{"id":144526,"date":"2022-09-05T09:08:00","date_gmt":"2022-09-05T15:08:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=144526"},"modified":"2023-11-06T14:21:44","modified_gmt":"2023-11-06T21:21:44","slug":"turnkey-property-due-diligence","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/turnkey-property-due-diligence","title":{"rendered":"5 Things You Must to Do Before Investing in a Turnkey Property"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC8300214114&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">No matter what real estate investing strategy you\u2019re into, the most important thing about any deal should be conducting proper due diligence. While not every aspect of a deal can be verified before it\u2019s done, most of the critical items can be. That\u2019s why due diligence is so critical\u2014to help ensure the profitability of your investment.<\/span><\/p>\n\n\n\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/mastering-turkey-real-estate-build-passive-portfolio\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Turnkey rental properties<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;are no exception. In fact, I would argue that due diligence is even more important with turnkeys than with other strategies.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In this article, we\u2019ll go over what turnkey is and the checklist you need to follow for your investment to be profitable.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What is Turnkey Investing?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">At its core, turnkey real estate investing is where you buy already rehabbed, tenant-filled, managed properties that are producing positive&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cash-flow\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash flow<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;already.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A lot of the extra work that goes into real estate investing is cut out with these types of properties. With that comes a different way to approach deals. It\u2019s easy to make mistakes.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Biggest Mistake Turnkey Investors Make<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">In my 12 years of working with turnkeys, the biggest mistake I\u2019ve seen investors make is not conducting proper due diligence on the turnkey properties they invest in. I believe this is due to the marketing of turnkey rental properties.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Turnkeys are pitched as being a hands-off investment strategy. Essentially, turnkeys sound as if they\u2019re pre-packaged. When you buy a turnkey from a provider, you\u2019re given a property address, a picture of the property, a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/pro-forma\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">pro forma<\/span><\/a><span data-preserver-spaces=\"true\">, a tenant (in many cases), property management, and emotional assurance that all of the work is done for you and all you have to do is sign the closing documents and start collecting cash flow.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In a perfect world, this is exactly what happens.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, we don\u2019t live in a perfect world. And despite what many people assume, turnkey provider companies are made up of imperfect humans.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Because the marketing of turnkeys suggests investors are getting pre-packaged perfection, it\u2019s easy to assume nothing could go wrong, and therefore no stress needs to be exerted over doing due diligence.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The worst thing a turnkey investor can do is to trust the turnkey provider to deliver perfection. I\u2019ve never known a turnkey provider to blatantly mislead an investor or want to scam an investor intentionally, but because everyone\u2019s human, errors happen.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">No real estate investor, no matter the strategy, should trust other people to hand them their deal. All investors, including turnkey investors, need to take the reins on what they\u2019re investing in and make an effort to verify everything they can.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Due Diligence Checklist<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The hardest part about doing due diligence on a turnkey rental property is knowing all of the things you should check and how you should check them. The good news is that the list is fairly straightforward, and with some practice, it will become easier with each purchase.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. <span data-preserver-spaces=\"true\">Property condition<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Major repairs and maintenance on a house can cost upwards of thousands to tens of thousands. With turnkeys, one of the aspects of that \u201cperfect pre-packaged deal\u201d is that the property has been recently rehabbed and&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/glossary\/capital-expenditure\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">CapEx<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;items on the house have a significant lifespan remaining on them. The intention is for turnkey investors to not have any major repair items (less those caused by tenant damage) for a long period of time.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While it\u2019s the turnkey provider\u2019s intention to deliver a house in perfect condition to the investor, remember, you should throw the word \u201cperfect\u201d out the window. Your job as the investor is to verify that you are getting a property that is in fully turnkey condition.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">There are the two things you need to do to confirm this:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Get a third-party property inspection.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Read the inspection report and ensure those items are fixed by the provider prior to closing.<\/span><\/li>\n<\/ol>\n\n\n\n<p><span data-preserver-spaces=\"true\">You might be saying, \u201cWell, #2 seems kind of obvious.