Why Turnkey Rentals Might Just Be an Ideal Investment for Real Estate Newbies

by | BiggerPockets.com

There are a lot of you new investors out there, and there is a lot of talk and hype about turnkey rental properties. But should you be considering turnkey rental properties if you are an REI newbie?

I think so.

It’s no secret that I am a fan of turnkey rental properties myself, as the large majority of my properties were bought turnkey, but I do still strongly believe that turnkeys can be a great entry for new investors.

I’m going to tell you why.

But first, I am also going to tell you that I don’t think turnkeys are for everyone. Quite frankly, I think that if you have the skills and interest to take on distressed properties yourself and you are local enough to good ones to do so, you should do that. However, not everyone has those skills or interest (including me). For more information to help you decide if turnkeys are right for you or not, check out “The One Piece of Advice You NEED to Read Before Buying a Turnkey Property.”

Now that you’ve decided turnkeys might be the right route for you (because if they weren’t, I assume you wouldn’t still be reading), why might they be good for you if you are a new investor?

Turnkeys let you learn the fundamentals of rental property investing without the pressure of figuring out the more complicated, riskier aspects of rental property investing.

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The Tasks Turnkeys Eliminate for Investors

What does that mean?

Well, think about it. Let’s say you want to find a distressed property and rehab it and then rent it out. This is an extremely common strategy because it allows you to value-add and have quickly added equity in the property, which is essentially cash in your pocket. Makes sense to me! But what things do you need to master in order to do this kind of investment successfully?

  • Market and neighborhood expertise
  • Ability to identify what makes a property a good candidate for succeeding with this method
  • The skill of finding these properties—knowing where to find them, how to find them, or how to find motivated sellers who might be willing to sell them
  • Numbers
  • Negotiating
  • Due diligence
  • Funding rehabs
  • Rehabbing
  • Finding quality tenants
  • Managing tenants

I’m not sure about you, but to me, this is no small list of potatoes. Do you know how to do all of these things, if you are pondering rehabbing or the BRRRR method for buying rental properties? And I don’t mean the basic gist of each; I mean getting a handle on the ins and outs of exactly how to do each one and how to do it well and mitigate risk in each.

BRRRR-strategy-deal

Related: The Truth About Turnkey Providers No One Tells You

If you are missing the boat on even half of one of these tasks, you could sink your investment.

I think if you have the skills for all of this, like I said, you should absolutely go for it. But as a new investor, do you have these skills? Again, they are no small potatoes.

Which of these skills do turnkeys eliminate for you?

  • Market and neighborhood expertise
  • Ability to identify what makes a property a good candidate for succeeding with this method
  • The skill of finding these properties—knowing where to find them, how to find them, or how to find motivated sellers who might be willing to sell them
  • Numbers
  • Negotiating
  • Due diligence
  • Funding rehabs
  • Rehabbing
  • Finding quality tenants
  • Managing tenants

Can you even see in there what is left over for you to need expertise in after turnkeys help out with the majority of stuff? Numbers and due diligence.

For a list of 10 to get shrunk down to a list of two—that’s pretty serious. And on top of that, those eight things that turnkeys eliminate for you are much more complicated to learn and have expertise in than numbers and due diligence.

Numbers are pretty easy to learn. And once you’ve learned them, you can whip them up pretty quickly on any property you look at. For help on learning the numbers on rental properties, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”

Due diligence in more thorough, and this is where you are going to learn a lot as a new rental property investor. You are going to verify market fundamentals (note: here you only have to learn how to verify if a market is good, whereas the initial list of DIY tasks requires you to do much more than just verify), run and verify numbers, verify rentability and advertised quality of the investment, follow along with property inspections to verify the quality of the rehab, verify the tenants, and verify the quality of the property management set up to manage the property for you.

Learning the Investing Process With Turnkey Rentals

Do you see a common word in that list? Verify. That is the most of what you are doing with turnkeys.

Learning what things you need to verify and then verifying them, will teach you the most basic (and crucial) fundamentals there are for rental properties.

Verifying all of the things involved with the property is very different than having to do all of those things yourself. You will learn what needs to be done for each component (which can be used later if you decide to DIY), and all the while, the turnkey seller is holding the risk—not you. If you do everything yourself, you are the one whose money is in the pot while you are trying to figure everything out and hope you get it right. With the turnkeys, you don’t have any money in the pot until you confirm everything is up to snuff. That difference in risk-holding is huge!

For help on doing due diligence on turnkeys, check out these three articles:

Now, you do have to add a task to this list of items that you may not have needed on do-it-yourself (DIY) properties: managing the property manager. This is very different than managing tenants or the property. It’s a completely different set of skills.

