Invest in Rental Property

Turnkey Real Estate Investing: Grasp the Fundamentals Before You Start

Updated on October 23, 2019 Updated on October 23, 2019
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I’m sure you’d agree when I say there are plenty of real estate investment options available these days — single-family homes, multi-family units, REITs, industrial complexes, high-quality commercial investment properties, and more.

The question now becomes what kind of real estate investor do you want to be? What if you don’t want the associated hassles of being a landlord?

Enter turnkey real estate.

If you don’t have the time nor care to assemble a team, search for rental properties boots-on-the-ground style, market your units, interview tenants, or deal with maintenance issues like fixing leaky faucets, turnkey real estate investing might be a good fit.

If you’ve been on the fence about getting started or have doubts that have been holding you back (like becoming a landlord), you’ll want to read this.

Let’s get started.

What Is Turnkey Real Estate?

many turnkey proprties

The quick and dirty version is that it’s a piece of property that has been rehabbed and is move-in-ready. It affords you the opportunity to create a passive income stream on property that’s managed by someone else. The property tends to be newer and is an instant cash-flowing source.

All you (or your tenant) need to do is show up and “turn the key,” hence the expression turnkey.

Because the goal is to generate income from day-one, turnkeys usually have short turnarounds. Short turnarounds mean a faster ROI.

Turnkey real estate also lets you invest in properties existing outside of your neighborhood. For example, if you live in a city with a high cost of living (like me), you can invest in less expensive areas.

You could say it resembles value investing as many turnkey strategies involve rehabbing undervalued properties located in stable markets.

The property management team does the bulk of the work. They handle marketing the property and finding tenants, administering paperwork, and all necessary upkeep.

The property managers know their neighborhoods and have their finger on the pulse of the market. If you’re an outsider, hiring a local management team will make your life easier.

Picking a Winner: Finding the Right Turnkey Property

The basic formula for what to look for is to find undervalued properties in secure or up-and-coming markets.

You should consider how strong the market is and whether there is potential to earn high yields. How’s the neighborhood? Does it have a substantial proportion of amenities and access to mass transit? Does the neighborhood have a sizeable number of renters? How reliable is the cash flow?

That’s why it’s still essential to conduct your due diligence – even if you’re not managing the property yourself.

Examine the Turnkey Company

How transparent are they? Can you easily access their past and present yields? How do they treat investors? What do their occupancy and vacancy rates look like? Are their properties well-kept?

Their team should be experienced with a proven track record as well as being appropriately staffed to handle their portfolio workload efficiently. Testimonials from investors and clients are a plus.

What Type of Turnkey Company Is It?

Understand the services your turnkey company offers. Are you looking for a company that buys, rehabs, rents and then hands it off to you? Or do you want them to do it all; find the property and also manage it.

Some companies have in-house property management teams while others outsource that aspect of it.

Costs

While earning passive income through real estate investing is terrific, getting started can be expensive. More so than building a digital piece of real estate like this blog.

Many turnkeys require a 20% down payment which is why that’s important to remember when evaluating your property.

Turnkey companies are a great option if you're looking to invest in an area with a lower cost of living than your own.

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For example, a quick Google search of the median home value in my city of Los Angeles revealed that it’s $696,000. You’d need $139,200 to cover a 20% downpayment. That’s a lot of money for most people.

This is why turnkey properties are ideal if you’re looking to tap into a market with a lower cost of living. Imagine finding a $100,000 property in a different city. Now you’re only putting $20,000 down. Huge difference.

Returns Will Vary Based on the Real Estate Market

Depending on what neighborhood you’re exploring will determine the type of return you get. Why?

Because not all appreciation is created equal. Some neighborhoods will have faster growth while others not so much.

For example, places like San Francisco and New York City usually appreciate quicker than properties found in the middle of the country.

Do your due diligence.

turnkey income potential

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Important Things to Know Before Buying

You should understand precisely what you’re paying for. Understand the numbers and terms of the deal. You don’t need to be as knowledgeable as a real estate broker but knowing the basics is essential.

For example, it’s a good idea to know terms like cash on cash return, capitalization rate (Cap Rate), and net operating income.

It’s vital to have a fundamental understanding of what you’re getting (or should be getting) for your hard-earned cash.

Income Potential

The amount of time your property is occupied affects your returns. Consider whether it’s a seasonal property or if it’s rented out year-round. Six months of rent isn’t as much money as 12 months.

Your retirement date is also important to know. If you’re leaving the workforce and the market craters, you don’t want this to be your only source of income when you’re supposed to be enjoying yourself. You can investigate the market history of your rental property along with its neighborhood.

Places like Zillow should be able to tell you if it looks favorable or fickle.

Run the numbers. They never lie.

What Are Your Investment Goals?

