If you are interested in becoming a real estate investor, chances are you have already done some research and know that owning rental properties and succeeding with them takes a lot of work. There are several variables to account for, and this can be scary for new investors.
For that reason, many would-be investors look for options that make real estate investing easier. One of the most attractive options for such investors is turnkey rental properties. What is a turnkey rental property, and is it a decent way to become a property investor?
What is a turnkey rental property?
A turnkey rental property is a newly-built or fully-renovated property with a tenant and a good property management team in place to oversee the rental’s operations. All these are in place before you, the investor, are ready to close on the property. It is like buying an investment property off the shelf.
A turnkey rental property promises everything you need to make a rental property succeed; it is in good condition and has positive cash flow, the potential for appreciation, and tax reduction. Turnkey properties let you enjoy all the benefits of real estate investing without any hassles.
You are probably thinking to yourself right now. “This sounds too good to be true, and there has to be a catch somewhere.” All real estate investment strategies have their pros and cons. To determine if the turnkey option is the best way to buy rental properties, you need to know the pros and cons of using this method.
Pros of turnkey rental properties
Turnkey properties let you own a fully-functioning rental property without lifting a finger to do any work. It is an attractive option for people with a full-time job or if you don’t incline to do the work of finding a rental, rehabbing it, and finding a tenant for the property.
The benefits of a turnkey rental property are:
1. They are fully passive
You can avoid any active role in your rental property’s management from the get-go and reserve only the benefits for yourself. With a turnkey rental property, you can make more money without any need to change your lifestyle.
2. Massively cuts down on the risk
As a real estate investor doing everything yourself, you have to decide the best market to buy, find a good home in that location, and oversee its renovations. All these steps involve risks. But with a turnkey property, you don’t have to deal with any of that.
3. You can invest from a distance
You don’t have to visit a turnkey property to close the deal. It allows investors to invest in real estate markets far from their location and offers better returns than their local market.
Cons of turnkey rental properties
The fact that most people who buy turnkey properties are out-of-state or out-of-country investors makes it hard to do proper due diligence on the property. You can buy a property that looks good on paper. However, the experience of owning will be different.
Some of the issues with buying turnkey properties are:
A. Not always in the best locations
Most turnkey properties are in the worst parts of town. They are usually purchased from a tax auction or foreclosure and have been traded around. Sometimes when you find a turnkey property in a good part of town, it is overpriced.
B. Returns are often low
Turnkey properties offer low returns if you compare them to what the investor pays. The rental rates are usually not high enough to justify the investment, and the high cost of the property doesn’t leave much room for appreciation.
How to make turnkey rental properties work for you
That said, it is possible to make this model work for you. You can win with this strategy if you are willing to invest the extra work. Here are the things you should do to avoid the pitfall of buying turnkey rental properties.
i. Shop around
Don’t just talk to one company when you are looking to buy a turnkey property. Talk to several companies and ask them for referrals to people who have bought from them in the past. Talk to some of these people, especially those who have owned their property for years.
ii. Run the numbers yourself
You can allow a turnkey operator to do several things for you but running the numbers on a property is not one of them. You must know how to calculate the viability of a rental and subject all of the company’s numbers to scrutiny.
iii. Know what makes a decent rental property
The best way to do this is to talk to several turnkey operators and analyze their offers. It will give you a basis for comparing the performance of the different properties. You will also be able to tell which companies are honest in their analysis.
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