It seems that turnkey rental properties have gotten more and more popular over the last few years. It makes sense — they open up the door (great pun!) for people who wouldn’t have gotten involved in real estate investing otherwise. Turnkeys allow people who don’t necessarily have skill or interest in finding motivated sellers, rehabbing, and managing tenants to still own a profitable rental property.
How? Someone else does all of that complicated stuff for you! You just have to do you due diligence and buy the property. Yes, other people are running your investment property, which brings on a certain level of skill just in managing your team, but learning that tends to be a lot easier for most of us than something like rehabbing.
With so many people getting interested in turnkeys as a potential investment strategy, I’m hearing more and more questions come up about them. I’ve chosen the top 5 questions I hear from people interested in turnkeys, and I’m sharing them with you here.
The Top 5 FAQs About Turnkey Rental Properties — Answered!
1. Are turnkeys too good to be true?
Answer: no. Sure, at first glance, it may be hard to see the catch — nice, fully rehabbed properties, great cash flow, doable prices, and everything taken care of for you. Why isn’t everyone buying them? I’d say there are a few main reasons not everybody necessarily wants a turnkey.
The major downside to turnkeys is that typically they are priced fairly close to market value, if not at market value, and since they are fully rehabbed, there is limited ability to force appreciation. A lot of investors want to force appreciation (and rightfully so). Then, there’s the price. I’ll get to that in the next bullet, but in short, turnkeys are typically more expensive up front than non-turnkey properties. Lastly, some people just don’t have any desire (or capability) to let other people control their investment.
For more in-depth information about whether or not turnkeys are too good to be true — or whether or not a turnkey is for you — check out “The One Piece of Advice You NEED to Read Before Buying a Turnkey Rental Property.”
2. Do the markups kill the deal?
Answer: no. Sort of. Well, it depends.
If you have skill in finding properties and rehabbing and all that jazz, I’d say yes, the markups on turnkeys should kill the deals for you. If you can do everything easily on your own, go for it. But if you aren’t in that category, you absolutely don’t need to feel like the markups on turnkeys should be a deal-breaker (another great pun — I’m on roll).
First of all, the “markups” by the turnkey provider are not as much as you might think. What they actually make on each property, after all of the rehabbing and such expenses are covered, isn’t anything crazy high. I knew a turnkey provider a few years ago, quite a popular one, who only made $5,000 per property.
Now, is $5,000 too much for them doing ALL of the work for you and taking on ALL of the risk? I hope your answer is no. That’s a steal for the buyer! But more important than how much the actual markups are is the concept of valuing your time. If you pay $50k for a piece of junk property that needs a massive rehab, you are going to be investing a lot of your time into that. You will also be taking on risk, and never mind the money you’ll have to front for the rehab. If you compare all of that to the same property but fully turnkey priced at $100k, are you really saving that much money — once you consider how much you have to put in for the rehab and how much of your own time you have to invest?
For more clarification on what I mean by trading your time for money, check out “Do the Markups on Turnkey Properties Kill the Deal?”
3. Where should I buy a turnkey rental property?
Answer: It depends. Once you narrow down the list of options of where you can buy one, then it will come down to your own preferences. Before the preferences, though, I’d say first that at a minimum, you need to assess the different markets and then find the good turnkey providers.
Turnkey providers are only in so many markets, but not all of those markets are ones I would necessarily consider good to invest in. Projected cash flow is inherent with turnkeys, so that part is covered, but then you need to assess whether a market is a growing market or a declining market. Well, at least in my opinion, you should. Buying in a declining market is substantially more risky.
For more information on assessing good markets for buying turnkeys, check out “The Turnkey Investor’s Guide to Choosing a Profitable Real Estate Market.”
Then you want to determine where the good turnkey providers are. Once you come up with the combinations of good markets and good providers, now you can just go off which ones you like the best. Different markets will offer different opportunities. Some cities may have more suburban SFRs, some markets may specialize in MFRs, some will offer urban row house-style properties rather than freestanding properties, some will offer higher returns, some will offer less risk, etc. Maybe you prefer a newer suburban SFR over an urban MFR, even though the urban MFR offers higher projected returns. Or maybe you only care about the numbers. Things like that. There are lots of options out there!
4. How do I know if the property I’m buying is a good one?
Answer: due diligence! Due diligence is key. By far the most important bit of due diligence that every turnkey investor should do is hire a professional third party home inspector to inspect the property. You need to ensure you are getting a property that lives up to how it is being advertised. If there are any unresolved maintenance issues, it could cost you quite a bit.
Once you get an inspection done, you submit all of the repairs to the seller, and typically they fix all of them before you close on the property. So check the quality of the property before you buy it, for sure. Then, it’s always good to verify all of the numbers you have been given. Call your insurance company and check tax records to confirm the actual numbers for those expenses. The less obvious one people don’t realize is that they can verify how realistic the projected income (rent) is.
Sure, the tenants placed in the property at the time you close on it may be paying a certain amount, but make sure that if those tenants leave that you can realistically get that same rent from new tenants. The easiest way to do this is to call a third party property management company and ask their opinion on rents for the area — the rental amounts, the rentability, and maybe even their thoughts on the specific neighborhood or location. Don’t abuse their helpfulness. Maybe even offer to pay them for a comparative market analysis (CMA) for their time, but they can be very helpful. Speaking of a property’s location…