What is Turnkey Real Estate?
Turnkey Real Estate Explained
Not all real estate investors want to get their hands dirty rehabbing distressed properties or dealing with the day-to-day hassles of tenant maintenance requests. Turnkey real estate is a type of “hands-off” investment designed to generate immediate rental income.
A turnkey property is one that is fully renovated, rehabbed, and ready for immediate occupancy. It can be used to describe both a residential or commercial property. The new owner simply needs to “turn the key” and move in.
In the real estate investing profession, turnkey real estate typically refers to properties that were purchased in a distressed condition, but have already been rehabbed and are now in tenant-ready condition.
Turnkey properties are often sold by companies that specialize in turnkey investments. In many cases, the company also provides or arranges for property management; the investor has little to no involvement in the property after the sale.
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Turnkey real estate investments can be structured in a number of ways. Individual investors can purchase turnkey properties or they can form partnerships, LLCs, or real estate investment groups (REIGs) to shift liability to the company and generate pass-through income for the partners.
Loosely defined, a turnkey real estate investing strategy is one in which the investor contracts with a third party, often long-distance, to purchase, rehab, and rent properties to make the process essentially hassle-free for the investor.
Advantages of Turnkey Real Estate Investing
When done correctly, turnkey real estate investing requires much less effort on the part of the investor relative to other real estate investing strategies, which is its primary appeal. It allows an investor who lives in one market to take advantage of favorable economic and real estate conditions in another market.
Turnkey properties are ready to rent and may even have a tenant in place when the deal is closed. There should also be minimal repair costs in the first few years, leading to more stable cash flow in the immediate years ahead.
Turnkey companies tout several benefits for investors:
- Market Insight: Presumably, a turnkey company will know the local market well and can pinpoint the neighborhoods and properties that appeal to tenants and command good rent.
- Professional Management: Many turnkey providers have connections with many property management companies and may even manage properties directly, which means they have staff constantly searching for good deals and an expert marketing team lining up tenants to keep vacancy rates low.
- Lower Expenses: Because some turnkey providers have such a large portfolio, they may be able to negotiate rates with equipment vendors and repair and maintenance contractors that are well below those available to individual investors.
Granted, not all turnkey real estate companies are large and they don’t all manage properties and tenants directly. There are also varying levels of quality and reputation among turnkey providers, so an investor needs to be diligent at evaluating a company prior to working with them.
Disadvantages of Turnkey Real Estate Investing
There are significant financial downsides to turnkey investing as well.
Given that a turnkey company is essentially rehabbing and flipping the property, the investor will be paying a steep premium for the property.
Anyone who has flipped a distressed property knows that there are multiple layers of profit built into each deal. There could be a wholesaling fee, material markups, project management fees for the rehabber, and real estate commissions.
A real estate investor who buys a turnkey property is effectively paying all of these extra costs upfront, and that means a higher upfront investment in return for fewer headaches after they own the property.
Turnkey properties also require professional property management as well, which means more ongoing costs for the landlord. A hassle-free investor experience doesn’t come cheap.
There’s also a huge trust factor that comes into play with turnkey real estate. A turnkey real estate investor is relying on outside parties to know the market, choose the best property, find reliable tenants, and efficiently manage operations on their behalf, again, often long distance. While some investors have great experiences with turnkey investing, there are many horror stories of companies slapping lipstick on a pig of a property and selling it to an unsuspecting out-of-state investor.
Tips for Investors Considering Turnkey Real Estate
A good rental property is a great investment and many investors enjoy solid revenue streams from turnkey real estate. For any investor who decides to pursue turnkey real estate, there are some good practices to keep in mind.
- Don’t skimp on due diligence. Some investors make the mistake of thinking there is less due diligence involved in turnkey properties. This definitely is not the case. Investors should visit the property in person, explore the neighborhood, and pay for a professional inspection. The fancy kitchen remodel and brand new bathroom won’t make up for a faulty furnace or crumbling roof.
- Investigate the management company. Many turnkey properties include property management services, so it’s important to know what will be provided in return for the fee. What is the process for screening tenants? Do they handle repairs, maintenance, and cleaning in addition to rent collection? Find out what type of financial reports they provide and how expenses are tracked and reported. Ask about vacancy rates, the average length of time to find a tenant and a clear breakdown of management fees.
- Be prepared for the pitfalls. Turnkey real estate isn’t a fail-safe investment; it carries the same risks as other real estate investments. Fires, natural disasters, unexpected major repairs, property tax hikes, and assessments are just a few threats investors may face with a turnkey property. Not only that, but liquidity can also be an issue. If property values fluctuate and an investor needs to sell, they might be forced to take a loss because the purchase price for turnkey properties is higher.
Some people consider turnkey investing a great option for novice real estate investors. If an investor does their due diligence and finds a good deal with solid management arrangement, turnkey real estate can definitely be profitable, but like any real estate investment, it is not without risk.