Thinking about buying a turnkey rental property? Great! I love turnkeys, they are all I’ve ever bought for myself (and plan to buy for myself). I know a lot of folks out there are interested in turnkeys because they are extremely convenient for anyone who either doesn’t want to put in a lot of work for a rental property investment or doesn’t have a lot of time to dedicate such a project.
For anyone interested in the turnkey concept, I want to make sure you understand that there are two different models of turnkeys out there (although more accurately, “turnkey advertising”). These two methods are advertised very similarly but they are in fact drastically different from each other, mostly in terms of the risk associated with each (hello, risk = important).
Before I explain the two different methods of buying turnkeys, let’s first make sure you understand what a turnkey property is:
What is a Turnkey Rental Property?
The most general definition of turnkey, irrespective to real estate and according to Wikipedia, is:
“… something that is ready for immediate use, generally used in the sale or supply of goods or services.”
For real estate investing specifically, according to
“A turnkey property is fully occupied, little or no maintenance required, with management in place.”
You can probably see how those two definitions correlate. Essentially it means you are buying a rental property that is already up and functioning and ready to go (i.e. performing). Now, from here it can get a little hairy as far as what people consider to be turnkey properties. Some might consider a property to be turnkey while others don’t, etc. Either way, not a big deal. Just know that the general idea is that the property is ready to go as an investment property, in terms of there is no work needed for the property to perform. Perform, in this case, means provides cash flow to the investor.
Any property, hopefully assuming it meets the definition of turnkey, can be sold as turn-key. If I own a property somewhere and it’s in great shape, ready to go, producing cash flow, with tenants and management in place, I can sell that property to someone and tell them it’s turnkey and they will have bought a turnkey property. If you are an investor and looking to buy a turnkey property though, finding individuals who sell them or individual turnkey properties can be difficult. The easiest way to find a turnkey property is usually to find a company who specifically sells turnkeys. Assuming you go this route, make sure you are very clear upfront when you talk to the turnkey companies about how exactly they work.
The Two Different Methods of Buying Turnkeys
I feel a bit strange even explaining one of these two methods to you, because in my opinion it by no means fits the definition of “turnkey”, but for some reason companies who utilize this method still advertise the properties as turnkeys. Because of that, I’m considering it a method of buying a turnkey {rolls eyes}.
If you call up someone (a company) who sells turnkeys, they are likely to tell you that if you buy a property from them, it will work in one of two ways:
- Option 1. You purchase a property that is fully rehabbed, tenants are in the property already paying rent, and property managers are standing by to manage the property the minute you own it.
- Option 2. You buy a distressed property, you provide the funds to the company to do the full rehab to the property, and they then find the tenants for the property and then hook you up with property management as well.
The main difference you will see with the two options is: equity. In Option #1, you are buying a fully-done property so you can’t necessarily add forced value to it by making improvements, so you are likely buying at 100% ARV (after repair value, meaning the value of the property in pristine condition). In Option #2, and this can vary between the companies advertising it, your purchase price is likely to only be say 75% of the ARV because you are paying that company strictly on the rehab. As you know, or don’t know, it’s just how flipping properties works- you buy a property for $X, you add $Y in repairs and improvements, and now the property is worth $Z, which is higher than $X+$Y. So in the two scenarios above, you either buy the turnkey property at $Z, or $X+$Y, which is less than $Z. See what I did there?
Well then you ask, ooh, well if $X+$Y is lower than $Z, why not go for Option #2? If you go with Option #2, great! I’ve known it to work in some cases. But if you choose Option #2, make sure you are extremely aware of what you are getting yourself into as far as the associated risk. If you’re wondering why the difference in prices between the two options, the difference is because of risk.
- Higher price = less risk
- Cheaper price = more risk
(Kind of the general trade-off in real estate in general, isn’t it?)
The Difference in Risk Between the Turnkey Options
There is no such thing as a real estate investment that has zero risk. I’m often surprised at how many people I talk to that seem to be really driving towards that zero-risk investment. Well, uh, sorry. If you want a zero-risk investment, keep your money in a bank that earns you 1% (on a good day). Even that risk level though could be argued. But! Good news, there are ways to control risk. Even with turnkeys! So let’s look at the differences between these two methods of buying turnkeys to help demonstrate one aspect of controlling risk factors in an investment property purchase.
Read The Rest On Bigger Pockets.
Now I know the difference of two. I prefer on option 1. Less stress and risk involve. Not all company that offer High Price have less risk, i know there’s company out there that make a fair offer.