Turnkey? What in the world is that? It’s a method of buying an investment property. Most people who buy turnkeys buy them because they live in an area where it doesn’t make sense to invest, so they have to be long-distance owners. Or, they have full-time jobs and/or families and are limited on how much time they can spend on an investment property. Turnkey means (usually) that a property has been fully rehabbed, tenants are living there and paying rent, and property management is already set up to handle the property once you own it. The name “turnkey” refers to the theoretical idea that all you have to do for the property to be putting cash in your pocket is turn the key in the door. I think that name is misleading though, because I’ve never so much as owned a key to any of my turnkey properties, much less turned one in a door.
Turnkeys (a.k.a. turn keys or turn-keys, but that extra space or hyphen is just an extra character I don’t care to type so I leave it out) are highly debated, mostly because the price tags on them are higher than do-it-yourself rental properties and there have been turnkey providers in the past who were less than ethical and they gave turnkeys a bad name. The latter isn’t as big of an issue now because most of the really bad ones are out of business, but the price tags are still higher than other rental properties you can buy. If you wonder or worry about why they are more expensive, check out this article: Do the Markups on Turnkeys Kill the Deal?
As that article mentions, and as a lot of turnkey advocates will stress, turnkeys do have their perks. They allow you to buy an investment property with a lot less effort, no rehabbing work, stress or risk, and you don’t have to spend your time and brain landlording the property yourself. Some of those perks are exactly why some people don’t want to buy a turnkey though- they want more control over their property and are willing to do more work in order to achieve higher returns. To each their own and there is no right or wrong route to go when it comes to buying rental properties.
If you are toying with the idea of going the turnkey route versus doing everything yourself though, I want to point out one much less obvious perk to turnkeys that most people don’t realize. We already established the obvious benefits to paying more for a turnkey property. So what is left? It seems like that covers all of them, no? Nope, there is one more. This one isn’t advertised, nobody has mentioned it that I’ve seen anywhere, and I bet you couldn’t guess it if you tried. Oh! And one more thing, this benefit could be the reason you become a big rig, hugely successful real estate investor later on!
The Secret Advantage to Turnkeys…
Learning the fundamentals.
Whoa, hang on. Yes, I know that sounds boring, but hear me out.
You’ve heard a million times that you can’t become a successful real estate investor, or anything for that matter, overnight. You can’t because you have to find your niche, which isn’t always as easy as it seems like it should be, you have to learn basic skills, you have to expound on those skills, and you have to do all of that step-by-step. Doing it any faster than step-by-step will cause you to miss out on critical information and skills, do something you don’t end up liking, get yourself in too deep, or who knows what else.
Think about a rental property. You want to own one. What are the two critical things you have to know about a rental property in order to own one, and profit from one, successfully?
- Knowing what makes a good rental property
- How maintain a rental property
If you buy a good rental property and you do a good job at maintaining a rental property, you should end up profiting successfully. If either of those two things are lacking, it is likely that your investment in said rental property will tank, potentially costing you tens of thousands of dollars (no pressure).
So what comprises those two issues? What do you have to know (or learn, if you’ve never done it)?
Knowing What Makes a Good Rental Property
- Running numbers. You absolutely have to understand how to calculate returns and you have to know how to do that not based on phony-baloney theories or equations. You have to understand how to include estimates for uncertain expenses (which does not include expenses you can easily find actual numbers for) and what are those uncertain expenses and how do you estimate for them? How do you know what a good return is?
- Markets. How do you know if the market you are buying in is a good one or not? What even makes a market good or bad? How do you know where within a larger market to buy?
- Condition of the property. How do you know the true condition of the property? You know one of the biggest horror stories of real estate investing is you buy a property not realizing it needs a mega-major repair that you weren’t expecting and that repair costs so much that it blows any profit potential out of the water. Whoops! How do you ensure you know what you are getting and how do you know what you even need?
- Back to running numbers. Did I mention it’s important? It’s critical! If the numbers don’t work, you’re hosed. So, while we revisit numbers again, let’s add in financing. Are you approved for financing? Do you know what your monthly financing costs will be? Will that negatively impact the property? Have you gone through the mortgage process in the last few years?! It’s repulsively long and tedious. You will definitely be asked to send them your left arm and first-born child. And then they will you ask you for both of those again because they’ll have forgotten you sent them in once already.
How to maintain a rental property
- Finding tenants. You do know that tenants are your most crucial element of owning a rental property, correct? If you have bad ones, or if you have no tenants, you lose. You lose big. How do you know how and where to find good tenants?