\u201d You\u2019d be surprised. Everyone only hears that they need to get an inspection. I can\u2019t tell you how many people either don\u2019t read the inspection report or if they do, they don\u2019t follow up on the repairs.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It\u2019s 100% the responsibility of the investor to ensure everything about the condition of the property is as advertised prior to closing. If you miss something and then close on the property, any repairs that come up after that are your financial responsibility, not the turnkey provider.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Be as picky with a turnkey as you would any property and don\u2019t just assume everything\u2019s good because you\u2019ll be the one to pay for it later.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. <span data-preserver-spaces=\"true\">The numbers<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">When a turnkey provider gives you a pro forma, they do so to the best of their ability, but that doesn\u2019t mean they don\u2019t make mistakes. And when you\u2019re analyzing a property for cash flow, a major mistake on the pro forma can be the difference between positive and negative cash flow every month.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Therefore, you want to ensure that you agree with all of the numbers and the overall financial outlook.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">There are very few numbers on a pro forma that can\u2019t be verified; only a couple of them have to be estimated.<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><em><span data-preserver-spaces=\"true\">Price <\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&#8211;&nbsp;Rely on the appraisal to confirm you\u2019re paying an appropriate price for the property. While it would seem optimal to run your own comps sooner in the buying process, most people make the mistake of not comparing like to like when it comes to the quality of the property. I\u2019ve seen very few turnkey investors not get misled by nearby prices of foreclosed properties and non-upgraded properties. For the most part, you shouldn\u2019t make a decision about the value of your property (i.e., if you\u2019re overpaying) until you receive the appraisal. If you\u2019re paying cash instead of financing, and therefore you don\u2019t have a lender heading up the appraisal effort, order one on your own. It will be worth the investment!<\/span><\/li>\n\n\n\n<li><strong><em><span data-preserver-spaces=\"true\">Rents <\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&#8211;&nbsp;You can run rent reports through various online programs, but oftentimes those programs don\u2019t offer the most accurate estimates. The best thing you can do to confirm the estimated rent on a property is to call at least a couple of third-party property managers in the area and get estimates. Property managers are boots on the ground every single day and will have the best idea of what a property may be able to rent for. If you\u2019re buying a turnkey with tenants already placed, verifying the rent estimate isn\u2019t as critical since it\u2019s already been proven to an extent, given tenants are already paying it. However, it can\u2019t hurt to get a couple of additional estimates just in case the current seller or property manager was able to get a tenant in at a price higher than market rent.<\/span><\/li>\n\n\n\n<li><strong><em><span data-preserver-spaces=\"true\">Property taxes <\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&#8211;&nbsp;Go to the tax assessor\u2019s website for the county where the property is located and find the exact tax amount. What most people forget to do, though, is find out how property taxes are assessed in a county. For example, if the property tax changes with a sale, that means the amount is going to change once you buy the property. Make sure you\u2019re aware of what it\u2019s going to change and use that in your analysis. The property tax number used in a pro forma is the current tax amount, not a forecasted number.<\/span><\/li>\n\n\n\n<li><strong><em><span data-preserver-spaces=\"true\">Insurance<\/span><\/em><\/strong><em><span data-preserver-spaces=\"true\"> <\/span><\/em><span data-preserver-spaces=\"true\">&#8211;&nbsp;Call and get an actual quote for property insurance.<\/span><\/li>\n\n\n\n<li><strong><em><span data-preserver-spaces=\"true\">Maintenance &amp; vacancy estimates <\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&#8211;&nbsp;Estimates for maintenance and vacancy are the only numbers that can\u2019t be known with certainty. The idea is to put some extra expense estimates into your cash flow calculations to help compensate for inevitable costs that every investor will run into. The standard estimates for a turnkey pro forma tend to be 5% of the rent amount for maintenance and 7% for vacancy. It would be wise to increase the maintenance estimate for older, cheaper homes (even if they are turnkey), and vacancy rates can be discussed with property managers as they will have a more accurate idea of current vacancy rates in that area.<\/span><\/li>\n\n\n\n<li><strong><em><span data-preserver-spaces=\"true\">Additional expenses <\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&#8211;&nbsp;Confirm with the turnkey provider if a particular property has additional expenses, such as homeowner\u2019s association fees, owner-paid utilities, etc., and ensure those are included in the pro forma.<\/span><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">3. <span data-preserver-spaces=\"true\">Property management<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many, if not most, turnkey investors don\u2019t do thorough property management vetting! They assume that the property manager who comes with the property will be great. That\u2019s the worst assumption you can make. You should interview a few different property managers just as you would if you were buying a rental property non-turnkey.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. <span data-preserver-spaces=\"true\">Rentability<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">In those conversations with prospective property managers, ask them how rentable the property you\u2019re considering is. Do people want to live there? Is it easy to find tenants for a property in that area? You\u2019d be surprised how many properties aren\u2019t as rentable as you think they are. Not that they can\u2019t rent, but when a property doesn\u2019t have strong rentability, it can cause increased vacancy times (which are expensive), and force you to lower the rent amount.