Turnkey? What in the world is that? It’s a method of buying an investment property. Most people who buy turnkeys buy them because they live in an area where it doesn’t make sense to invest, so they have to be long-distance owners. Or, they have full-time jobs and/or families and are limited on how much time they can spend on an investment property. Turnkey means (usually) that a property has been fully rehabbed, tenants are living there and paying rent, and property management is already set up to handle the property once you own it. The name “turnkey” refers to the theoretical idea that all you have to do for the property to be putting cash in your pocket is turn the key in the door. I think that name is misleading though, because I’ve never so much as owned a key to any of my turnkey properties, much less turned one in a door.
Turnkeys (a.k.a. turn keys or turn-keys, but that extra space or hyphen is just an extra character I don’t care to type so I leave it out) are highly debated, mostly because the price tags on them are higher than do-it-yourself rental properties and there have been turnkey providers in the past who were less than ethical and they gave turnkeys a bad name. The latter isn’t as big of an issue now because most of the really bad ones are out of business, but the price tags are still higher than other rental properties you can buy. If you wonder or worry about why they are more expensive, check out this article: Do the Markups on Turnkeys Kill the Deal?
As that article mentions, and as a lot of turnkey advocates will stress, turnkeys do have their perks. They allow you to buy an investment property with a lot less effort, no rehabbing work, stress or risk, and you don’t have to spend your time and brain landlording the property yourself. Some of those perks are exactly why some people don’t want to buy a turnkey though- they want more control over their property and are willing to do more work in order to achieve higher returns. To each their own and there is no right or wrong route to go when it comes to buying rental properties.
If you are toying with the idea of going the turnkey route versus doing everything yourself though, I want to point out one much less obvious perk to turnkeys that most people don’t realize. We already established the obvious benefits to paying more for a turnkey property. So what is left? It seems like that covers all of them, no? Nope, there is one more. This one isn’t advertised, nobody has mentioned it that I’ve seen anywhere, and I bet you couldn’t guess it if you tried. Oh! And one more thing, this benefit could be the reason you become a big rig, hugely successful real estate investor later on!
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The Secret Advantage to Turnkeys…
Learning the fundamentals.
Whoa, hang on. Yes, I know that sounds boring, but hear me out.
You’ve heard a million times that you can’t become a successful real estate investor, or anything for that matter, overnight. You can’t because you have to find your niche, which isn’t always as easy as it seems like it should be, you have to learn basic skills, you have to expound on those skills, and you have to do all of that step-by-step. Doing it any faster than step-by-step will cause you to miss out on critical information and skills, do something you don’t end up liking, get yourself in too deep, or who knows what else.
Think about a rental property. You want to own one. What are the two critical things you have to know about a rental property in order to own one, and profit from one, successfully?
- Knowing what makes a good rental property
- How maintain a rental property
If you buy a good rental property and you do a good job at maintaining a rental property, you should end up profiting successfully. If either of those two things are lacking, it is likely that your investment in said rental property will tank, potentially costing you tens of thousands of dollars (no pressure).
So what comprises those two issues? What do you have to know (or learn, if you’ve never done it)?
Knowing What Makes a Good Rental Property
- Running numbers. You absolutely have to understand how to calculate returns and you have to know how to do that not based on phony-baloney theories or equations. You have to understand how to include estimates for uncertain expenses (which does not include expenses you can easily find actual numbers for) and what are those uncertain expenses and how do you estimate for them? How do you know what a good return is?
- Markets. How do you know if the market you are buying in is a good one or not? What even makes a market good or bad? How do you know where within a larger market to buy?
- Condition of the property. How do you know the true condition of the property? You know one of the biggest horror stories of real estate investing is you buy a property not realizing it needs a mega-major repair that you weren’t expecting and that repair costs so much that it blows any profit potential out of the water. Whoops! How do you ensure you know what you are getting and how do you know what you even need?
- Back to running numbers. Did I mention it’s important? It’s critical! If the numbers don’t work, you’re hosed. So, while we revisit numbers again, let’s add in financing. Are you approved for financing? Do you know what your monthly financing costs will be? Will that negatively impact the property? Have you gone through the mortgage process in the last few years?! It’s repulsively long and tedious. You will definitely be asked to send them your left arm and first-born child. And then they will you ask you for both of those again because they’ll have forgotten you sent them in once already.
How to maintain a rental property
- Finding tenants. You do know that tenants are your most crucial element of owning a rental property, correct? If you have bad ones, or if you have no tenants, you lose. You lose big. How do you know how and where to find good tenants?
- Maintaining the property. Another horror story- constant repair expenses, the repairs never end. That’s just if the house isn’t in good condition. What about if tenants constantly destroy the house? Told you tenants are critical. How do you minimize repair expenses while still maintaining the property properly? How do you afford a big expense, do you have a savings account built up for that situation? How do you keep an eye on your beloved tenants and make sure they are behaving and not destroying things?
- Evicting tenants, if necessary. Where do you even start for that? Courthouse, police, I don’t know?
