The turnkey real estate scene is getting hotter by the day—and not without good reason. If, as a real estate investor, you too want to get your hands on good turnkey deals, then be forewarned—today, there is plenty of discussion surrounding the subject of turnkey real estate investing. This kind of investing isn’t simple, and if you ignore what’s important, you could soon find yourself in the red and owning property you don’t want.
Yet while turnkey properties are more expensive, when done right, they can also earn you a significant amount of passive income and save you a lot of stress in the long run.
Investing on your own
Buying a property labeled as a “turnkey investment” should mean that the property has already been fully rehabbed, tenants are already living there, and property management is in place to handle rent collections and any issues. It is a rent-ready property.
When real estate investors buy a house on their own, on the other hand, that means finding a good deal via foreclosures, short sales, at auction, or finding motivated buyers willing to sell at a discount. You might even look at the MLS for properties.
The extent of any repairs or renovation work necessary will vary from needing only cosmetic work to needing to be completely gutted. If the work is only cosmetic, you can probably do it yourself. You will likely need to hire a general contractor for bigger jobs so multiple jobs can get done simultaneously.
Then, when renting out the property, you have two choices: be the landlord or hire a property manager.
If you take on the landlord role, you’ll need to advertise for tenants and then screen them, which usually includes credit checks, reference checks, background and criminal checks, and income verification. You’ll provide all of the legal documents for the tenants to fill in and sign, and you must ensure that the forms comply with all state rules. Then you collect rent each month, respond to repair calls, handle the turnover of a move-out—and if an eviction is needed at any point, you’ll have to pursue a legal process for that. Or you need to hire a management company to do all of this for you. The latter cost is usually 10% of the monthly rent, so, for example, if you collect $1,000/month in rent, you’ll pay out $1,200/year.
That’s if you buy on your own.
If you use a turnkey provider to buy property, they help you find the property, the tenants, and the property manager.
Investing with a turnkey provider
When it comes to investing in real estate, rental property investors can choose to do it alone or work with a turnkey real estate provider that will help you decide which houses are worth buying and then take care of the other headaches. If you prefer a more hands-on approach, then working with a turnkey provider isn’t for you. If you want to be an investor without doing everything yourself, you may want a turnkey solution.
The foreclosure and short sale processes can be uncertain and take a long time to complete. Auctions are extremely competitive, and if you don’t know what you’re doing and/or don’t have a significant amount of cash in your wallet, you won’t do well. Because the turnkey providers are so experienced at house buying, they will win most of the time.
Turnkey providers may then spend less on the overall costs of rehabbing a property. Anything done in quantity is always less expensive, and turnkey providers use standard paint, carpet, flooring, trim, and anything else you can name in every purchase. Since they have multiple houses that need these materials, they can buy everything at wholesale prices. As an individual, you can’t get those prices on materials, so the costs required to rehab and maintain a do-it-yourself (DIY) property are more expensive for you.
More on turnkey real estate from BiggerPockets
Analysis: Profits for turnkey rental properties
What else ties back to costs? Here is an example of the cost differences between buying a DIY property and buying a turnkey property. The subject property is a cheaper-end house that needs a decent amount of rehab.
Let’s say the totals come out to be $55,900 for the DIY property and $60,500 for the turnkey provider. In this example, the price isn’t dramatically different, but in some cases, it could be tens of thousands of dollars more for the DIY-er. The example here is not to detail actual allocations but to show what those different allocations are. For this example, you have:
- Initial purchase: The price of the property.
- Rehab costs: Costs of the rehab.
- Seller profit: Of course, the turnkey provider will look to make a profit, and the company did the work on finding the property.
- Access costs: If you buy a house via a real estate agent, you will pay that real estate agent a fee for finding the property for you. Because most turnkey properties are completed through private channels, the person who made the connection gets a referral fee.
- Guarantees: Some turnkey providers offer a rental guarantee for some length of time (often a year), meaning if your property is vacant for any reason, they still pay you the monthly rent. While paying this extra $2,000 (or so) yearly fee seems pointless if you don’t have any vacancies in that time, it is also extremely handy if you do. You could easily be out far more than $2,000/year due to vacancies. Consider this fee like any other insurance payment.
One more monetary difference with purchasing the property yourself rather than through a turnkey company is the resulting capitalization rate. Let’s look at two graphs side-by-side, one showing the cap rate and the other showing stress. Yes, stress. While a monetary number isn’t available for stress, it’s definitely worth something to you. Think of the cost difference between buying a DIY property and a turnkey property and then add the cap rate and stress differences.
