The Turnkey Investor’s Guide to Choosing a Profitable Real Estate Market

The Turnkey Investor’s Guide to Choosing a Profitable Real Estate Market

11 min read
Ali Boone

Ali Boone is a lifestyle entrepreneur, business consultant, and real estate investor, who has literally defined non-conformity when it comes to her career. Ali left her corporate 9-to-5 job as an Aerospace Engineer—despite the “dream job” status that came with it—to follow her passion for being her own boss and truly designing her lifestyle. She did this through real estate investing.

Experience
Using primarily creative financing to purchase five properties in her first 18 months of investing, Ali’s real estate portfolio started with pre-construction investments in Nicaragua and then moved toward turnkey rental properties in various markets throughout the U.S. With this success, she went on to create her company Hipster Investments, which focuses on turnkey rental properties and offers hands-on support for new investors and those going through the investing process.

Ali’s written roughly 190 articles for BiggerPockets and she’s been featured in FOX Business, The Motley Fool, and Personal Real Estate Investor magazine. She has over 300K views on her “Calculating Rental Property Numbers” video on YouTube, has sold over 200 copies of her Turnkey Rental Properties 101 eBook, and was awarded Top 100 Real Estate Investing Blogs & Websites. Her articles teach successful rental property fundamentals, investor psychology, and strategies to help get new investors started.

She still owns her first turnkey rental properties and she is also a co-owner and the landlord of a local property to her in Venice Beach.

In addition to running Hipster Investments and working as an active business consultant, she’s a pilot and teaches flying. She can often be found snowboarding, hiking, or volunteering in California prisons. Her ultimate goal is to one day challenge Tim Ferriss to a lifestyle design duel.

Education
Ali has two master’s degrees: a master’s in Aerospace Engineering from Georgia Tech and a master’s in Spiritual Psychology from the University of Santa Monica. Her undergraduate degree is a bachelor’s in Aerospace from Middle Tennessee State University.

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Instagram & Twitter: @HipsterInvest or @aliboonedotcom

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Shopping for turnkey rental properties? Trying to figure out where to buy one? Where do you even start?

Well, the best place to start is with networking. Find out where other people are buying, find out who is having luck in which market and with which turnkey provider, and shop from there. But how do you know how to sift through all the information? Or better yet, how do you decipher whether or not the referrals you are getting are good ones?

The trick to getting into any good real estate investment deal, turnkey or not, is to have at least enough knowledge going into it to know whether what you are being told is true or not, or whether it fits what you are really trying to do. That’s what I’m going to help you with — giving you just enough information to start the process, and then you can go from there.

What is a Turnkey Rental Property?

This article won’t do you much good if you have no idea what this “turnkey rental property” idea is I keep talking about.

A “turnkey rental property” (also seen spelled as “turn key” or “turn-key”) is a property that has been freshly rehabbed or redeveloped, has tenants in and paying rent, and property management already set up to manage the property for you. The name suggests the idea that all you have to do as the buyer of the property is turn the key in the door, and it’s up and running with no required effort from you. But to be truthful, I’ve always bought turnkey rental properties and I’ve never even had a key to any of them to turn in the door.

You can buy a property that would fall into the category of turnkey from, say, a real estate agent. Basically any property you can buy that meets the above criteria can be considered turnkey. And really, there are other definitions out there too (so always verify exactly what “turnkey” means to the person trying to sell you a property). For the intents of this article though, I am specifically referring to turnkey rental properties that are sold, typically in bulk, by actual turnkey providers.

These companies go out, find a ton of distressed inventory, fix them all up for you, place tenants, and secure management. This is their job, and turnkeys are all they focus on. I did say they work in bulk, but that doesn’t mean you have to buy in bulk; they just operate with bulk property so they can do everything cheaper. Basically, these companies are glorified flippers. Instead of the usual flipper who flips properties to primary homebuyers, these guys flip properties to investors.

The benefit of turnkey rental properties? For anyone not really wanting to swing hammers or put a lot of time or effort into real estate investing, or someone who is more comfortable relying on other people’s expertise for their investment, or anyone living in a city that isn’t conducive to positive monthly cash flow, these properties are great. Everything is done for you, and you can stay totally hands-off.

Related: Yes, Turnkey Rentals CAN Be a Solid Investment Choice: Here Are the Numbers to Prove It

That’s the short of this “turnkey” concept. Now, let’s delve into how to shop for one. Specifically my focus here is in thinking about what market to start in. Turnkeys (again, referring to turnkey companies providing turnkeys in bulk) exist in several markets across the US, and each market offers something completely different.

turnkey-rentals

Shopping for Turnkey Rental Properties

There are a lot of turnkey providers out there, and they are spread across a lot of markets. Your first challenge is sifting through all of the options so you can then hone in on actual properties. I get asked the question a lot: What markets do I like for turnkeys? I’m going to give you an expanded answer to that question.

