If you’re looking for a passive income stream with real estate investing, turnkey real estate investing may provide an exciting opportunity. Before you jump in headfirst, learn how it works, what to consider, and the advantages and disadvantages to determine if it’s right for you.
What Is Turnkey Real Estate Investing?
Turnkey real estate investing means purchasing a property that’s move-in ready. In other words, as soon as you close on the property, you can advertise it for rent. Some turnkey properties even come with tenants already living in the property with an active lease.
Most of the time, the property needs few to no repairs or upgrades. It has all working appliances, its structure is sound, and the layout and features are what local renters desire.
This differs from traditional rental properties that typically require repairs or at least cosmetic upgrades. In other words, investors typically purchase a property and spend time renovating it to ensure it’s attractive for renters and that investors can profit.
How it works
Turnkey real estate investing has a similar process when purchasing real estate as it would for a non-turnkey property.
To purchase turnkey property, here are the steps:
- Find the right turnkey property: Just like finding any property, take the time to do your due diligence to find the right property. Just because a property is move-in ready doesn’t mean it fits the bill for your investment needs.
Look at the big picture, including the local rental market, the area’s appreciation rates, and your desired profits. Don’t let a property’s attractiveness lure you into a purchase that doesn’t make sense.
You can find turnkey properties yourself, with a real estate agent, or through a turnkey real estate company, which is the most common way.
Turnkey real estate investment companies purchase undervalued properties, fix them up, and then sell them for a profit to investors like yourself looking for tenant-ready properties.
- Financing the turnkey investment: After finding the right property, you must determine how to finance it. Of course, there’s always the option to pay cash for the property. If not, you can explore your financing options.
Consider how much money you’ll invest for the down payment and what you can afford for a monthly payment. The higher the monthly payment, the less profit you make, so keep that in mind as you calculate cash flow.
- Closing the deal: After signing a sales agreement and securing financing, you’ll work toward closing the deal. If you financed the property, you must clear the lender’s conditions, such as proving your income, assets, credit score, and debts.
When all conditions are cleared and the property is ready for transfer after determining the title is without any liens, you can close the deal and become the new property owner.
- Property management: Once you own the property, you must determine if you want to manage it yourself or hire a property management company.
Property management is an active job, requiring much attention and time. Hiring a property management company increases your costs but reduces the time you must spend on the property, making the turnkey real estate investment passive versus active.
If you work with a turnkey real estate investment company, they may offer in-house property management services or outsource with a reputable company. If not, you must find a property management company to handle it.
Advantages of Turnkey Real Estate Investing
Any type of real estate investing has its advantages and downfalls. Here are the advantages of turnkey real estate investing.
Easier to get tenants
When you purchase a turnkey property, it’s renter-ready. This may make finding tenants much easier because the property is less likely to have issues or things tenants don’t like. You will spend less time worrying about renovating a property and more time getting tenants and making money.
Few (if any) renovations needed
Turnkey properties don’t often need renovations or even cosmetic changes. Of course, every investor has their own opinion, and you may want to make small changes, but they are typically unnecessary. You should be able to buy the property and immediately list it for rent.
Easier for out-of-state investors
It can be difficult to invest out of state when you have to visit the properties, make decisions, and make renovations. You may not have much time to invest in the property or know the area well enough, leading to a less-than-profitable investment.
Having faith in turnkey properties is much easier because they are often newly renovated and have all the features local renters desire. You can quickly rent the property if it doesn’t need renovations and start earning income.
Faster to get started
If you’re a new real estate investor, turnkey real estate investing can help you get your feet wet without the stress. Having a property ready for renters eliminates the need to figure in the costs to renovate the property, not to mention the time required.
You can purchase a property, rent it out, and immediately see what it’s like to be a real estate investor. As you gain experience, you might choose cheaper properties that require renovations to increase your profits, but some investors prefer all turnkey properties.
Lower vacancy rates
Because turnkey properties are move-in ready, you may have fewer holding costs and lower vacancies because you can rent the property out quickly.
Of course, there’s no guarantee you’ll rent it out immediately, but the chances are higher because the property is newly renovated and has local renters’ desired features.
Disadvantages of Turnkey Real Estate Investing
Just as turnkey real estate investing has advantages, there are downsides, too. Here’s what to consider.
The cost will be higher because you’re purchasing a property ready to rent. Sellers won’t discount it because they’re in a hurry to sell or can’t afford the property.
Most sellers of turnkey properties put a lot of time and money into the property and want to make it back, so you won’t necessarily get a deal, especially if you purchase from a turnkey real estate investment company. They are in business to make a profit.
Best for long-term investments
Because of the higher sales price, you’re better off keeping a turnkey property for a long time to earn a profit.
If you try to sell it too quickly, chances are you’ll be closer to breaking even because the property didn’t have time to appreciate. You already paid a higher price for the convenience of having a renter-ready property.
Lack of control
When you purchase a turnkey property, you have little to no say in what the property looks like or its features. Since you’re already investing a large amount of money into the property, the last thing you want is to put more money into it because it will be much harder to turn a profit, so you’re at the mercy of what the seller chooses.
What to Look For in a Turnkey Real Estate Company
You can purchase turnkey real estate from a turnkey real estate company or an individual. Your best bet is usually to work with a turnkey company, though.
However, like any transaction, there are bad apples out there, so here’s what to look for in a turnkey real estate company.
In-house property management
Turnkey real estate investment companies that don’t offer in-house property management may not be legit. They are likelier to sell mediocre properties and run than a company that sticks around and offers property management. The companies that develop relationships with you and help with the property moving forward are more likely to provide better services.
Rely on your real estate investor community to form an opinion of a turnkey real estate company, especially if you’re investing out of state. See who other investors use and what they think of them. Stick to the companies other investors used and had positive experiences with.
Tenant vs. no tenant
Decide if you want to purchase turnkey properties with tenants already in them, or if you’d prefer to do the screening yourself.
If you want properties with tenants, look for a turnkey real estate investment company offering this service. Again, read reviews and know what type of clientele they work with to ensure it’s something you’re ready to take on.
Don’t let a turnkey real estate investment company lure you in with “too good to be true” numbers. Know the realistic profits for the area, and compare them to what the company offers. If they seem unrealistic, it’s more than likely a scam.
Turnkey real estate investing isn’t for everyone. Determine what you want from your real estate investment before deciding. However, a turnkey property may be a good fit if you’re looking for a move-in-ready property that already has tenants or needs little to no work.
Turnkey properties work best when you want to expand your real estate portfolio but don’t have time to manage the property. Investing out of state with a turnkey real estate company that offers property management could be just what you need.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.