For this reason your risk is less, so your reward is a bit less as well.
If you are in the business of buying distressed homes and rehabbing them to rent or flip, yes you might make a lot of money because you have the POTENTIAL to buy low and sell high after you fix it up. But you can also lose your shirt if you don’t know what you are doing or don’t properly estimate those rehab or carrying costs!
For a beginning real estate investor especially, the process of buying and rehabbing can be stressful and costly. With turnkey purchases, you are offloading that stress onto someone else, so you will pay closer to retail prices for your property.
Not All Turnkey Providers are Created Equal
Not all rehabs are created equal, either. We have heard and read a few horror stories about various turnkey providers out there. Unfortunately, there isn’t a turnkey czar that goes around pointing out the good and bad providers.
Some of them don’t know what they are doing and some of them are downright shady. In both cases, you could get stuck with a bad renovation. And once you're past whatever guarantee period they offer on the work (if they offer one) you're stuck having to pay for repairs. The renovation philosophy can vary greatly between different providers. Some of the better ones do a full gut job on a property and replace everything (roof, plumbing, electrical, HVAC, etc.) Others put some lipstick on the pig in the form of paint and carpet and call it good. Most are somewhere in between.
Due Diligence
While this isn't our full post on due diligence (that post coming soon), you're probably wanting to know some tips for getting started, so here are some ideas.
It is the responsibility of the you, investor, to vet out the providers and make sure you are getting what you a paying for. There are many ways a good investor can do due diligence on the turnkey provider. The first and easiest way is to do some online research. Google the name of the provider and any key people at the company that you know of. Look for bad reviews, look for good reviews. Beware that not every review online tells the full story and you can’t always trust every review you read (shocking, I know), but if there are many bad reviews out there about one provider that might be a red flag.
Get the names of references and actually call them. If possible, get the names of references from a third party. Be careful getting references from the provider, since of course they are only going to give you the best references.
We highly recommend going to the city where you are planning to invest and actually meeting with the team. This will go a long way in making you feel more comfortable with the team and potentially saving you from a bad deal. Don’t be afraid to ask tough questions to the providers regarding construction methods and timelines and property management. Even if you don’t see the exact house you are planning to buy, you can get a pretty good idea of how neighborhoods look and what areas you would feel comfortable owning property in.
These things are just the tip of the iceberg. A full blog post on how to perform due diligence is coming soon!
Conclusion
We have found turnkey real estate investing to be a great opportunity for us to get into real estate investing while juggling our other priorities such as working full-time jobs and living where we want to (which is far from where it makes sense to invest). By understanding the pros and cons and with the proper due diligence and property analysis, it has been a great investment strategy for us and should continue to perform for many years.
Disclaimer: This article is intended to be a general resource only and is not intended to be nor does it constitute legal or professional advice. Any recommendations are based on personal, not professional, opinion only.