When I tell people what markets I like right now or at any particular time, for turnkeys my answer is always based on:

Numbers + Market Fundamentals + Quality of Turnkey Provider

So when I say I like a market for turnkeys, I mean I think the market is good in each of those three items: numbers, market fundamentals, and the quality of the turnkey provider. I’d say oftentimes people forget to consider the latter especially. A market may have fantastic numbers (returns) and great market fundamentals, but if there is no quality turnkey provider there, I don’t recommend it as a market for buying turnkeys. See what I’m saying? A lot of markets out there are awesome, and I would love to buy in them, but I don’t know of any high-quality turnkey providers there, so that keeps me from buying there. There is also the reverse: There may be a super high-quality turnkey provider that I would love to buy from, but I don’t advocate the market that they are in, so that keeps me from buying as well.

Let’s go over each of those three criteria I mentioned.

Numbers

The point of buying a turnkey rental property is to receive positive monthly cash flow. Turnkeys are not set up to support methods of investing such as investing for appreciation (meaning you don’t get monthly cash flow but are instead relying on the idea of the property appreciating later). In order to receive positive monthly cash flow, there must be supporting price-to-rent ratios in that market. The price-to-rent ratio is telling of whether or not the price you have to pay for a property will allow you to receive cash flow each month (after expenses) given the amount of rent the property can feasibly bring in.

For example, when I bought my first (turnkey) rental property in Atlanta in 2011, the price of the property was $55,000 and the rent it was bringing in each month was/is $975/month. If you do the math on that, that much rent coming in each month easily allows for cash flow after all the expenses are paid. (For help on learning to run the numbers on a rental property, check out: “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”)

I know of a property in Los Angeles, however, that was purchased for $460,000 and the rental income was $2,250/month. That rental income, if you do the numbers, is not enough to cover the expense of having purchased the property. See the difference? That Atlanta property has a fantastic price-to-rent ratio, and the Los Angeles property does not. If you are out for cash flow, having numbers that support positive monthly cash flow is critical. Where this comes into play with markets is that markets typically either support good price-to-rent ratios or they don’t. Los Angeles, San Francisco, and New York City, for example, do not have good price-to-rent ratios for cash flow. Midwestern cities, for example, typically do.

So if you are out for cash flow, you might shoot for Midwestern cities to start your search. There are others, but that is a good generalization. Note: Just because a market supports good price-to-rent ratios does not mean that all neighborhoods or areas of that market also have good ones. The nicest areas will not. So keep that in mind. The good news is that turnkey providers rarely exist in markets where there are not supportive price-to-rent ratios, so you can usually avoid the stress of wondering whether or not a turnkey property from a turnkey provider will yield positive monthly cash flow or not. If you are shopping for a rental property outside of turnkeys, make sure you consider this point.

Market Fundamentals

I personally am only a fan of growing markets. Meaning, the population is trending upwards, industry and jobs are growing, and there is a general desirability to the market. Turnkeys exist in both growing and what I would deem to be declining markets. This is something you should be aware of. For details on what I look for (and avoid) in markets when shopping for general rental properties, check out: “How to Know if Any Given Real Estate Market is Wise to Invest in (With Real Life Examples!).”

In general, though, the main thing to understand is that a market’s fundamentals can directly affect the success of your investment, and the risk level associated with any particular property is also affected. The last thing to know about the market you choose, not necessarily in terms of the market fundamentals though, is that different markets will have different types of turnkey offerings. Some will offer multifamily properties (MFRs), some will only offer single-family properties (SFRs), some markets will offer higher cash flow with lower purchase prices with properties in more urban-type areas, and some markets will offer nicer properties that are more expensive with slightly lower cash flow. So keep that in mind, too — the types of properties that wet your lips the most may only be in one market or another.

traits_reputable_turnkey_company

Quality of Turnkey Provider

Here’s the kicker to bring up the rear. As I said before, there may be a market that offers great cash flow and  fantastic fundamentals, but there may just not be a good turnkey provider there. Some markets won’t have any turnkey providers, either because the numbers don’t actually work there, or if they do work there, there may not be enough distressed inventory available to make it worth setting up shop.

Related: How to Use Property Management to Save a Bad Turnkey Investment

Some markets will have turnkey providers, but the quality of that provider — because not all turnkey providers are superb — can make it or break it for me. There are a lot of ins and outs with turnkey providers that lend their hand to major red flags, and despite being in the industry for a handful of years now, I still have to rely on some of my experts to pick out those red flags a lot of times because they may not be that obvious. In thinking of the positives, though, here are a few qualities that might make a turnkey provider really good:

  • Consistently delivering high-quality properties
  • Good communication
  • Transparency
  • Delivering as advertised
  • Solid property managers in place
  • Willingness to work with the buyer if any obstacles pop up
  • No slips in quality consistency

Many turnkey providers out there do not fit this list. I know of some incredible turnkey properties in Atlanta; I even bought one of them, but the seller himself is so amazingly difficult to work with that I would tell a new investor to avoid that company completely because he will likely traumatize a new investor, no kidding.

