Pros and cons of buying a turnkey STR

[Vivian Hsieh]

Hi everyone,

I'm looking to purchase my first STR property this year, mostly for tax benefit purposes. I know there are listings for turnkey STR properties, which can include furnishings, revenue/pricing history, and sometimes even the systems established by the seller to run the place. Could I realistically meet the 100 hours material participation if I buy a turnkey property? Are there other pros and cons I should consider with a turnkey?

Thanks in advance for your input!

[Andrew Steffens]

I am a Tampa FL based Property Manager who is also a broker and sell about 5 or so (predominantly turnkey on and off market) houses per month.  Most of my current buyer pool are tax buyers.

I also agree that you should not buy a property solely for the tax benefits, but if you can achieve a great performing property that has history and is turnkey, then great. 

Furnishings technically do not contribute to the property value, so if the market or the specific property is competitive, it may not appraise if the agreed price is inflated to account for furnishings.  Generally, I do not think you should pay much or maybe at all for turnkey, but it can make sense.  If you pay separate from closing i.e. $10,000 bill of sale for the furnishings separate from the value of the house it is cleaner and more defensible in case of audit, and that $10k is 100% bonus depreciable.

Getting back to your main question, can you still get to the 100 hours, and the answer is yes it is possible.  You should probably begin to move quickly as even if you contract a property today it will likely be mid July before you close so less than 50% of the year to get your hours in.  You can and should begin logging your allowable hours from the minute you contract the property.  Likely the property will need something upon purchase i.e. small punch list items, design refresh, etc.  You can rack up a lot of hours simply by going to the house and spending 3-7 days working on such items.  You can also get credit for every hour you spend operating the business i.e. guest communications, housekeeping operations, maintenance operations, accounting, so and so forth.

Good luck!