Using a turnkey company means you have little to no stress, as they suggest the property to buy and then find the tenants and the management company. Doing everything on your own will inevitably cause some stress, and if you’re a perfectionist, a lot of stress. Time is another factor. Working with a turnkey company means you are only filling in the required paperwork. Investing and doing everything on your own could take weeks (or months) of your time. How much is your time worth?
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What to look for when investing in turnkey real estate
Quality over quantity
When you’re investing in turnkey real estate, the first—and definitely the most important—thing to do is to focus on quality, not quantity. When you’re in real estate, it’s easy to get carried away with the feeling that you should be selling or renting out as many properties as you can. This is tricky, though, and can lead to a lot of debt and even a bad reputation. Instead, focus on a few well-chosen, high-quality properties rather than many low-quality ones.
This attitude should be reflected by your turnkey provider as well. Don’t be turned off or worried that the company you’re using isn’t unloading a lot of houses each month.
To deliver on good properties, the company needs a decent size staff to serve you properly. And the most important thing they can offer you is proper delivery. In fact, rather than overpromising and then underdelivering, the company you choose should do the opposite.
Many investors think that not having a larger share of the market means they’re limiting their growth, so they buy more than they can handle, and this, in turn, can cause substantial financial losses.
Remember here: Less is more.
The right quality
While choosing turnkey real estate, there is one step to follow: invest in specific markets.
The “A” property class is a mark given to newer homes with a certain “wow” factor; this is the house you would want to live in. These properties tend to include nice views and are well maintained.
“B”-class properties are homes built in the 1940s, ’50s, or ’60s, typically occupied by working-class homeowners. These homes are also well kept and on nice-looking streets.
“C”- and “D”-class homes have the potential to be lucrative because they usually can be bought at super-low prices, but they come with a big downside. And that is the risk that comes with investing in higher crime and lower socioeconomic areas.
Instead of buying questionable properties in “C”- and “D”-class areas, invest in the “B”-class area for better long-term returns and a lot less risk. Another benefit is that most folks would also rather own instead of renting, and the renters might want to buy the property in the future.
“B”-class properties are located near schools, shops, and places of work, making the crime rates much lower than in “C”- and “D”-class areas.
The price of turnkey properties
One big drawback of buying through a turnkey real estate company is that it will sell you properties above market value in any property class. That price means a lower return for you and a weaker exit strategy when you want to sell.
Investors should look to purchase properties in “B”-class areas that are at or below market value. That said, in today’s market, there aren’t many turnkey companies that sell at or below market value.
It is OK to pay more than market value, but only after you know the property is in a good neighborhood and that the turnkey company is top-notch—and so is the management company they use. It’s important that the pricing is justified, of course, but remember that everyone is expecting a good return on investment.
Quality after-sales experience
A vital role in the turnkey real estate business is providing the entire after-sales experience, which means quality property management. You should be assured of high-quality tenants, fewer vacancies, limited legal issues, and a good management company that offers reasonable maintenance and repair costs. That’s what you can and should receive when investing in turnkey real estate.
Even if the management company charges a little more than another (and remember, they’re in it for the money, too), it is better to work with a company that won’t keep giving you bad surprises. And working with an in-house property management company from the turnkey real estate company could save you money.
A low-pressure sales tactic
Sales tactics are often hard to deal with, and a good salesperson can put more pressure on you than you anticipate. Companies have so many ways to make you believe that the right time to buy is now and that they are the right company to work with.
However, turnkey real estate isn’t a highly variable market. Real estate won’t go out of fashion as long as someone is willing to sell a home and someone else is willing to rent or buy it. Steer clear of anyone pressuring you into purchasing in a hurry and do all your homework before giving anyone your money.
Turnkey real estate is a great way of investing your money for passive income, but it’s vital to know where to invest and with whom to invest. One way of finding out if a turnkey provider is worth working with is by paying attention to their communication style. If they pressure you, walk away. And even without a hard-sales tactic, if they don’t respond to your emails or pick up or return your calls promptly, walk away.
Prompt communication is important for any business, but especially in turnkey real estate and especially if you’re not in the same region as the company. You want fast results delivered properly, and you want to be kept apprised of any happenings related to your purchase. This is, of course, also true for the management company taking care of your investment.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.