What Is Turnkey Real Estate (And Is It Right for You)?
The world has become a very busy place, and many people are looking for investment opportunities that are more passive and less hands-on. Real estate is a solid, historically proven investment. However, there is a newer form of real estate called turnkey real estate which many may not know about. So, the question is, “What is turnkey real estate, and is it right for me?”
Turnkey real estate is where a property is in good condition so the buyer can purchase it and make it available to rent immediately. The idea is to buy the property, turn the key to access your investment, and then collect your returns.
Continue reading to learn more about turnkey real estate, the benefits you can get from choosing it, the average costs for turnkey real estate, and whether you should invest in it.
What Is Turnkey Real Estate?
Turnkey real estate is when you purchase properties that require little to no repairs that are generally available to rent to tenants with little effort rather than ones that need repairs. It is named this because all you need to do is “turn the key” and open the door to start.
These properties are usually owned by companies that specialize in renovating properties. After they renovate the property, they then sell it to the landlords to turn them into rental properties.
Using turnkey real estate is a good way to enter real estate if:
- You are not very handy
- Want to take on less risk
- Avoid sudden repair costs
- Want a simpler investment
- Have less capability of watching over your properties
If you want to enter real estate, turnkey real estate may be the answer. There are many benefits turnkey real estate has that you may desire.
The Benefits of Turnkey Real Estate
There are many benefits to investing in turnkey real estate:
- You can potentially receive immediate collection of rent
- Management and tenants may be already prepared for you
- You will gain access to broader markets
Below, we will discuss these benefits in greater detail.
Immediate Collection of Rent
With turnkey real estate, you can potentially collect rent on your property immediately because it allows you to own property that does not require much, if any, immediate maintenance.
The repairs of a property that is in disrepair can take around 6 months to repair. That is 6 months of rental income you will miss out on and 6 months of insurance, property taxes, and other fees you will have to pay. You will not only lose out on earned money, but you will also spend money on your property.
A general rule for charging rent is that the average rent of any rental property should be 0.8-1.1% of the property’s value. That is around 5-7% of your property’s value that you will not obtain over the 6 months for repairs, assuming it does not become longer than 6 months.
Using turnkey real estate can help to avoid the missed opportunities of your investment and potentially save you money.
Management and Tenants May Be Prepared for You
Many turnkey real estate properties have management and even tenants prepared for you when you make your investment. You don’t need to worry about anything except making your investment, but even that doesn’t require much effort.
You don’t need to worry about much except making your investment, but even that doesn’t require much effort.
If there is anything you need to worry about including faults in repairs, the company that sold you the real estate property will have a warranty for you. You do not need to worry about repairs initially. However, after the warranty is up, the company will bill you for the repairs.
Access To Broader Markets
Turnkey real estate gives you access to the best real estate markets.
If you want real estate in the best neighborhoods, chances are, there will be a turnkey property. Also, you can choose which markets you want to invest in. If one market is overpriced, you can easily find another with a fairer price. This also allows you to diversify your real estate portfolio.
The ease of investing in real estate and diversification allowed by turnkey real estate cannot be mimicked by traditional real estate investing. However, there are many downsides of turnkey real estate.
The Cons of Turnkey Real Estate Investing
While turnkey real estate can allow investors to easily buy and profit from real estate, there are many costs to having these advantages:
- More expensive investing
- Little appreciation in value
- Less ability to control your investment
- Lack of diversification
While turnkey real estate investing is easier to accomplish than traditional real estate investing, there will be much you cannot control compared to a traditional real estate investor.
More Expensive Investing
Turnkey real estate investing utilizes the property that has been properly repaired and usually has a property manager established. That will cost more money.
If you buy a turnkey real estate property, you should expect multiple charges. Real estate management may charge around 3% for acquisition, 10% for construction management, and 7-10% for property management. That could mean that over 20% of your income from your property will be charged instantly.
Factor in your mortgage payments and any additional fees, you will not have much if even any money to profit from. Much of the time, a landlord has small margins of profit, turnkey real estate investing will make those margins even smaller.
This means you will need to find real estate investments in markets that are on sale, usually those that have been hard hit by some local or broader economic crisis. While this is a sound method of investing, there are significant risks.
Little Appreciation in Value
You will find that most turnkey real estate investments are in a city or a well-established metropolitan area. These properties will see very little appreciation. However, one good side to this is that there is also very little chance of depreciation.