More common than the jerk seller, though, I would say slips in consistency are the most common issues. Turnkey providers start out great, they offer fantastic properties, and then somewhere in the mix, the quality starts slipping and things begin to go south. Or there are the providers that never intended to actually deliver what was advertised, or what they advertise is not as good as they make it out to be. So quality of turnkey provider is extremely important in my opinion, and I will oftentimes base my buying decisions off who is available to work with. I may really want one market, but in another market the turnkey provider is so off the chain awesome that I end up buying through him instead.

Changing Turnkey Markets

I have a last note about turnkey markets.

Turnkey markets are constantly changing.

Meaning, what was a good turnkey market may not necessarily be a good turnkey market now. Here are the things that can change in a market that may cause this shift:

General Market Shifts

For instance, back in the day, Phoenix was a great market to buy in for cash flow. But so many people came in and bought that it drove the prices up to where now the price-to-rent ratios in Phoenix are not conducive at all to positive monthly cash flow. The entire market did a shift with their numbers.

Inventory

It happens quite often that a market may just run out of inventory. The turnkey providers will have started sifting and digging for any good property they can find that is left, but eventually it’s just not worth the search anymore. This happened first in Charlotte and then in Dallas.

Turnkey Providers

There is definitely a cycle with turnkey providers — they all start out great, and then at some point most of them are no longer so great. So a market may hang tight and keep producing inventory, but the provider quality flunks out, and that causes me to shift my focus to another market. Birmingham would be a recent example of this.

Saturation

Maybe the market has stayed strong, inventory still exists, and even the turnkey providers have kept their head on their shoulders. What has happened then sometimes is saturation. So many investors have come in and bought properties that now the market is saturated, meaning there are so many rental properties that now tenants looking to rent have so many properties to choose from that yours begin to struggle. Vacancy can be very costly to a rental property owner.

This happened to me with one of my Atlanta properties. I bought when Atlanta was a great market to buy in for a long time, but after so many people came in and bought, my vacancy periods began increasing because it was getting harder to land tenants. One of my properties that typically would only take 30 days to fill took four months last time I got a new tenant in it.

invest-turnkey

Other Markets

Maybe the same thing as with saturation — the market has stayed strong, inventory still exists, and even the turnkey providers have kept their head on their shoulders, but the fact is there are just better markets out there. Why stick to a market that has already had its heyday if there are other markets out there that offer higher returns, better purchase prices, and better deals? I group Atlanta and Memphis into this category.

Position in the Growth Cycle

This last point is a significant one. Well, maybe. If you have any desire for appreciation potential with a turnkey rental property, it is critical that you buy when the market is in its infancy stage of its growth cycle. Meaning, the growth boom hasn’t quite happened yet. Now, don’t confuse this with a market that is suggested to have a boom cycle coming, but no proof of it actually happening. But many markets have the fundamentals in place to give solid evidence of an impending boom. That is when you want to buy!

I did this with Atlanta in 2011-2012. The boom hadn’t happened yet, but there was every reason to believe it would happen, so I jumped in. The last property I bought there was in late 2012 and I just refinanced it a couple months ago, so less than 3 years after buying it, and I pocketed $40,000 from appreciation. Boom! Granted, that’s no Los Angeles or San Francisco level of appreciation, but that’s a nice wad of cash to add to my pocket on top of the killer cash flow I get from it every month.

But look at that timeline — clearly Atlanta’s boom happened, and I can tell you it happened around 2013 plus or minus a year. So when I bought in 2011-2012, it was in its infancy stage. Now Atlanta is in the mature phase. That boom already happened. So if you buy there now — because the fundamentals and numbers and, well, not so much the turnkey providers, are still there — you aren’t going to see that kind of boom because it already happened. There are other markets out there, however, who are closer to the infancy stage of the cycle. They may not boom has heavily as Atlanta did, but there is more room for growth than Atlanta has. I also put Memphis in this category.

There you go. A start into shopping for turnkey rental properties, with the emphasis being on how to decide on a turnkey market. Now you know exactly what I consider when I am considering turnkey markets for myself. There are obviously many more details in figuring out market fundamentals and picking out the good turnkey providers from the bad, but my theory has always been to leave that job to the experts — the guys who are really good at that stuff (because they do exist) — and leave the shopping to me.

For any of your turnkey buyers out there, what has your experience been in terms of shifting markets? Have you bought turnkeys in different markets or all in the same one?

Let me know with a comment!