There are many investment opportunities within the real estate market. You may find a number of options depending on your skill level, the amount of capital you have, the location, and/or your investment goals and interests. Investing in public versus private real estate is often a leading consideration.
Public investments offer a piece of a very large pool for shareholders. Private investments, on the other hand, often offer the chance to become more involved in a variety of ways. Flipping properties become more popular in the private market as online lending provides easier access to capital, but many private investors want something faster and easier. For these investors, turnkey properties are often a top choice.
- Turnkey property investments are one of several options available for investors in the private real estate market.
- Turnkey properties are fully rehabbed and ready to rent out upon purchase.
- With the right due diligence and ownership agreement, turnkey properties can start to generate income quickly with very little time and effort required by the owner.
- Like many real estate investments, turnkey properties bring the risk of potential property tax hikes, chronic maintenance issues, and accidents such as fire or severe weather.
- Consider jumping into the market for a turnkey property when interest rates are low as it will be cheaper to finance.
What Is a Turnkey Property?
A turnkey property is one that you can buy and immediately rent out. That's because it is fully renovated and repaired. As such, properties that fall in this category require very little time and effort to rent out. The term turnkey is derived from the idea that you can just turn the key and start living in the home.
Turnkey properties aren't always the cheapest option for homeowners and real estate investors because they don't require many (or any) updates. But what makes these properties unique is that they’ve already been rehabbed (usually by a specialized turnkey real estate company) before they’re listed. In fact, there’s often a renter in the home already when the sale closes. Those same firms also offer property management services to the investor. That means the property manager is the one who gets a call when the air conditioner breaks down—not you.
Owning a rental property can be a great investment. You get a steady stream of income from the rent that helps to pay off the costs and return a profit. However, buying any type of property—specifically one that you plan to rent out—often comes with risks. That’s why it is important to make some good decisions in the following areas when going through turnkey property due diligence.
What to Know Before Buying a Turnkey Property
While turnkey homes usually require much less time than other types of real estate, investors shouldn’t underestimate the due diligence required to own one. The biggest question, of course, is whether the property adds value to your investment portfolio. Novice investors may become enchanted by the term turnkey that they assume all homes with that label are fail-proof. Unfortunately, that’s not the case.
Experts say you should always visit the property in person before closing the transaction, even if that means flying to another city. Real estate property is a major purchase and investment, so it's crucial to know exactly what you’re buying. 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.
Seasoned investors suggest getting a professional property or home inspection just for added security. The rehab company may wow you with a dazzling kitchen and fully renovated bathrooms, but you want to make sure the less-conspicuous features of the home, such as the furnace and roof, are in just as good shape, too.
Research Property Managers
If your turnkey property comes with a property manager or property management services, make sure you understand their terms. Property management may be available to provide a full range of services like maintenance, rent collection, and building cleaning. Some property managers may also be responsible for filling tenant vacancies, running background checks, and signing leases.
Since a property manager’s services usually vary, it is important to know exactly what they are liable for and to get it in writing through a contract. So when you consider a property manager associated with a turnkey property, make sure you ask the following questions:
- How much experience does the firm have?
- On average, how long does it take to find a new tenant for vacancies?
- Does the company provide financial reporting through monthly and annual statements that can help you track revenue, expenses, and income?
- What are the fees?
Getting a mortgage loan pre-approval can be a good idea for investors looking to finance through a mortgage loan.
Ownership Arrangements for Turnkey Properties
There can be a variety of ways to structure your real estate investments, especially within the private market. Knowing your ownership arrangement will usually be a factor in your overall investment decision.
There are several structures that can be used. Real estate investment groups (REIGs), partnerships, and limited liability companies (LLCs) are a few of the options. In these business structures, the company usually has most of the responsibilities and offers many convenient benefits. These structures usually also pass-through income to owners as partners. This means income may be reported on a K-1.
Less complex agreements may also exist. In many cases, the financier becomes the independent owner. Independent ownership can require personal management or the procurement of third-party services for help in property management. In some instances, independent owners may look to set up separate expense accounts authorized for third-party property management use.
Overall, it is important to know your arrangement and to be comfortable with the associations. Each type of structure comes with its own provisions so you should understand and agree on all of the nuances before making a final decision.
Financing Your Turnkey Investment
Interest rates are always changing based on the economic environment of the time. Financing when rates are the lowest is ideal. Even if you don’t get in at the best time, there can always be options for negotiating the best rate. Borrowers with the best credit score will have the greatest advantage. The mortgage lending market also offers a wide variety of loan products.
Not all banks will offer every type of loan but here are a few to consider:
- 30-year fixed
- 20-year fixed
- 15-year fixed
- 5/1 ARM
- 7/1 ARM
- 10/1 ARM
- 30-year Veterans Affairs (VA)
- 30-year Federal Housing Administration (FHA)
- 30-year fixed jumbo
- 15-year fixed jumbo
The longer the loan is financed, the lower the monthly payments. But the tradeoff is that you'll end up paying more in interest. FHA loans offer special rates to some qualified borrowers. Adjustable-rate mortgages (ARMs) with specified intervals will require a fixed payment for a certain period of time followed by a variable rate that resets on a schedule after that. Jumbo loans are for relatively higher principals.
As of Sept. 29, 2022, the average interest rate for a 15- and 30-year fixed rate mortgage in the United States was 5.96% and 6.7%, respectively. The average rate for a 5/1 year ARM was 5.3%. Government assistance loans like those backed by Veterans Affairs or the Federal Housing Administration will have lower interest rates for those who qualify.
Investopedia's mortgage rate center can be a great place to check the average rates on all types of mortgage lending options.
Know the Pitfalls
While it may sound like a great way to boost your revenue stream, 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 like fire or falling trees. As such, buyers should have extra capital and cash available to rely on if any surprises or emergencies occur.
Experienced investors also say it’s often best to view turnkey properties as a long-term undertaking. Unlike stocks and other relatively liquid investments, real estate can take a while to sell. Property values also fluctuate so selling to earn any type of profit may not be possible until after a few years of mortgage payments have been made.
The Bottom Line
Turnkey properties are an interesting alternative in the real estate market. They require little renovation or maintenance. They are also usually available for tenants immediately, which means immediate income flows once vacancies are filled. To be sure, investing in real estate is never a risk-free endeavor. However, with the right due diligence, turnkey properties can come with low risks and high returns.