Several years ago, when I first got serious about real estate investing, I realized that, because we live in the expensive San Francisco Bay Area real estate market, I was hitting a ceiling as far as affordability and cash flow. I would need upwards of $200k for the down payment. And cash flow? Ha. Not in the Bay Area. You’d be lucky to find something that was breaking even.
Given that, I quickly started to think about investing in a rental property out of state. But where to start? With the entire map of the US open, it became overwhelming to find and settle in on a market. There was so much research to do, and plus, I would have to build a solid team in each market, to include a broker, lender, and property manager at a minimum.
At the time, my goal was to be as hands-off as possible with these out-of-state rentals, but I didn’t know where to start. That’s where turnkey real estate comes in.
If you’re exploring passive investment opportunities, turnkey real estate might have surfaced as a recommended option. But what exactly is this investment strategy, how does it compare to passive investing through real estate syndications, and is it the right fit for you and your investing goals?
In essence, turnkey real estate involves purchasing properties that are renovation-free and rent-ready, often managed by a third party. Designed for ease and immediate cash flow, it’s an avenue attracting both new and experienced investors eager for a quieter role in the landlord game.
In this article, we unpack turnkey investments – from the nuts and bolts of acquiring a property to understanding the benefits and risks involved.
Key Takeaways
Turnkey real estate investments are fully renovated, often tenanted properties that offer a hassle-free, immediate rental income opportunity, ideal for distant investors or those seeking portfolio diversification without direct management.
The acquisition process of turnkey properties is straightforward and includes market research, financial planning, and selecting a reputable turnkey company or property management service to ensure the investment’s success and ease of management.
While turnkey properties provide potential for passive income and expansion of investment portfolios, investors must carefully assess cash flow potential, management fees, and associated risks to make sound investment decisions.
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Exploring Turnkey Rental Property Investing: An Overview
Turnkey investment properties serve as a hassle-free avenue into real estate investing, offering a great option for those seeking an investment property. These turnkey properties are fully renovated and often tenanted, ready for immediate rental income. They cater to a diverse investor profile, from those living far from profitable rental markets to seasoned investors looking to diversify their portfolios without hands-on management.
There are numerous advantages to purchasing turnkey property, including:
Minimizing risk
Offering immediate cash flow potential
Providing a strategy for diversification, especially for investors priced out of their local market
Taking the heavy lifting of renovations and building a local team off your hands
Accommodating different budgets and financial situations, with properties available at various price points
These factors make turnkey real estate investments a versatile investment option for many investors, particularly those who might live in expensive markets or areas that are not landlord-friendly, to invest outside of their local area.
The Mechanics Of Turnkey Property Acquisition
The process of acquiring a turnkey property, which includes market research, securing financing, and closing the deal, is quite straightforward. Investors can either independently source properties or hire a turnkey real estate company.
Factors such as the property’s location, condition, amenities, and budget constraints should be taken into account when selecting turnkey properties.
Market Research And Selection
The acquisition process begins with market research. It involves identifying properties with high cash flow and growth potential. Evaluating a neighborhood’s safety, crime rate, cap rate, and cash-on-cash return is crucial in this analysis.
Investors should confirm that the turnkey company invests in markets with stability and growth potential, which aligns with their investment objectives. It is also helpful to understand the types of properties and the class range that a turnkey provider deals with to align your goals with the services offered.
Navigating Financing And The Down Payment
Following market research, securing financing is the subsequent vital step in the acquisition process. Turnkey providers generally accept financing or cash as purchase methods for investment properties. It is crucial to confirm which methods align with the investor’s financial abilities.
For investment properties financed through turnkey companies, lenders often require a down payment ranging from 20% to 25%. This requirement is something investors should prepare for before getting into the buying process.
The Closing Process Simplified
Closing the deal marks the last stage of the turnkey property acquisition process. This often starts with securing financing, unless the purchase is an all-cash transaction. Prospective buyers are usually asked to provide a substantial number of documents to lenders to establish creditworthiness.
Upon selecting a property, the following steps are typically taken:
Complete a purchase agreement detailing terms like price and closing timeline.
Carry out property inspections within a designated period, which can lead to further negotiations based on the inspection report.
Work with the title company to ensure there are no encumbrances on the property and to confirm the tax status.
These steps are important for real estate investors in the process of purchasing a property.
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The Role Of Property Management In Turnkey Investments
Maintaining turnkey rental properties heavily relies on effective property management. These professionals offer services like tenant placement, maintenance, and repairs, making it easier for investors to manage their rentals from afar.
Investors are attracted to the hands-off investment experience provided by property managers, allowing them to solely focus on rent collection without daily property obligations. Even in high-cost living areas, investment in cheaper rental properties in different regions is facilitated through property managers who oversee day-to-day management.
