Turn Key Rental Property

10 Replies

What is the due diligence on buying a Turn Key Rental Property with a tenant living in the property? I ran the numbers on the BP rental calculator and the numbers look promising. I’m just skeptical as to why owner wants to sell. Any advice?

Some folks purchase distressed property to turn them around only to sell as turn key. Its very similar to a flip but with a tenant in place. 

A lot of investors that I come across are less interested in generating a return  from turning around a property. Most are simply interested in developing residual income which makes them a perfect target market for turn key rentals.

@Albert Severino , @Jim Murray is correct - the motivation to sell really just depends on the goals of the owner. I can't tell from your post if you're talking about a Turnkey company (who finds, rehabs, tenants and manages many properties which they sell to investors) or if you are using turnkey as an adjective simply meaning that it's tenant-ready (in this case, tenanted). Anyone can sell a 'turnkey' (adj) property - that just means it doesn't need to be rehabbed before it can be occupied- while a Turnkey (noun) company is a more specific thing. 

In the case of a company (I can speak from experience here) the motivation behind selling perfectly profitable properties is that it frees up capital to do just as Jim said - buy more distressed props, rehab and sell them. For investors who are looking for passive income, buying a turnkey (either adj or noun) property is a good way to generate rental income with little effort. People who are looking to be more hands-on and generate bigger lump sums will do the work of hunting down props that need work, doing the rehab, and then selling (flipping).

All that is to say that there may be nothing at all wrong with the property - the owner may just prefer the large one-time income of flipping to the smaller monthly income of renting, and want to free up capital to buy another flip.

With regard to due diligence on the tenant, I would just suggest that you ask for rental records, check on any late payments or large maintenance issues etc - just make sure this tenant is someone you would rent to if they were just applying for the first time. In truth, buying a rental property with a solid tenant in place already is great, no down time means immediate cash flow!

The other key aspect of any turnkey purchase is the PM. If you're buying from a Turnkey company, you need to make sure they're on the level and have high standards for management - ask lots of questions about their performance metrics, number of props under management, maintenance issue turnaround time, average tenancy etc (I have written several loooong posts about how to vet TK providers, so I won't get into that again here ;). If you're buying from an individual owner and there is a PM in place already, do all the same due diligence on that management team and make sure you're aware of any contract requirements - if you don't like how they work, can you end the contract at-will or do you have to wait a year or more? If the property isn't currently managed, then you get to decide if you want to self-manage and save that 8-10% a year, or if you want a truly passive investment - which would require that you find and vet a PM of your own.

I wouldn't discount this option just because it seems counterintuitive to sell a cash flowing property - people have different strategies and goals for REI. Just make sure you check on rental history, capex item age (when was the roof replaced, etc), and management team quality before you pull the trigger. When you buy turnkey (either adj or noun) it's important to verify that the value of that prop isn't all cosmetic, so make sure you get a detailed list of what was done to make this property tenant-ready and when, regardless of who you're buying from. New paint and fixtures can hide a multitude of rehab sins from the untrained eye, so if it looks great but the HVAC system is 20 years old, you need to know about it before you buy.

Best of luck!

NUmber one due diligence is go to see the property and flush a toilet.

Thanks for the insight @Clayton Mobley,@Jim Murray, and @Jody Newman.

Originally posted by @Albert Severino :

What is the due diligence on buying a Turn Key Rental Property with a tenant living in the property? I ran the numbers on the BP rental calculator and the numbers look promising. I’m just skeptical as to why owner wants to sell. Any advice?

 Many companies main source of income is the profits made from selling these properties. Buy & Hold has a long term payback. It takes many years to recapture your funds. Without a source of additional funds in the short term one would quickly run out of cash.

@Albert Severino turnkeys are a good way to get started. But if you are pretty smart you will graduate to bigger or more complex things.

Thank you all who have answered my question. I truly appreciate the help from the Community. 

When you say a turnkey rental property, are you talking about a property from an actual turnkey provider or just a property that is in turnkey condition? The answer to that matters as far as your question about why an owner would want to sell it. 

Actually it matters for the due diligence too...

If it's not from a turnkey provider- have you visited the property, have you had it inspected, have you verified documents on it, have you verified the actual numbers on it, do you know anything about the neighborhood and/or market?

@Ali Boone thanks for the reply. I will be visiting the property this weekend and taking into serious consideration all your questions. I’m still in research mode.

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