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">5. <span data-preserver-spaces=\"true\">Tenant information<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">If your turnkey property comes with tenants, don\u2019t just assume the property manager screened them properly. Confirm that they should be good tenants. Few things are more frustrating than non-payment and evictions early on!<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Even with a thorough list of due diligence items, chances are you\u2019re not going to get it 100% right the first time, or maybe even the second time. That\u2019s okay! Real estate investing is very much an on-the-job training industry; the key is continuing to learn as you go and get better each time. Hopefully, though, with help getting started, you can at least cover some of the major items that could be most costly to you down the road and avoid those expenses as best as possible.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Additional Considerations<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">While it seems rare for turnkey investors to see their property before buying it, there are few better ways to do due diligence than putting your eyeballs on the property. You\u2019ll get a feel for the neighborhood, the quality of the rehab, and you can even meet the turnkey provider face-to-face and see how you feel about them, which can go a long way.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Then lastly, one thing that many new turnkey investors don\u2019t understand is the timing of due diligence.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Due diligence on the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">property<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;needs to happen&nbsp;<\/span><strong><em><span data-preserver-spaces=\"true\">after<\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&nbsp;the contract is signed.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Due diligence on the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">market<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;and the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">provider<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;should happen&nbsp;<\/span><strong><em><span data-preserver-spaces=\"true\">before<\/span><\/em><\/strong><span data-preserver-spaces=\"true\">&nbsp;the contract is signed.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many investors lose out on great deals because they try to do all of their due diligence on the property before signing the contract. A turnkey provider won\u2019t wait for you, so it\u2019s likely that another investor will swoop in and get the property before you finish. In the sales contract, there should be a specified timeframe literally called the \u201cdue diligence period .\u201dDuring that period is when you should go through your list of verifications. If at any point something doesn\u2019t check out on the property, you can cancel the sales contract with no penalty (although, traditionally, you&#8217;ll lose your due diligence deposit.)<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">At the same time, the due diligence period that starts once under contract is not the time to decide how you feel about the market or the provider. You don\u2019t have time to do that. All of that research should be done prior to signing a sales contract.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Conclusion<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A turnkey investor should treat all of their investments as if they are not pre-packaged deals and verify each element as such. If you don\u2019t do that, you\u2019re putting the control of your investment into someone else\u2019s hands, and as a real estate investor, that should be something you never do.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_64dd5ab97ed79\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-slate-900-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-large-font-size\"><strong>Analyze Deals Like a Pro<\/strong><\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. <em>Real Estate by the Numbers<\/em> makes real estate math easy, and makes real estate success inevitable. <\/p>\n\n\n\n<div id=button-custom-event-block_64138224164cd class='button-custom-event'>\n      <a\n    href=\"https:\/\/store.biggerpockets.com\/products\/real-estate-by-the-numbers?utm_source=blog&#038;utm_medium=marketing_block\"\n        x-on:click=\"window.analytics.track('Blog Block | Publishing: REBTN Book', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/turnkey-property-due-diligence',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n\n\n<div id=button-custom-event-block_641381f7164cc class='button-custom-event'>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/REBN_cover_mockup_01-e1679000020543.png\" alt=\"real estate by the numbers\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/signup\"\n        x-on:click=\"window.analytics.track('Blog Block | Acquisition | Free Membership Signup', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/turnkey-property-due-diligence',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>No matter what real estate investing strategy you\u2019re into, the most important thing about any deal should be conducting proper due diligence. While not every aspect of a deal can [&hellip;]<\/p>\n","protected":false},"author":782,"featured_media":144528,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252,7119],"tags":[],"class_list":["post-144526","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144526","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/782"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=144526"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144526\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/144528"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=144526"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=144526"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=144526"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}