Selecting A Property Management Company
A successful turnkey investment heavily depends on the selection of a trustworthy management company that can offer property management services. Ineffective managers could jeopardize the profit potential in turnkey real estate investing.
A company with a solid track record in turnkey real estate can prevent investment issues and ensure they have established strategies for success. Reviewing a management company’s success with similar properties provides insight into their expertise and whether their tenant management methods align with the investor’s preferred approach.
Often, turnkey real estate companies include a property management arm, which means that they can manage the property in-house. This can be a benefit to real estate investors, as it means you’ll have an all-in-one team.
Understanding Management Fees
Management fees form an integral part of a turnkey investment property. They form part of the operational expenses that impact the cash flow from turnkey real estate investments. Investors should compare management fees with industry standards to confirm they are not overpaying and to guarantee the cost-effectiveness of their investment.
Some turnkey real estate companies offer rent guarantees, ensuring investors continue to receive rental income even when the property might be unoccupied, safeguarding the investor’s cash flow.
Evaluating The Cash Flow Potential Of A Turnkey Investment Property
A meticulous analysis is necessary for assessing the cash flow potential of turnkey properties. Turnkey properties facilitate quick rental turnaround, which allows investors to start generating revenue almost immediately, impacting cash flow positively.
Cash flow is calculated by subtracting the monthly expenses from the rental income. These expenses may include:
Mortgage
Taxes
Insurance
Property management fees
Investors should purchase turnkey homes in areas with low vacancy rates to ensure consistent rental income that exceeds mortgage payments.
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Turnkey Rental Investing Vs. Real Estate Syndications
At this point, you might be wondering how turnkey rentals compare to real estate syndications (group investments), and which one is a better fit for you and your real estate portfolio, since both types of investments are relatively hands-off ways to invest in real estate.
Asset Types
For starters, real estate syndications generally give you the opportunity to invest in commercial real estate (large multifamily complexes, self-storage, hotels, etc.), whereas turnkey rentals are residential properties.
Asset Management
With a turnkey property, even though the renovations will have already been done for you, and the property manager will be doing all the local boots-on-the-ground management, the overall strategy of the investment and the asset management is still in your court. In other words, if you want to sell the property right now, you could decide to do that.
With a real estate syndication, on the other hand, because it’s a group investment, you relinquish control in the management of the asset. The sponsor team manages the asset on your behalf, making it even more hands-off than a turnkey investment. That being said, it’s all that much more important to take time vetting the real estate syndication team you’re working with, as they will be making decisions on your behalf.
Related: Investing In Rental Properties Vs. Real Estate Syndications
Investment Amounts
As far as investment dollars, that’s another difference to consider. With turnkey properties, because you’re buying the property on your own, you’ll be accountable for the entire down payment, so you’ll need to provide an exact amount for the purchase of the property.
With a syndication, on the other hand, because you’re pooling your resources with other investors, you can choose the exact amount to invest, as long as it’s above the minimum investment threshold. For example, if the minimum were $50k, you could choose to invest $50k, $65k, $100k, etc., versus a turnkey property, which would dictate an exact amount for the down payment.
Investment Returns
As far as returns go, both turnkey rentals and real estate syndications can offer a combination of cash flow and upside, as well as tax benefits. The decision is more in how much say and control you want to have in the management of the asset.
Accredited Investors
One additional consideration is that, for many real estate syndications, you may need to be an accredited investor, and the minimums are often $50k or higher. If you’re not yet an accredited investor, or you want to invest a smaller amount, turnkey properties may give you more flexibility.
That being said, at Goodegg Investments, we offer crowdfunding opportunities for non-accredited investors to invest starting at $10k.
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The Allure Of Passive Real Estate Investing
Passive investing is alluring due to its simplicity and potential for profit. Passive investing involves either hiring or contracting a turnkey real estate investment company to find and manage investment properties, or investing in a real estate syndication or crowdfunding offering, both of which offer passive income with minimal investor involvement.
Another way to invest passively in real estate is via REITs (real estate investment trusts), though with a REIT, you are investing in a company that buys the underlying real estate, which means that you won’t be a direct owner in the properties, so you won’t receive the same tax benefits of direct ownership.
Further, most REITs tend to follow the ups and downs of the stock market, so if you’re looking to diversify outside the stock market, a turnkey investment or real estate syndication might be a better fit.
Turnkey properties offer several benefits for investors:
Buying rental properties that come fully renovated and managed, allowing investors to start earning rental income immediately.
They provide immediate cash flow returns.