You’re directly invested in the property so things like time and financing matter. This isn’t like handing over your money to a REIT, which is easier to liquidate in times of financial crisis. And it’s not like you’re doing a fix and flip with a quicker turnaround.

You should have a buy and hold strategy in place when entering the deal and be prepared for swings in the real estate market. How promising does your investment look over the long-term? If you don’t like the idea of having your money invested in a property and are looking for something short-term, you may want to consider alternatives.

Hire an Excellent Property Management Service

Having a great team in place makes the process smooth. Find a team of well-respected professionals you can trust. Why?

Because you’re going to have to take their word for it most of the time – you’re not local to the neighborhood. Talk to other companies in the area to determine your team’s reputation. Think about how much they’re charging and whether it’s a fair deal relative to industry standards. Fees matter and do affect your ROI.

Andrew wrote a detailed post about his experience as a turnkey investor with Roofstock. Be sure to read it if you’re considering who to hire and how to get started.

Tax Implications

Turnkey rental properties do carry certain tax advantages. Applicable deductions include mortgage interest payments, property taxes, and operating expenses. You can even deduct travel expenses if you journeyed to view your property.

Be mindful of when you’re receiving rent checks. Why?

You report rental income on your return for the year you receive it, regardless of when it was earned. – IRS

If you have tenants paying in advance, keep that in mind. Always consult with your CPA to sidestep potential hazards. Don’t get footed with a substantial tax bill because you didn’t know the rules.

real estate tax forms

What’s to Like about Turnkey Real Estate?

Where you live no longer matters. You gain access to markets you’d otherwise be excluded from with turnkey properties. You can live in New York and invest in properties located in Memphis.

You’re capitalizing on the experience of the management team. They know the local market, which means they’ll find properties and tenants quicker than you could on your own.

Your property is move-in ready, which grants you immediate cash-flow. In many cases, there are already tenants in place with the bonus of your property management team handling the day-to-day operations.

The property has already been renovated and is in fantastic condition. This means you shouldn’t have to spend money on repairs in the early years of your investment.

You’re building equity the longer you hold the property — as its value increases the loan amount decreases. That appreciation can be used as leverage if you’re considering buying another rental.

If you sell a property and reinvest your earnings into the new property, you defer capital gains in what’s called a 1031 exchange.

Like with most real estate investing, your property’s value is an inflation hedge. Ideally, your property appreciates every year. An increase in value means an increase in rent.

What’s Not to Like about Turnkey Real Estate?

The white-glove service provided by some companies means you’ll pay a higher price. Because you’re primarily hands-off, the management team is doing the work for you. You’d save money if you did it yourself.

You have to trust your team – a lot. You won’t be there to know what’s going on with your property. Some companies will show you photographs of one home and then sell you another. Know the management company’s reputation before handing over your money.

You’re relying on someone else to do the work for you. They better know what they’re doing.

Combat a Seemingly Untrustworthy Company Like This

If you think you’re being taken for a ride, ask for a walk-through of the property. When the management team gets a bit hot under the collar or refuses, walk away.

If their management fees are higher than the industry average, ask them to justify why that is? You’ll know if they’re charging more than what they’re worth because you’ve done your homework – you already know what the industry averages are.

Examine your turnkey provider’s staff-to-property ratio. Are they adequately prepared to deal with the daily workflows?

Turnkey Companies Worth a Look

There are many to choose from. Some of the top-rated ones include Roofstock, Home Union, Memphis Invest (read our review), and Norada.

It’s also worth considering where you’d like to invest. For example, Roofstock services properties in 25 states, while Memphis Invest is only available in five.

Roofstock A turn-key rental property marketplace. Every property has a tenant, is certified and comes with a 30-day money back guarantee. They also screen and negotiate with property managers so you get a high-quality team for a good price. Find Rental Properties Roofstock

Final Thoughts: Is Turnkey Real Estate Investing Right for You?

What’s worth considering is how hands-on you want to be. A little or a lot? If the process of securing a realtor, lender, property manager, and contractor sounds like too much work, perhaps a turnkey investment might make more sense.

On the other hand, if the idea of finding a property, marketing it, interviewing tenants, and dealing with maintenance issues sounds like your cup of tea, then perhaps turnkey properties shouldn’t belong in your investment portfolio.

Are you a DIY-er, or would you rather pay a little extra and outsource those responsibilities? That’s the ultimate question.

Sean Brison - Senior Editor Sean Brison is a personal finance writer based in Los Angeles, California. After spending the better part of his early forties educating himself on the subject and turning around his financial situation, he’s logged thousands of hours researching and writing on matters revolving around budgeting, investing, and retirement. He’s passionate about teaching others what he’s learned and has been a contributor to Listen Money Matters for over a year.
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