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A client asked me yesterday, “Should I buy a property that needs renovation work or a turnkey rental property?”
It’s certainly a simple question — fundamental, even. But simple questions often have complex answers.
What are the pros and cons of buying a turnkey rental property versus one that needs updates and repairs?
Pro: Avoiding the (Many) Renovation Headaches
Ever renovated a property? Then you know how stressful it can be.
Working with contractors is often a nightmare. It’s a rare gem of a contractor who is affordable, trustworthy, does quality work, and stays on budget and on schedule.
More often than not, though, contractors will deliver excuses, rather than on-time, on-budget work.
Then, there are permits. And inspections. And re-inspections. And more permits. Permits and housing inspectors can present a seemingly endless rabbit hole, tangled with red tape.
Perhaps you’re an old pro at managing renovation jobs. Maybe you’re even a contractor yourself. If so, then you’re in a great position to implement the buy, renovate, rent, refinance, rinse and repeat (BRRRR) model.
For everyone else: You’ve been warned.
Pro: An Existing Tenant in Place (Often)
Not all turnkey rental properties have a pre-screened, existing tenant in place … but many do.
While this comes with its own risks (which we’ll explore in detail below), placing new tenants is one of the most time-consuming jobs that landlords face.
You have to clean and prepare the property for rent. Then, you have to advertise it in multiple places online and offline. All in all, you have to collect and sift through endless rental application forms from prospective tenants.
I haven’t even mentioned tenant screening yet, which includes things like running credit, criminal, and eviction reports, calling employers and former landlords, and so forth.
Placing and screening tenants is a lot of work. If it’s done well, then it’s worth paying a certain premium for a rental property with an excellent tenant already placed.
Pro: Turnkey Properties Are Easier to Invest In from Afar
Have you ever tried to oversee a property renovation from another state?
As difficult as managing renovations is when you’re local, it’s even more difficult from a long distance. It’s so difficult that I unequivocally told my client, “Do not buy a property that needs renovation in another state unless you have a local partner you trust to oversee the rehab work.”
Granted, if you’ve been in the industry for a long time and established relationships with local contractors who you trust implicitly, they can serve as your local eyes and ears for the project. But for new real estate investors? Fuhget about it.
If you are thinking about investing long-distance and don’t plan on having a local partner, consider turnkey rentals.
Con: It’s Harder to Force Equity & Find Deals
One of the great advantages of the BRRRR model is that investors can force equity by taking on the headaches of a fixer-upper.
Investors who buy turnkey rentals don’t have that luxury. Instead, they’re typically buying a property that’s already optimally improved, and they’re paying another investor’s profit margin on the renovation.
That can make it very, very difficult to find good deals.
Most often, investors looking to buy a turnkey rental have to go through a seller who specializes in turnkey properties. Sometimes, these sellers are willing to negotiate; maybe they even leave some “meat on the bone” equity-wise in their asking prices.
Many of these turnkey sellers are local, mom-and-pop flippers who specialize in selling rentals to investors. That can make them difficult to find, especially from a distance.
Seth recently reviewed Roofstock, a turnkey seller that operates in multiple states and offers some enticing guarantees to buyers. Definitely worth a look, especially for investors who live in overpriced coastal markets!
Still, just as often, turnkey sellers’ pricing makes it difficult for rental investors to generate positive cash flow. Make sure you run your cash flow numbers properly before putting a cent down on a turnkey property!
Con: Suspicious, Pre-Placed Tenants
When you screen your tenants, you probably do a thorough job (or at least you should if you know what’s good for your returns). You steer clear of bad tenants because you know that those tenants will directly impact your profits as a landlord.
Turnkey sellers know they won’t have to manage their tenants for very long. In fact, it is in their best interest to place tenants willing to pay the highest possible rents, rather than reliable, clean long-term tenants.
That means their interests and yours don’t align when it comes to tenant screening and placement.
As a turnkey rental buyer, you need to double check several alleged “facts.”
First, screen the existing tenant all over again, by demanding copies of their rental application, all tenant screening reports, and contacting employers and prior landlords on your own. Make sure they meet your own (rigorous!) standards.
Second, do your own independent review of the property’s market rent. Is the current tenant paying a reasonable market rate, or does it seem a little high, given the property’s location, size, and condition?
I knew a turnkey seller once who just threw the highest-bidding tenant into his properties, so he could sell them for the highest price to buyers. He barely screened them, if at all.
Beware of these unscrupulous sellers – not everyone in the industry is a straight shooter!
Con: Tenants Signed the Seller’s Rental Agreement, Not Yours
If you’ve been around the landlord block, you know that a thorough, preventive rental agreement is worth its weight in gold.
But what about the seller’s lease? Does it protect you as a landlord? Does it include all the little clauses that divert liability away from you, protect your property from tenant damage, and specify the tenant’s obligations in detail?
Make sure you read a copy of the signed rental agreement carefully — and make sure you’re comfortable with it. Remember that lease agreements transfer with the property, and you will be obligated to honor it until the lease term ends.
At that time, of course, you can require the tenant to sign your more thorough rental agreement if they wish to renew.
Con: Uncertain Repair Quality
When you renovate a property yourself, or with contractors you know and trust, you know that no corners were cut. You control the quality of the materials, and you can make sure the work is done right.
That’s not the case when a flipper does the work. What you can do is inspect the work carefully:
- Are the materials durable and long-lasting?
- When you look under access panels, behind walls, or in the basement, what do you see?
- Was the work done well? Or was it a rush job?
If you’re not particularly handy, take a trusted contractor with you to inspect the quality of the work. And always send in a home inspector as part of your due diligence when buying, to pick apart the property from top to bottom.
Remember the unscrupulous turnkey seller I mentioned earlier? He referred to his favorite contractor as “a butcher, but fast and cheap.”
Are Turnkey Rentals for You?
If you like to delegate work and pay a premium for someone else to take on your headaches, turnkey rental investing can be an excellent route. That goes double for any investors looking to buy long-distance.
If you’re meticulous and like to keep control of projects yourself, or if you’re looking to score the best possible deal, then turnkey properties probably aren’t for you.
Remember that turnkey sellers’ motives don’t always align with yours, and triple check their tenants, their rents, and their work. While you can delegate the work of renovating and leasing a property to a turnkey seller, ultimately, you’re responsible for your own returns.
Even – or perhaps especially – turnkey properties require plenty of due diligence on your part as a buyer!