Well, the best place to start is with networking. Find out where other people are buying, find out who is having luck in which market and with which turnkey provider, and shop from there. But how do you know how to sift through all the information? Or better yet, how do you decipher whether or not the referrals you are getting are good ones?
The trick to getting into any good real estate investment deal, turnkey or not, is to have at least enough knowledge going into it to know whether what you are being told is true or not, or whether it fits what you are really trying to do. That’s what I’m going to help you with — giving you just enough information to start the process, and then you can go from there.
What is a Turnkey Rental Property?
This article won’t do you much good if you have no idea what this “turnkey rental property” idea is I keep talking about.
A “turnkey rental property” (also seen spelled as “turn key” or “turn-key”) is a property that has been freshly rehabbed or redeveloped, has tenants in and paying rent, and property management already set up to manage the property for you. The name suggests the idea that all you have to do as the buyer of the property is turn the key in the door, and it’s up and running with no required effort from you. But to be truthful, I’ve always bought turnkey rental properties and I’ve never even had a key to any of them to turn in the door.
You can buy a property that would fall into the category of turnkey from, say, a real estate agent. Basically any property you can buy that meets the above criteria can be considered turnkey. And really, there are other definitions out there too (so always verify exactly what “turnkey” means to the person trying to sell you a property). For the intents of this article though, I am specifically referring to turnkey rental properties that are sold, typically in bulk, by actual turnkey providers.
These companies go out, find a ton of distressed inventory, fix them all up for you, place tenants, and secure management. This is their job, and turnkeys are all they focus on. I did say they work in bulk, but that doesn’t mean you have to buy in bulk; they just operate with bulk property so they can do everything cheaper. Basically, these companies are glorified flippers. Instead of the usual flipper who flips properties to primary homebuyers, these guys flip properties to investors.
The benefit of turnkey rental properties? For anyone not really wanting to swing hammers or put a lot of time or effort into real estate investing, or someone who is more comfortable relying on other people’s expertise for their investment, or anyone living in a city that isn’t conducive to positive monthly cash flow, these properties are great. Everything is done for you, and you can stay totally hands-off.
That’s the short of this “turnkey” concept. Now, let’s delve into how to shop for one. Specifically my focus here is in thinking about what market to start in. Turnkeys (again, referring to turnkey companies providing turnkeys in bulk) exist in several markets across the US, and each market offers something completely different.
Shopping for Turnkey Rental Properties
There are a lot of turnkey providers out there, and they are spread across a lot of markets. Your first challenge is sifting through all of the options so you can then hone in on actual properties. I get asked the question a lot: What markets do I like for turnkeys? I’m going to give you an expanded answer to that question.
When I tell people what markets I like right now or at any particular time, for turnkeys my answer is always based on:
Numbers + Market Fundamentals + Quality of Turnkey Provider
So when I say I like a market for turnkeys, I mean I think the market is good in each of those three items: numbers, market fundamentals, and the quality of the turnkey provider. I’d say oftentimes people forget to consider the latter especially. A market may have fantastic numbers (returns) and great market fundamentals, but if there is no quality turnkey provider there, I don’t recommend it as a market for buying turnkeys. See what I’m saying? A lot of markets out there are awesome, and I would love to buy in them, but I don’t know of any high-quality turnkey providers there, so that keeps me from buying there. There is also the reverse: There may be a super high-quality turnkey provider that I would love to buy from, but I don’t advocate the market that they are in, so that keeps me from buying as well.
Let’s go over each of those three criteria I mentioned.
The point of buying a turnkey rental property is to receive positive monthly cash flow. Turnkeys are not set up to support methods of investing such as investing for appreciation (meaning you don’t get monthly cash flow but are instead relying on the idea of the property appreciating later). In order to receive positive monthly cash flow, there must be supporting price-to-rent ratios in that market. The price-to-rent ratio is telling of whether or not the price you have to pay for a property will allow you to receive cash flow each month (after expenses) given the amount of rent the property can feasibly bring in.
For example, when I bought my first (turnkey) rental property in Atlanta in 2011, the price of the property was $55,000 and the rent it was bringing in each month was/is $975/month. If you do the math on that, that much rent coming in each month easily allows for cash flow after all the expenses are paid. (For help on learning to run the numbers on a rental property, check out: “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”)
I know of a property in Los Angeles, however, that was purchased for $460,000 and the rental income was $2,250/month. That rental income, if you do the numbers, is not enough to cover the expense of having purchased the property. See the difference? That Atlanta property has a fantastic price-to-rent ratio, and the Los Angeles property does not. If you are out for cash flow, having numbers that support positive monthly cash flow is critical. Where this comes into play with markets is that markets typically either support good price-to-rent ratios or they don’t. Los Angeles, San Francisco, and New York City, for example, do not have good price-to-rent ratios for cash flow. Midwestern cities, for example, typically do.
So if you are out for cash flow, you might shoot for Midwestern cities to start your search. There are others, but that is a good generalization. Note: Just because a market supports good price-to-rent ratios does not mean that all neighborhoods or areas of that market also have good ones. The nicest areas will not. So keep that in mind.