Are Turnkey Rental Properties A Smart Investment?

When it comes to buying rental property, just about everyone expects to do some work to get their rental property ready for rent, regardless if they put in the work or hire a contractor to do the job for them.

Although most rental properties will require work before they are able to be rented there are some rentals that are “turnkey”, meaning that you can literally start renting them immediately as soon as you close but the BIG question is are these rental properties a smart investment for you to make?

Learn More about Turnkey Rental Properties

When we use the term “turnkey rental properties,” we are referring to the loosely defined investment strategy of buying, rehabbing, and managing a property through a third party. The process of working with a turnkey real estate provider typically looks something like this:

Finding a property: Based on your personal investment goals, the company will help you to identify and build a portfolio of properties. Most claim to have a pre-vetted database of turnkey investment properties for you to consider. Some also have proprietary software to evaluate which properties are likely to produce the greatest returns.

Funding the investment: Unlike experienced investors, most turnkey buyers are unfamiliar with the various ways to finance rental properties (e.g. various loan products, 401K, 1031 exchange). The turnkey provider will help you to evaluate a range of financing alternatives depending on your individual circumstances and goals.

Acquiring the property: Once you’ve identified the property you’d like to purchase, the turnkey provider will assist you with all of the paperwork, home inspections, appraisals, loan documents, and more. They provide end-to-end service, much like a real estate agent would, but they specialize in working with long-distance buyers who want to take a hands-off approach.

Renovating the property: Depending on the situation, some turnkey rental properties will be in need of major renovations, while others may simply need minor repairs to bring the property up to code. The turnkey provider will manage all renovations and maintenance for you.

Managing the property: The primary reason that people buy turnkey rental properties is because someone else pledges to manage the property on a day-to-day basis. This includes finding tenants as well as responding to any tenant needs (e.g. fixing a leaky sink). It ostensibly creates a stress-free investment opportunity—all that’s left for the buyer to do is deposit those rent checks!

Generally speaking, most turnkey firms will charge around a 3% fee for property acquisition, and then anywhere from 7 to 10% for ongoing management of turnkey rental properties.

That said, it’s important to know that there are hundreds of turnkey firms across the U.S., and no two are exactly alike. Some will buy, rehab, rent, and THEN sell a property to you (the investor). Others specialize in helping you to find cheap properties (for as little as $20,000!) that need major renovations—and the turnkey company will take on all of those renovations for you. The range of services can vary greatly, so be sure to thoroughly research several turnkey providers before you commit to anything.

The Growing Popularity of Turnkey Rental Properties

Turnkey rental properties have proven a great fit for people like Yang Guo, a 30-year-old data scientist who lives and works for a tech company in San Francisco. Even though he earns a good salary, he’s been priced out of the Bay Area. Nonetheless, Guo still wanted to add real estate to his investment portfolio.

Guo ultimately purchased two properties: A small home in the suburbs of Birmingham, AL and another outside of Columbia, SC. He worked with HomeUnion, a turnkey real estate provider based in Irvine, CA. HomeUnion helped Guo to purchase the two properties for a total of $60,000—quite the bargain in comparison with the Bay Area, where the median home price is over $675,000. HomeUnion, a 3-year-old startup, handled all of the necessary renovations, and they now manage the property for Guo. He’s never actually seen the properties or met the tenants—but he collects a rent check each month from 2000 miles away.

“There’s too much risk with buying property in the Bay Area,” Guo says. “As long as the cash flow is coming and hitting my bank account, I basically don’t care about seeing them in person.”

Novice real estate investors like Guo are attracted to turnkey rental properties because they’re lower-cost and less time-intensive to manage. The average turnkey investment property sells for between $50,000 and $150,000. Most are located in markets that were hit hard by the housing crisis. For example, Florida, North Carolina, Tennessee, Georgia, and Ohio have experienced an explosion of turnkey rental properties. In Florida, for instance, an estimated 12% of landlords are from out-of-state. Turnkey investors tend to come from high-priced markets and want to buy in states with low home prices and relatively strong rents.

However, long-distance real estate investors tend to lack local market knowledge. “You see these people coming from California and what I like to call ‘yuppie-ing up a place,’ but they don’t realize it’s not in the best area because they didn’t do their homework,” says Tony Kazanas, a Cleveland area real estate agent. There are all sorts of miscellaneous things that novice real estate investors don’t consider, like local vacancy rates or the need to obtain hurricane or other specialty insurance. Turnkey companies fill these important gaps by providing local market expertise.

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