They offer a range of services provided by a property management company, which can determine how hands-off an investor can be in managing the property.
They allow investors to maintain control over their investments (choosing tenants, deciding when to sell, etc.), without the need to be too hands-on.
Real estate syndications also offer several benefits for investors:
They give investors the ability to decide the exact investment amount, as long as it’s above the minimum investment.
They give investors the opportunity to diversify into commercial properties.
The sponsor team takes over all the asset management of the property.
With cost segregation and accelerated depreciation, the tax benefits of syndication investing can be significant.
With either strategy, you could also look into investing with retirement funds, like a self-directed 401(k) or IRA.
Strategic Expansion: Adding Turnkey Rentals To Your Portfolio
Adding turnkey rentals is a strategic way to expand investment portfolios. Investors can diversify their investment portfolio and enhance returns by purchasing turnkey properties in various locations.
A turnkey property investment allows investors to own rental homes anywhere, granting geographical flexibility and access to multiple markets. Some cities that offer concentrated opportunities for turnkey property investments include:
Indianapolis
Memphis
Birmingham
Kansas City
As a bonus strategy, you can also consider getting a HELOC (home equity line of credit) through your turnkey property investing, giving you extra capital to invest with and thus expand your portfolio. Or, you can use 1031 exchanges to grow your portfolio.
On the real estate syndication side, one way to quickly and efficiently scale and diversify your portfolio is to invest in real estate funds, giving you built-in diversification through a single investment.
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Turnkey Property Investment Risks And How To Mitigate Them
Just like any other investment, turnkey properties are not devoid of risks. Investors should confirm they’re not overpaying for turnkey properties by comparing pricing to the specific market values of the area they are investing in.
Ineffective property management can result in financial losses, making the selection of a reputable management company critical. The level of renovation in turnkey properties can vary, influencing the perception of value and potential for hidden issues.
Leveraging Technology In Turnkey Real Estate
Turnkey rental property investing has been transformed by technological advancements in the real estate market. Online marketplaces like Roofstock offer investors direct access to certified, inspected, and exclusive listings of turnkey rental properties, making the buying process convenient and similar to online shopping.
Turnkey real estate companies assist in selecting sound investments through pre-vetted databases and proprietary software, simplifying the acquisition of turnkey properties. Property management software like DoorLoop offers full-service tools for property management, from single properties to large portfolios, and is recognized for its competitive pricing.
Navigating The Landscape Of Turnkey Companies
A careful evaluation is necessary to navigate through the landscape of turnkey companies. Asking for references is crucial when choosing a turnkey real estate company to gauge reputation among past clients and within the industry.
Summary
To sum up, turnkey real estate investing offers a simplified, yet profitable, property investment strategy. It caters to a diverse range of investor profiles and provides a hands-off investment experience.
Despite the potential risks, strategic planning, careful selection of turnkey companies, and leveraging technology can yield high returns and positive experiences.
Frequently Asked Questions
What does the term turnkey mean in real estate?
In real estate, the term “turnkey” refers to a property that is fully ready for immediate occupancy or use, with no need for repairs or renovations. Turnkey properties are move-in ready, allowing the buyer to simply turn the key and start renting out the property.
What is the meaning of turnkey real estate investment?
A turnkey real estate investment refers to a property or project that is ready for immediate use or occupation, requiring little to no effort from the buyer or user. It generally denotes a completed product or property that is move-in ready without the need for additional renovations or updates.
Are turnkey properties worth it?
Yes, turnkey properties can be worth it, especially if you can find a home in a less expensive or emerging market, potentially leading to significant returns on your investment.
How do I select a turnkey property?
When selecting a turnkey property, consider the location, condition, amenities, and budget constraints. This will help you make an informed decision.
How does a turnkey property compare to a real estate syndication?
Both options offer a passive way to invest in real estate. With turnkey, investors are investing in a single residential property on their own, through a turnkey company. With a real estate syndication, investors are investing in a commercial property via a group investment.
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Next Investing Steps
Whether you’re considering investing in turnkey properties, real estate syndications, or a combination thereof, passive investing can be a great way to get your money to work for you in real estate.
As you continue to explore turnkey rentals and whether they’re right for you, we’re here to help! As a first step, we invite you to join the Goodegg Investor Club, so we can keep you in the loop on insights, as well as opportunities to invest alongside us in real estate syndications, if that’s the right fit for you.
You can also check out our open deals page to learn more about our current or upcoming opportunities.
Learn More
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101.
You can also get a copy of our book – Investing For Good – or check out our Life & Money Show Podcast.
To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.
Connect With Us
If there’s ever anything we can do to help you on your journey, feel free to email us at [email protected] or call / text us at (888) 830-1450.
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