Related: 4 Steps to Ensure You’re NOT Getting Duped by a Turnkey Provider

Without going into the nitty gritty about property managers, oftentimes they may not be great, and therefore you need to understand how to manage them. In one of the articles I already gave you, it talks a lot about dealing with the property management side of turnkeys. For help with dealing with property managers in general, check out “Surviving the Hell We Call Property Management.”

So officially, you only need to understand (very thoroughly) numbers, due diligence, and management of managers in order to be successful with turnkeys. Significantly smaller list than the DIY list, no?

tenant-screening-tips

The Verdict

So back to the verdict about whether turnkeys are a good idea for new investors or not. Are they? Well, first ensure that turnkeys fit your goals and interests at all. Then, if they do, then I think yes, they can be great for new investors—primarily because they allow you to learn the most critical fundamentals of what makes a successful rental property investment without having to learn the advanced tasks and the riskier tasks at the same time.

My theory? Learn the easier stuff while you can do it with less risk (still while getting a great investment), and then if you desire, move on to the advanced stuff once you feel comfortable with the fundamentals. Just because you buy a turnkey once or a few times doesn’t mean you can’t ever go do it on your own.

Assuming you do thorough due diligence on a turnkey property—including verifying the quality of the turnkey provider, the property, the location, and the management—I believe the risk then is significantly less than if you go out on your own to do everything. Verifying is just easier than doing, and it’s certainly less risky if you aren’t sure of what you are doing just yet. It’s much easier to learn and master!

How did everyone out there get their starts? With complicated or easier investment properties?

Leave your comments below!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

3 Comments

  1. Christopher Smith

    Here is how I got my start:

    I started in 2011 as well with likely the same basic philosophy (i.e., that the market was very ripe with some incredible deals, but being a total novice RE investor I wanted to avoid properties/markets that required a deep RE skill base which I simply did not posses at the time). So here are my first six acquisitions beginning in 2011 following that simplified strategy.

    1) 2011 bought the last new construction property in a new subdivision (Nor Cal) after 2 previous buyers for the same property had fallen through. They fell through because as the housing crises deepened the second and third credit reviews (which had become almost a joke) were now being taken very very seriously by the banks. I had cash so no review necessary. The only cost to get it leased was the installation of window blinds.

    2) 2011 bought a home from a Limited Partnership flipping outfit that was sweeping through my area and buying numerous 2 to 4 year old foreclosed houses, putting them into spit polish new condition and then selling them mostly to cash investors like my self. No additional costs were incurred to get leased – it was walk in ready on the date of acquisition form the wholesale flipper outfit.

    3) 2012 bought a 4 year old REO about a block from #2. The cost to get this one leased was about $3,000 (just some relatively minor painting, cleaning, and miscellaneous repair work).

    4) 2012 bought the model home which had been used to sell other homes in #1’s development. No costs to make lease ready since I immediately leased it back to the developer for about 4 to 5 months, and when they moved on (all homes in the development had been sold), they left it in pristine condition removing all model related nick-knacks except those that I wanted retained.

    5) 2013 bought a property with a tenant already in place from an estate. No immediate costs, but spent about $5,000 after that initial tenant moved out, but nothing significant since.

    6) 2016 bought a 5 year old home in pristine condition after the original buyer (who had the property fully inspected and repairs made) fell through. Seller was finishing up construction on its new replacement home and was on the verge of having two substantial mortgages so got a really great investor deal from a motivated seller. No costs to make lease ready – Seller even tossed in a new French Door Refrig so I didn’t need to get one for the new tenant.

    I invested about 1.2 in total for the above properties and they Zillow now for about 3 and all are very solid cash flow generators. Its been a really great ride and I am learning (in a relatively low risk manner as you describe above) all the things that might enable me to go out and do something a little more aggressive in the future. Not sure that I will ever do that, I like the very low maintenance life style (have a prop mgr), but at least I think I could go beyond basic “turn key” like properties now and swing it.

  2. Andrew Syrios

    Turnkey properties and even more so, turnkey companies need to be vetted very carefully. I’ve known some good ones, but I’ve also known some very bad ones. And I would also note that I rarely see investors get much if any built in equity with turnkey properties. Often their sold at or even above market. So it’s very important to know what you’re getting into.

    • Paul B.

      It’s probably not fair for an investor to expect built-in equity. After all, the turnkey company earned that, so they should get it. But I totally agree that an investor needs to understand that this is the case. Turnkeys are a great way for a new investor to get some experience, if they work with a reputable company. Lower risk, and lower return. Those seeking higher returns need to do the work themselves and find properties at a substantial discount.

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