When it comes to real estate investing, buzzwords get thrown around like candy at a parade. And if there’s one buzzword that’s overused more than the rest, it’s “turnkey.” The phrase is used so frequently that it seems to have lost all its meaning. You think you want to invest in a turnkey property, but you don’t really know what one looks like.
In this article, we’ll attempt to clear up some of the misconceptions and help you understand what turnkey properties are, why they’re good, what challenges they pose, and how to invest with peace of mind.
What is a Turnkey Property?
It’s hard to find a definition that’s widely agreed upon by all industry experts. However, Investopedia defines a turnkey property as a “fully renovated home or apartment building that an investor can purchase and immediately rent out. A turnkey home is often a property purchased from a company that specializes in the restoration of older properties. Those same firms may also offer property management services to buyers, minimizing the amount of time and effort they have to put into the rental.”
Turnkey properties have been around for a while, but they grew in popularity after the market crash of 2007. During this time period, it became cheaper to buy residential real estate in most parts of the country. Successful individuals with lots of wealth but little time gobbled up these properties and offloaded all of the daily responsibilities to property management companies. Since then, turnkey properties have become a viable option for anyone who wants to invest. They’re seen as easier to manage, less risky, and simple.
You’ll see the term “turnkey” used by investors, property owners, realtors, property managers, and even lenders. And despite its overuse, there is some legitimacy attached to these opportunities. The key is knowing the difference between a property that’s turnkey and one that’s simply being branded as such.
The Benefits of Investing in Turnkey Properties
Anyone who is investing in residential real estate should at least consider turnkey properties. As you do so, mull over the following benefits:
- More options. Turnkey investing is great for people who can’t find deals in their local market. For example, someone living in San Francisco might not be able to afford a rental property in the city. However, they might be able to afford a property in Birmingham, Alabama. Turnkey investing allows this investor to buy real estate on the other side of the country with minimal friction.
- No renovations. Far too often, investors have to put in a little bit of elbow grease to make a property suitable for renting. Not only is this costly, but it’s stressful and time consuming. With turnkey properties, there are no renovations required – it’s ready to go.
- Immediate cash flow. In most cases, turnkey properties come with a renter already in the house. This maximizes cash flow by eliminating vacancy on the front end.
- Less time commitment. Because turnkey properties come with property management services, you don’t have to worry about collecting rent checks, fielding phone calls, repairing leaky faucets, etc. This saves hours of time each week.
The Shadow Side of Investing in Turnkey Properties
There’s a lot to like with turnkey properties, but it’s not all as perfect as it seems. There’s a darker side to turnkey property investing. To provide a clearer picture of the situation, let’s explore some of the risks and negatives:
- Lower ROI. You don’t get a turnkey property without paying a premium. Generally speaking, you can expect significantly lower cash flow. This eats into your ROI and limits your ability to build wealth.
- Harder to build equity. When investing in real estate, one of the quickest ways to build equity is by putting in a little sweat and time. Whether it’s painting walls, ripping up floors, or doing yard work, property improvements allow you to create instant equity. With turnkey properties, someone else has already done the work and you’re getting charged for it (in the sale price).
- Less control. At the end of the day, a turnkey property gives you less control over the details. You might view this as a positive or negative, but it’s something to be aware of.
Helpful Tips for Effective Turnkey Rental Property Investing
If you weigh the pros and cons and ultimately decide that turnkey rental property investing fits your life, you’re not alone. But in order to enjoy the good without the bad, you’ll need a plan. Here are a few helpful tips:
- Choose a market. Location is the first crucial decision you have to make. Do you want to buy a turnkey property in your geographical market, or are you willing to expand your search into other cities and states?
- Find a reputable provider. Not everyone who uses the term “turnkey” is legitimately providing turnkey Make sure you find a reputable provider who uses the term in the strictest sense. Otherwise, you might be paying a turnkey price for a property that’s anything but hands-off.
- Do your own due diligence. Until you build a relationship with a turnkey provider and have a few deals under your belt, you should never trust anything someone else says without first doing your own research and due diligence.
- See the property. If buying a turnkey property in a different city or state, make it a point to see the property in person at least once prior to purchase. If nothing else, laying eyes on it should provide you with a little more context and peace of mind.
Green Residential: Houston Property Management
If you’re interested in building wealth, real estate investing is one of the best growth vehicles you have available. However, unlike the mutual funds and other “paper” assets, real estate is hands-on.
If you have the financial resources to invest, but not the time, consider hiring a Houston property management service like Green Residential. We handle everything from finding and screening tenants to collecting rent and handling repairs. Contact us today to find out more!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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