Investing in real estate has the potential to build your assets and make you money for years. Turnkey properties are real estate investments that are designed to be “turnkey” — in other words, ready to rent immediately, with little effort needed from an investment owner. If you’re interested in direct ownership, but don’t want the hassle of renovating a property or finding a tenant, you may want to look into turnkey investing. We’ll break down what it is, what to look for, how to finance it, and what alternatives you have for investing in real estate.
Definition of a Turnkey Property
Turnkey properties are rent-ready homes that are typically new construction or fully renovated. They’re often associated with a turnkey company that has completed the renovation and may already have a paying tenant in the rental unit. It might even have property management services in place.
Turnkey rental properties are most common in areas where homes sell at a lower price point but have high rental rates. Outside investors are often targeted for these investments, which can be both a good thing and a bad thing. There are some key considerations you’ll need to make if you decide to invest in one.
Key Characteristics
Some key features of turnkey rental properties include:
• Newly built or renovated
• New systems, such as electrical, HVAC, roofing, and plumbing
• New flooring, paint, countertops, and cabinets
• Ready to rent or tenant in place
• Rent is coming in as per the lease agreement
A turnkey property is meant to have no gaps in monthly rent for the investor, which is a major positive when you’re getting started.
The Difference Between Turnkey and Traditional Properties
The major difference between a turnkey property and a traditional property is there’s usually a middleman involved to make sure turnkey homes are truly “turnkey.” The turnkey company’s role is to buy a property, rehabilitate it, get a tenant in place, and then sell the property for a large profit. Some turnkey companies also provide property-management services.
With a traditional property, you would go through the purchase process with a real estate agent and then do a lot of the leg work yourself. You would have to find a property management company, contractor, cleaner, attorney, accountant, and more.
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Types of Turnkey Properties
Turnkey properties come in all shapes and sizes. What’s available depends on what has been renovated by a turnkey investment company. You’ll see a lot of single-family homes, but you’ll also come across some multi-family units and commercial properties that are ready to go.
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Turnkey Investment Process
Investing in a turnkey property is a straightforward process, much like buying any other property. The hardest part of the process is in the research. Here’s what you’ll want to investigate:
• Markets: You’ll want to find an area with high affordability, high rental rates, and a high rental population. You’ll also want to research neighborhoods to ensure you’re buying in an area where people feel safe renting.
• Turnkey and property management companies: Read reviews or talk to people who have worked with the property management company before.
• Individual properties: Look for quality renovations, desirable neighborhoods, and numbers that work. No matter what, you’ll want to see it in person.
Once you find a property you like, you’ll make an offer on a home, get a loan, go through escrow, and sign on the dotted line.
What may be different about a turnkey property is it may not be listed by a real estate agent. You might be buying directly from the company that renovated it.
Advantages of Investing in Turnkey Properties
Turnkey real estate has a number of benefits:
• Immediate rental income: With a turnkey property, they’re either ready to rent or already rented, which provides immediate rental income. It’s also possible rental procedures and management have already been set in place.
• Minimal effort: You don’t have to find contractors or put in elbow grease to get the property ready to rent. It has already been done for you.
• New or renovated: Since turnkey rental properties have been recently updated, they probably look pretty great and can easily rent out.
• Geographical diversification: If you’re priced out of your own market, you might like investing in another area that’s more affordable. A turnkey property can help you invest without needing to live in that area.
It’s also important to look beyond the fully renovated home to possible drawbacks.
Potential Drawbacks of Turnkey Investments
There are considerable drawbacks to turnkey investment properties, not the least of which may be that all the opportunity for profit may have already been squeezed out of the deal. Consider these possible problems:
• May be overpriced: Turnkey investment companies aim to get top dollar from investors. There’s little headroom for a property to appreciate when it is priced at the top of the market. And if you are paying top dollar for the property, a significant amount of the rental income can go toward covering a mortgage, not to mention keeping up with repairs.
• Turnkey companies make the majority of the money: In addition to charging top dollar for the property itself, many turnkey companies also serve as property managers and may charge fees for maintaining and renting out the property.
• May not be in the best neighborhood: When you’re not a local investor, it can be hard to tell if a property is in a desirable area or not.
• Rental income numbers may be too optimistic: When you buy a turnkey property from a company, its estimate of rental income may not account for vacancies or missed payments. Run your own numbers.
• Renovation may not be high quality: Companies that complete renovations may not be putting in the highest quality materials, and pictures won’t capture how good (or bad) the renovation might be.
• May be difficult to sell at a profit: If the property is turnkey and priced at the top price point, it may be difficult to get top dollar again from another buyer.