Every one of these are things you have to know even to buy a turnkey rental property, and turnkey rental properties are theoretically the easiest way to buy a rental property. Wait! I thought you said turnkeys were hands-off. Well all of this, compared to other methods of buying properties, is hands-off! Muahaha. Scary, isn’t it? Just think, knowing all of the things above and being able to function within that space with ease of knowledge is what we in the real estate investing world do consider hands-off. Meaning, that is the minimum amount of stuff you need to know in order to succeed with a rental property. And rental properties are usually considered one of the easier forms of real estate investing!
You have to know and understand each thing I mention above in order to be successful at profiting from rental properties. These are the fundamentals. If you go out and buy a turnkey rental property (the easiest of the rental properties), you will still be forced to learn all of these things. The only chance of escape you have from learning any of that is when it comes to the maintaining the property part. If you have a good enough property manager who functions properly and takes care of everything for you, you don’t need to learn the detailed ins and outs of finding good tenants and maintaining the property efficiently. The manager will do that for you. But don’t you need to know how to find a good manager, and therefore you need to know the questions to ask? So let’s keep all of those things in the list of fundamentals you have to learn.
Buying a turnkey rental property will teach you the fundamentals I list as being critical pieces of knowledge you must have in order to succeed with a rental property. As opposed to what though? Well, if you don’t buy turnkey, you are likely buying a property that needs work- a rehab. And because so few people who want to do that work themselves want to do all of that long-distance, chances are the property you buy is local to where you live, which odds tell me means you are planning to landlord the thing yourself.
So, on top of learning everything I already mentioned, you now have to learn in addition to those:
- Finding a property
Do you even know how much is involved in both of those? Oh man!
Finding a property
- Do you use a real estate agent? You do know only, like, 1% of Realtors have any lick of experience with investment properties, don’t you? Meaning most of them will not be able to help you find a good property, simply because they don’t know what constitutes one.
- What about auctions? Uh, have you tried one of those before? All I can say there is: good luck.
- Foreclosures and short sales? Maybe. They can be really good deals, assuming the bank ever lets you actually have the property. They usually will, assuming you are willing to wait 6 months to a year while they fight you on it.
- Are you looking in a market where a lot of big boy investors and hedge funds are buying? How will you, as a little guy, compete against them?
- Knowing what all needs to be done. And I’m not even just talking about the big things that need fixing… I bet you haven’t thought of things as small as making sure you replace all the locks and other methods for protecting from vandals, have you?
- Managing contractors, potentially multiple contractors at that. Which doesn’t sound hard, but have you dealt with bad contractors before? Oh, it’s horrible. Have fun with that.
- Doing the work yourself saves a lot of money, but then you are looking at needing to know how to do things like checking on and working on the mechanicals (plumbing, electrical, etc.), prepping walls and ceilings for painting, painting, possibly replacing windows, lighting, flooring (including laying tile!), and yard work.
- How do you know how to find the good tenants? More importantly, how do you figure out if someone is going to be a bad tenant? How do you screen? How do you run background checks? How do you accept application fees, security deposits, and ensure the move-in goes okay?
- Are you going to handle all repair requests yourself? If so, do you already know how to work on a house yourself? I supposed if you rehabbed it yourself, you are already miles ahead of the game. What if your tenant calls at 3am to tell you a pipe burst? Are you ready to go over there in your jammies to fix it? Do you know how to fix it? What can you do to make sure your tenants aren’t causing absurd damage to your property?
- God forbid you have to evict tenants, do you know how to handle that process? What is the process? Do you know the state laws concerning the eviction process? What if your tenants fight you on it?
Okay. Finding a property, rehabbing a property, and landlording a property is hard work! There is a ton of stuff you need to know and skills you need to possess. In no way am I saying this to say it isn’t possible to learn it all or that I don’t support doing it that way. I think it is all great stuff to know but what I am saying though is that if you are a new investor, do you see how much you need to learn in order to do everything yourself? Trust me, you have plenty to learn without worrying about finding the property, rehabbing, and landlording.
So, what is the summary of my point as to what is the secret advantage of turnkey rental properties? Turnkeys give you a chance to learn the fundamentals of what goes into a successful rental property without bombarding you with complicated things like finding properties, rehabbing, and landlording. Those three things are what I would consider to be advanced skills. Some people have a natural knack for them so it’s no big deal if they start out by doing them, but most people, I would venture to say, will be biting off more than they can chew if they choose the do-it-yourself route. If you go the turnkey route, you are allowing experts to do all of the advanced things for you while you spend your time learning the basics. You have to conduct due diligence on the turnkey seller and on the property and in order to do that properly, you have to learn all of those fundamentals. If you learn the basics in the beginning, you will only be more prepared to have a ridiculous amount of success with the harder stuff later.
Turnkeys are far from the only way for new investors to start out with decreased risk and skills required. But if you are looking at turnkeys or toying with the idea of them, be sure you realize this advantage that they give you. It can be a big one for a newbie!
For more advanced investors, what are the critical things you think newbies have to know in order to succeed as they progress?