Turnkey properties are often overlooked in the world of real estate investing.
They tend to play second fiddle to investments like the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy or wholesaling. Turnkey rental properties could be the perfect avenue to get into (and continue) real estate investing.
While turnkey companies operate differently with respect to how they define “turnkey”, the basis is a property that is ready to be rented out the moment you purchase it. Cash-flow from day 1!
Additionally, turnkey companies often provide vetted lenders, property management companies and tenants in place.
Too good to be true? Not necessarily. However, many people unfamiliar with the true benefits of turnkey investing will focus on some of the perceived negatives:
Paying a Premium for Turnkey
In my mind, paying a premium means the investor is overpaying for the property they are acquiring. A good turnkey provider won’t price a property more than what it will appraise.
By doing so, they risk having forcing the investor pay more out of pocket to cover the difference between their mortgage qualification amount and the purchase price.
Additionally, in today’s market, one could argue that purchasing turnkey is far simpler than any other strategy. Over the past 2 years, all you see in any real estate forum or discussion is how much over the asking price properties sell, how quickly properties sell, or you have to purchase in cash.
When purchasing turnkey properties, you know the property price up front – there is no negotiating, no price escalation, and while there might be competition it isn’t nearly as tumultuous as trying to pursue a BRRRR property.
One could argue that in today’s “seller market” everyone is going to be paying a premium for their properties. Compared to turnkey, where the work is already completed and include in the purchase price, you could be paying even more out of pocket to complete the rehab.
Doesn’t Cash Flow
If you read our blog post entitled: “Why is Cash Flow Overrated?“, you probably understand why basing a purchase on cash flow might not be the best strategy. While cash flow is a metric many investors care about, it can be very challenging to predict if you aren’t purchasing a property that is “rent ready” upon purchase.
If a property requires a rehab, it will likely take several months to complete and even longer to find tenants. Ultimately, it will be dependent on the rehab price, mortgage on the refinance, and current market rent to see the cash-flow. Given today’s mortgage rate fluctuations, determining an interest rate and associated mortgage payment can be exceedingly difficult.
Looking at Proformas from turnkey companies can help provide investors with optimal cash-flow situations. This detailed assessment can provide accurate insurance quotes, property taxes, mortgage payments, and reserves for vacancy, maintenance and capital expenditures. Through continued work with rehab companies and property managers, turnkey companies have a good understanding of what the typical reserves will be in a given area and can often provide accurate numbers.
Turnkey Properties Won’t Appreciate
In today’s market – everything appreciates.
But seriously, turnkey companies invest in states, cities and local areas that have a strong change to appreciate or to cash flow. Often times, properties will either appreciate well but not cash-flow or not appreciate well but cash-flow great. It’s important to have detailed discussion with turnkey companies about your goals, criteria for rental properties so that they can best tailor properties to your wants/needs.
Turnkey is a Poor Investment
I’ve heard many times that there is no value in investing in turnkey properties.
Real estate is almost universally a solid investment.
As mentioned earlier – most turnkey companies focus on areas known to be good rental markets. Providing rental properties that don’t succeed isn’t a good look. Additionally, as with any business, trying to get repeat business is optimal. Clients are happy with their experience and are likely to continue to invest.
Another point to consider is that you’ll have gained equity the moment you purchase the property. As previously discussed, properties purchased through turnkey companies will typically appraise for what they are purchased. Therefore, any down payment that you’ve made to acquire the rental property is immediate equity! Most lenders require at least 20% down so you’ve gained 20% equity in a rental property.
In certain cases, turnkey providers offer new construction turnkey properties. These specific properties are tailored for great marketability with the chance to gain significant equity as the properties are being built. Utilizing these types of strategic properties can put you in a great place to grow your portfolio.
It is important to remember that there is always risk to any investment.
Rental properties are never perfect, which inherently means you could see unexpected expense. This is true for any rental property – not just turnkey. The benefit of turnkey– and why we think they are such a great investment– is because they already have teams in place which have been vetted to help you succeed.
Turnkey properties, as with any investment, can have potential shortcomings. Unlike what many people think, turnkey properties can provide investors with great opportunities. In fact, we believe in today’s market, investing in turnkey properties might be the ultimate strategy to avoid stress while continuing to grow your portfolio.
Putting the right turnkey company in your real estate team can pay huge dividends to your portfolio, cash-flow, and ability to grow wealth. Contact Rent to Retirement to get started on your turnkey journey!