What are Turnkey Rental Properties and Should You Be Buying Them?

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What is this magic phrase we keep using—turnkey rental properties?

Turnkey (also spelled “turn key” and “turn-key”) technically refers to the condition of a property. The idea behind the phrase is that all you need to do is turn the key in the door and you’re making money on day one. This means that the property is already rehabbed, has tenants in and paying rent, and therefore you can start collecting income the minute you close on the property.

There are some variances of what people use turnkey to mean. Some people will call a property turnkey even if there aren’t tenants in it. Some people buy turnkey properties with property management setup, in addition to the rehab being completed and the tenants already in, so not only are they collecting income on day one but they also aren’t having to work for it because the property managers take care of all of that—and they are already set up and ready to start managing.

That is turnkey in relation to the condition of a property. You can easily go out and buy a property in turnkey condition and call it a day.

When a lot of people talk about turnkey rental properties, however, they are often referring to properties sold from turnkey providers. Turnkey providers are companies who go out and find distressed inventory, they rehab the properties, place tenants, set up property management, and then they sell those properties to investors.

So you can buy a property in turnkey condition on your own, or you can buy a turnkey rental property from a turnkey provider.

For the sake of the rest of the article, let’s assume we’re talking about turnkeys sold from turnkey provider.

Advantages of Turnkey Rental Properties

Why should you care about turnkey rental properties?

Here are some major upsides to turnkeys as a real estate investment strategy:

  • All the hard work is done for you.
  • Experts are completing the work, whereas if you do it yourself, you may not know what you’re doing and therefore you bring on added risk.
  • Because everything is done for you, you can invest in turnkeys long-distance.
  • Because everything is done for you, you can invest in multiple markets rather than just invest in one location.
  • While turnkeys aren’t completely hands-off, they are about as close as you can get if you invest in “real” property.
  • You can get into real estate investing without having to swing a hammer or do a lot of complicated stuff.

Think about it like this. You work a full-time job, you have a family, and you live in an expensive market (ex. Los Angeles, San Francisco, New York City, etc.): how would you invest in real estate that makes sense around all of those factors? You can’t buy in those cities and get positive monthly cash flow every month (too expensive). You don’t have a lot of time, if any, outside of your work and family. So what are your options?

Your options are either to take time away from your work and/or family, stop sleeping as much and use that time to figure out investing, or invest in something like stocks that require no effort.

OR, you can look into turnkey rental properties.

Your Tasks with a Turnkey Rental Property

If you decide to buy a property from a turnkey provider, here are the only things you need to do:

  • Choose the turnkey provider you want to work with. This involves making sure the company is legit and feeling confident in the market/city they offer properties in.
  • Choose a property. You can do this completely remotely or you can visit the property/area to get more comfortable with the process.
  • Due diligence. Once you select your property and go under contract for it, your main job with a turnkey is to verify everything that is being advertised to you about the property. The numbers, the condition of the property, title information, etc. *This section is the most amount of work you should ever need to do on a turnkey.
  • Manage the manager. Once you close on the property, your main job then is just to make sure the property manager continues to function properly. If at any point the manager stops functioning properly, you need to be willing to do whatever needs to be done. This might involve firing that manager and hiring a new one. Or, if there are repairs needed on the property, you may need to be the one to reach out to your insurance company.

This is a fairly short list as compared to a list for flipping houses or working on your own rental properties.

A very short list.

Also, once you learn this stuff once, you have it and you can apply it to all future turnkey purchases. So it’s really a one-time investment of gaining knowledge. Outside of those things, you’re hands-off.

Disadvantages of Turnkey Rental Properties

Who would we be if we weren’t transparent about all sides of this equation?

Here are the disadvantages to turnkey rental properties:

  • You’re going to pay close to market value for the property. Because everything has been done for you, yes, you’re going to pay a bit of a premium as compared to buying a dumpy foreclosure that you’re going to have to rehab.
  • You can’t force appreciation. The perk of buying that dumpy foreclosure is that you have the ability to force appreciation by fixing it up, which will likely increase the value of the property higher than what you paid for it. You can’t really do this with a turnkey because there’s nothing to improve. Turnkeys rely on the market itself for appreciation.
  • You’re going to be tempted to not do thorough due diligence. This is a minor downside in comparison to the other two, but it matters because it can mess with your returns. Investors hear that turnkey rental properties are “hands-off” and are told that experts are doing the work, so they assume they don’t need to participate because everything will be taken care of properly. Bad assumption! You need to do due diligence just as you would with any other property. If you don’t, don’t complain later if something doesn’t work out as easy as you thought.

Who Should Buy Turnkey Rental Properties?

Yes, you’re going to pay more, but there are a lot of perks to turnkeys.

Who can benefit the most from them? Turnkeys might be perfect for you if you fall into any one of these categories:

  • You live in an expensive market and it only makes sense to invest non-locally to where you live.
  • You work full-time and/or have a family or other obligations that leaves you with minimal free time for something like investing.
  • The idea of swinging hammers and getting dirty and having to negotiate deals sounds absolutely wretched to you.
  • You aren’t naturally inclined for things like rehabbing or dealing with tenants.
  • You prefer to be doing anything other than investing with your time (traveling, hanging at the beach, skiing, watching Netflix, deep-frying your own hand…)
  • You’re new to investing and would rather start easier before jumping into more advanced tasks.
  • You want mobility to be able to chase the best returns in whichever market those may be in at the time.

Have more questions about turnkeys? Join the Turnkey Rental Properties Facebook group and ask any questions you want, meet other turnkey investors (both current and prospective turnkey investors), and learn more about the strategy.

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