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Who Should Consider Turnkey Properties?
Turnkey properties are often lower-priced properties marketed to out-of-state investors who may be priced out of their local market. This can become a problem if the investor doesn’t know the neighborhood or values of homes in the area. Others who might consider a turnkey property:
• Investors who don’t have time to assemble a team or rehab a property
• Investors willing to sacrifice some profit margin for the convenience of a turnkey property
• Investors who don’t want to manage a property
• Investors who can find a good deal
• Investors who want to enter a new market
How to Evaluate a Turnkey Property
Not every turnkey property is going to work for you, and quite frankly, not all of them are “turnkey” as the name suggests. You’ll want to look at the following factors in evaluating a turnkey rental property.
• Location: Is the home in a desirable neighborhood? Ideally, you want your investment to appreciate or generate cash flow (sometimes both). If the neighborhood isn’t one you’d want to live in, or isn’t kept up very well, that will affect your property’s value. If you’re serious, you’ll want to get on a plane and walk the streets where you want to invest.
• Property condition: Even with renovated properties, you’ll want to ensure the major systems are in good working condition. It’s easier to get things fixed before you buy the property, so a home inspection is important.
• Financials: Learn to run your own numbers and analysis to make sure you’re getting a good deal. You don’t want to rely on the number provided to you by the turnkey company. Start with a mortgage calculator with taxes and from there, look at cap rate, ROI, and cash flow.
• Valuation: Don’t overpay for a property because you are unfamiliar with the market. You can find the fair market value from an appraisal or a BPO (broker’s price opinion).
• Turnkey company: Thoroughly vet the turnkey company. Talk to people who have used the service. Post questions in online real estate forums and look at reviews online.
• Management company: Talk to the management company and people who have worked with the management company. You don’t want a company that only does the bare minimum for your property while charging a premium.
Financing Turnkey Properties
Financing turnkey real estate is typically done with traditional home mortgage loans. Financing may be easier to qualify for since properties are in good condition. Typical eligibility requirements for financing include:
• Credit score: 620 or greater
• Debt-to-income ratio: No greater than 45%
• Cash reserves: Three months of cash reserves
• Mortgage insurance: Required for loans with less than 20% down payment
• Down payment: At least 15% for one unit, 25% for two or more
• Maximum loan amount: $766,550 for a single-family home in most areas
Depending on your property, you may need a different loan type, such as a multifamily, portfolio, or apartment loan.
Tax Implications of Turnkey Investments
You get all the tax benefits of ownership with turnkey investments. You’ll be able to deduct certain expenses since you’re paying for them directly. The IRS lists these as:
• Property tax (often, property taxes are included in the mortgage)
• Operating expenses
• Repairs
• Depreciation
Comparing Turnkey Properties to Other Real Estate Investments
If you’re interested in real estate investing, but don’t think turnkey homes are right for you, there are other options.
Fix-and-flip
A fix-and-flip property is a property purchased at a discount, renovated, and then sold for a profit. Buying a foreclosed home that needs repairs is a great example of this, but you’ll need to assemble a team to renovate and rent it.
REITs
A REIT is short for “real estate investment trust,” which is a trust that owns income-producing property (often commercial real estate) for the purpose of making a profit for investors. Investors own a share of the trust. It’s considered a passive investment where investors don’t need to make day-to-day decisions. You can buy a REIT on a stock exchange if they’re publicly traded or find the right broker if they’re not publicly traded.
Traditional rentals
You can work with a real estate agent to buy a property to rent out, either residential or commercial. Traditional rentals may need a little work to be ready and you’ll need to find your own team to be able to make it work.
The Takeaway
Turnkey properties sound convenient, but you need to do your homework to make sure the investment is a good one. You’ll also be buying at full retail price, which means there won’t be much room for the property to appreciate. On the flip side, it’s pretty appealing to walk into an investment property without having to fix it up. If you’re looking for direct ownership of real estate without the headaches, turnkey homes might be the way to go.
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FAQ
Are turnkey properties good for first-time real estate investors?
Each investor will need to evaluate the pros and cons for themselves. If you want to be as hands-off as possible, even at the cost of possible profits and upside, turnkey real estate investing might be the right fit. If you want to understand and work in your real estate business, you may want to look at the full range of investment options.
How much do turnkey properties typically cost?
Turnkey properties are typically sold at full market value, if not more. Most real estate investors look for properties below market value to get the benefits of appreciation and cash flow, and turnkey properties have a much smaller upside.
Can I visit a turnkey property before purchasing?
Yes, you can and should visit a turnkey property before purchasing, even if the company selling it is giving you assurances that everything looks good and is in working order.
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