Less Ability to Control Your Investment
With turnkey real estate, you may be far from and less able to be hands-on with your property. You may need to hire a management company to manage your property. While doing this makes your investment more passive, it also makes you less able to control your property.
You may even have less control of your tenants. Tenants cannot be vetted by you as well as with traditional real estate investing. In addition, tenants tend to be less responsive to management companies than the landlords themselves.
For instance, if a management company sees a tenant doing something the landlord does not want them to do, they may not report it because the management company does not own the property so a loss of value in the property will not affect them and they get paid either way.
Many turnkey real estate investments are owned by a company that either manages the property or pays some other management company to manage it. You may not have much ability to even choose the management company for your property.
Lack of Diversification
Diversification is a good aspect of investing, and turnkey real estate could help with diversification, but only if you own multiple properties. You may not be capable of buying too many properties which means you may not have as much diversification as you want.
Since turnkey real estate involves buying a property, you will sink at least several thousand on the investment. This is unlike mutual funds or other investment funds where you could own multiple investments in one fund.
If your property has few or no tenants available, you will not gain any money and you will lose money. With the little margin of profits you will have from turnkey real estate investing, you may only want to do turnkey real estate investing if you can own multiple properties.
Why Invest in Turnkey Real Estate?
When it comes to rental properties, the idea is that the landlord purchases the property for less than they can get from its value, much like any other investment. However, many of these properties require maintenance and repairs.
Turnkey real estate is a more sound investment for landlords. Instead of attempting to repair your property and possibly missing some crucial repairs that will cost you a fortune in the future, you can buy a property with little to no repairs needed.
There are general rules for maintenance if you expect healthy costs of maintenance. You only spend only 1% of the property value on maintenance, 1.5 times the monthly income, or a dollar for every square foot on maintenance.
Either way you look at the rules, any landlord should expect to spend thousands on maintenance for even the smallest rental properties. This can be even more if the rental property is older. In that case, the cost of maintenance can be 3% or even 4% of the property’s value.
Generally, preventative maintenance is considerably less expensive than reactive maintenance. However, if you end up missing some preventative maintenance at the wrong time, you may end up paying more in reactive maintenance in the future. This is especially the case when the property is in disrepair.
Is Turnkey Real Estate Right for You?
With the double-edged sword of turnkey real estate investing, you may find it difficult to decide if it is a good investment.
If you are interested in starting in real estate investing, you may find turnkey real estate investments enticing. However, you may not have the experience nor the skills to analyze real estate markets.
It could be argued that if you want to enter real estate investing, it may be better to find a property that allows you to be more hands-on. This way, you can learn how real estate is managed, repaired, and marketed with a higher profit margin than a turnkey property. When you have more experience with real estate investing, you may try out turnkey real estate investing to diversify.
Turnkey real estate may help you out because while investing in more than one property, especially more than one type, may help with diversification, each of your properties will be heavily swayed by local market trends. This will minimize your diversification.
After a little experience with real estate investing, you may look at turnkey properties as opportunities to expand into other real estate markets, especially since it is unlikely for you to be as hands-on in other markets.
One of the few instances where you may need to start with turnkey real estate is if you are incredibly busy or likely to be away from your property at any time. This is especially helpful to:
- People in the military
- Traveling businesspeople and consultants
- International people
However, if you have little time to manage and research properties and vet tenants, you may need to research these turnkey real estate companies extensively to ensure that they will fit your needs. If you cannot find one that you can trust, real estate investing just may not be right for you.
Conclusions
Real estate investing is difficult and risky. Turnkey real estate may offer an alternative to traditional real estate investing where you can be less hands-on with the property.
Real estate investors should not confuse the words less hands-on with less risk though. While you do not need to repair turnkey real estate properties as much as traditional real estate investments, you will still take on many risks. These risks include higher costs and less control of your investment.
While there are still many risks and higher costs involved with turnkey real estate investing, there are still many situations where turnkey real estate investing could benefit you. These include if you are too busy to be too hands-on with your investments or if you travel too much. You need to discern if turnkey real estate investments are right for you.
Sources
What Is Turnkey Real Estate (And Is It Right for You)?
Average (and Hidden) Maintenance Costs for a Rental Property
Rule of Thumb: How Much to Budget for Home Maintenance
Preventative vs. Reactive Maintenance for your Rental Properties
Realistically, How Long Does It Take To Flip A House?
How to Figure out How Much You Should Charge For Rent
5 Reasons to Think Twice BEFORE Purchasing Turnkey Real Estate
Use Caution When Investing in “Turnkey” Rental Properties – Here’s Why
