You’ve likely seen the term “turnkey” used in property listings before, but many wonder if this is just a savvy marketing buzzword or a legitimate selling point. The definition of turnkey can be subjective, but generally speaking, it refers to a fully renovated or move-in ready property that an investor can purchase and immediately rent out to tenants. Turnkey properties customarily won’t require any upfront costs to make updates or bring the property up to code.
How do you know if turnkey property investing is the right strategy for your portfolio? Weighing the pros and cons of any real estate investment decision is a critical step in determining if you will have a profitable return on your investment.
Pros and Cons of Turnkey Properties
Pros of Turnkey Property Investing
- Lower vacancy rates: Since turnkey properties are move-in ready, you’ll likely see a return on your investment more quickly because tenants can move in right away and the property can start producing cash flow without requiring upfront funds for renovations and repairs. Some turnkey properties are even occupied by tenants upon sale, making your job even easier. When you do deal with tenant turnover, turnkey properties can be more desirable to potential renters because they typically are updated with more modern features and amenities.
- Diversify your portfolio: Adding a turnkey property to your investment portfolio will allow you to diversify by type and even location. Turnkey properties make it much easier to invest in areas outside of where you live, looking for markets of growth even if your local market is in decline. Diversification across different markets can mitigate the effects of an isolated local downturn.
- Hands-off investment: Because a turnkey property doesn’t require much (or any) work to get your investment up and running, it is usually a solid “passive income” investment. All of the parties involved prior to your investment have likely handled the time-consuming processes like inspections, appraisals, and title search and procurement. You can even turn the property over to a management company for a completely hands-off investment.
Cons of Turnkey Property Investing
- Less personalization: As an investor, you will have less control over appearance, layout, appliances, landscaping, and similar items without incurring additional costs because the property has already been renovated and updated (and therefore reversing the turnkey status). If you plan to live in the home yourself at some point (or have another specific purpose in mind), this may be an issue for you. Vintage, specialized, or other unique homes also might not be included in the turnkey property category.
- Price: Because turnkey properties are often updated and in premium condition, they will be priced accordingly and in line with market value. This could potentially make a turnkey property a higher initial investment for you, and it will take you longer to realize an increase in overall property market value.
- Long distance: While the option to invest in markets outside of your local area is helpful to diversify your portfolio, investing in any sort of property long-distance presents its own set of risks. Being away from your investment property requires more effort in terms of due diligence, both before and after purchase, and often requires the help of other professionals. If there are any unforeseen issues that were not disclosed (structural, electrical, etc.), this can prove to be difficult to manage from far away.
Who Sells Turnkey Properties and Why?
Generally, there are two situations where a turnkey property is listed for sale:
1. The first is real estate agents or brokers who represent—or even specialize in—the sale of turnkey homes on behalf of property owners.
2. The second is investors who purchase fixer-upper, foreclosed, or wholesale homes and perform renovations and repairs to bring the property up to turnkey status. Then, they list it for sale.
You will likely encounter many different scenarios in your search, and doing your due diligence prior to making an investment will help mitigate your risk.
Related: 3 Ways to Vet a Turnkey Provider
Is Turnkey Property Investing Right For You?
Turnkey property investing is typically part of a long-term investment strategy. Investing in a property that needs work is known as a fix and flip or a buy, renovate, rent, refinance, and repeat (BRRRR) investment and is more commonly used in quick “resell for profit” situations.
Weighing the pros and cons of your investment and educating yourself as much as possible will help you make the right choice when it comes to your next rental property.
What other questions do you have about turnkey investing?
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