What Is Turnkey Cost?

Turnkey cost (sometimes turnkey pricing) is the total cost that must be covered before a product or service is ready to be sold and used by consumers. A turnkey cost may involve a direct cost, such as materials, or an indirect cost, such as administrative expenses and product engineering. In most cases, both direct and indirect costs are present. Turnkey costs are often quoted by manufacturers and real estate developers to describe the costs required to complete a particular project. The turnkey cost is essentially a net cost to own and/or operate, including all mark-ups or discounts.

Key Takeaways

  • Turnkey cost is the total cost that must be covered before a product or service is ready to be sold and used by consumers.
  • Turnkey costs include both direct and indirect costs involved in getting the item or property produced and ready for ownership and use.
  • Turnkey costs present themselves in manufacturing, franchising, and real estate investment markets.

Understanding Turnkey Cost

The word 'turnkey' refers to an item that is all ready for use as soon as it is handed to the consumer (all you need to do is 'turn the key'). The turnkey cost is the total cost to get the product to the point where it is finished and usable.

A turnkey business is thus a business that is ready to use, existing in a condition that allows for immediate operation. The term "turnkey" is based on the concept of only needing to the turn the key to unlock the doors to begin operations. To be fully considered turnkey, the business must function correctly and at full capacity from when it is initially received. The turnkey cost of such a business may involve franchising fees, rent, insurance, inventory, and so on.

In real estate, a turnkey property is a fully renovated home or apartment building that an investor can purchase and immediately rent out. Turnkey properties are typically purchased from companies that specialize in the restoration of older properties. Those same firms may also offer property management services to buyers, minimizing the amount of time and effort they have to put into the rental. The turnkey costs involved would include realtor fees, taxes, insurance, and furnishings, for example.

Example of a Turnkey Cost

As a hypothetical example, if a home builder is building a new home, there are many costs involved in construction, including materials and labor. But beyond that, other costs must also be paid before the home is ready to be purchased and occupied, including landscaping, insurance, taxes, cleaning, inspection and many more. The turnkey cost of the home would include all of these costs and fees.

Turnkey properties are an interesting alternative for people without the time 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.

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 units 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%.