How Investing in ‘Turnkey’ Property Works
The housing market is slowly coming back from the doldrums of a few years ago, but that hasn’t changed one striking fact – almost anywhere in the U.S., in the long-term, it’s still cheaper to buy a home than it is to rent one. According to the real estate website Trulia, buying is 37.7% cheaper when you look at the numbers nationwide (for more on these figures see Trulia's calculations).
For real estate investors – including part-timers with only a few homes to their name – that imbalance provides a golden opportunity. One of the trends in recent years has been buying up so-called “turnkey” properties that require a lot less time and effort to rent out.
What makes these homes unique is that they’ve already been rehabbed – usually by a specialized turnkey real estate company – before they’re put on the market. In fact, there’s often a renter in the home already when the sale closes. Typically, those same firms also offer property management services to the investor. That means they’re the ones who get a call when the air conditioner breaks down, not you.
Turnkey properties are proving especially popular with investors based in more expensive markets far from where the units are located, such as New York City. Unable to find affordable properties in their market, these folks can generate cash flow by snatching up homes in another part of the country.
Know Your Property
While turnkey homes usually require quite a bit less time than other types of real estate, investors shouldn’t underestimate the amount of research they have to do.
The biggest question mark, of course, is whether the property itself is a good value. Some novice investors get so enchanted by the term “turnkey” that they assume all homes with that label are fail-proof. Unfortunately, that’s not the case.
Experts say it’s always a good idea to visit the house or apartment building in person before sealing a transaction, even if that means hopping on a plane. A home is a major purchase and investment, so it's crucial to know exactly what you’re getting. Seeing the property up close also gives you a better sense of the neighborhood, which will have a significant impact on the property's long-term marketability.
For added security, seasoned investors say it’s always a good idea to get a professional home inspection as well. The rehab company might wow you with a dazzling kitchen and fully renovated bathrooms, but you want to make sure the less-conspicuous features of the home – the furnace and roof, for example – are in just as good shape.
Know Your Property Manager
By definition, turnkey investors are putting a lot of faith in their property management firm. The last thing you want is a company that’s slow to handle problems and can’t get new tenants to replace the ones who leave.
That makes it imperative to do your homework on the management firm before going down the real estate investment path. Here are some of the questions you’ll want to ask:
- How much experience does the firm have?
- On average, how long does it take to find a new tenant for its properties?
- Does it provide monthly statements that can help you keep track of expenses and income?
- What fees does it charge?
A face-to-face meeting can go a long way, but it also doesn’t hurt to get referrals from other clients of the firm, who can point out its strengths and weaknesses. For more thoughts and tips, see The Complete Guide To Becoming A Landlord: Hiring A Property Manager.
Know Your Ownership Arrangement
Most companies will sell the home to you outright, but others create a limited liability company or corporation and ask to become a general partner in that LLC.
One of the reasons they may want to stay on the title is to make things easier; if there’s a repair to be made, they don’t have to get your approval to fix it, spend money, etc. But this approach can also create a lot of unintended headaches. The simpler route, many advisors feel, is to create a separate expense account that the property manager can access as needed for minor repairs and preventative measures. You remain the sole name on the property title.
Financing Your Turnkey Home
Despite the recent Fed hike, purchasing a turnkey home is still a good call in today's low-interest environment. As of January 2017, the interest rate for a 30-year conventional fixed rate mortgage is 4.25% with an APR of 4.323%. For a 20-year conventional fixed-rate mortgage the average interest rate is 4.125% with an APR of 4.225%. And for a 10-year fixed rate mortgage, the average interest rate is 3.625% with an APR of 3.751%. (Based on figures from usbank.com)
Know the Pitfalls
While it may sound like a great way to bring in some extra revenue, it’s important to realize that real estate investing isn’t for everyone. There’s always the threat of some unforeseen calamity, from a sudden property tax hike to chronic maintenance issues to accidents (fire, falling trees, etc.). Buyers should have the nerve – not to mention the extra cash – to deal with these surprises. For other considerations, see What does asset management mean in regards to real estate?
Experienced investors also say it’s important to view turnkey properties as a long-term undertaking. Unlike stocks and other relatively liquid investments, homes can take a while to sell. So if owning a rental isn’t something you can commit to for years, it’s probably not worth getting involved in the first place.
The Bottom Line
Turnkey properties are an interesting alternative for people without the time or ability/interest to physically renovate or maintain a real estate investment. To be sure, investing in real estate is never a risk-free endeavor. But these properties can be an attractive option for those looking to diversify their assets without encountering the day-to-day hassles of being a landlord (see Top Alternative Investments To The Stock Market).
Investors pay a premium to acquire homes in move-in condition, so their potential returns aren’t as high as those for folks who flip older unit themselves. They also have to pay someone to manage the property, which further cuts into the bottom line. Even so, some of the more successful turnkey buyers can generate profits in excess of 10%. To understand more about return on investment (ROI), see How To Calculate ROI For Real Estate Investments. For another property investment alternative, real estate investment trusts (REITs), see 5 Types of REITs And How To Invest In Them.