Turnkey Rental Properties: Are They the Right Investment?

Have you been searching for the perfect real estate investment option? Many investors turn to rental properties to begin their journey as property owners or managers. Given the ability to generate recurring income, some future investors compare turnkey rental properties with other popular options.

Recent statistics show why and how rental property options are generating quite a buzz. According to Pew Research Center, in today’s marketplace, 36.6% of households in the United States are renting. This is the largest percentage of renters since 1965.

Moreover, the National Multifamily Housing Council revealed that there are almost 44 million rental homes in the country. This is in comparison to 75 million owner-occupied homes. The numbers and trends show that there is a need and desire for more available rental properties. 

If you’re ready to jump in but want to compare turnkey properties to other options, this post is the perfect place to start. 

What is a Turnkey Rental Property?

To sort through the real estate jargon, let’s start with a basic definition of what a turnkey rental property is. According to Buildium, the term turnkey simply relates to the process of “buying, rehabbing, and managing a property through a third party.”

Purchasing a turnkey property to rent is a common investment strategy in today’s real estate arena. Some investors choose this strategy when the current prices in a given marketplace are too high for their initial investment. It can also be a time-saving strategy if the investor has a tight turnaround and doesn’t want to involve manual labor. 

There are several commonalities of this type of rental investment property. You can identify a turnkey opportunity by the following characteristics:

• The investor doesn’t need to put much time or effort into preparing the property
• The properties are already gutted, renovated, or otherwise restored
• A special turnkey real estate company handles most of the prep work

Occasionally, the turnkey company may also offer property management services after the sale of the home or residence is complete. This added bonus may appeal to investors who don’t want to be on the hook for the everyday upkeep of their properties and tenants. 

Heed the warning signs of some turnkey companies

Although the option to invest with little work sounds appealing to many investors, there are some companies that try to take advantage of the system. Potential investors should be aware of these red flags and only work with reputable companies.

Before you purchase a turnkey property, it’s important to understand that this industry is not regulated or standardized. This means that a turnkey rental property can range from the most up-to-date, modernized home, to a dilapidated structure that has only new paint and surface-level upgrades. 

You can guard yourself against common turnkey scams, but it requires due diligence. As an investor, you should be aware of the following red flags and warning signs.

• Lack of portfolio: Can the turnkey company point to a history of success in certain neighborhoods or communities? Are past renovations professional and finished? If there are any loose ends, it may cast a shadow of doubt on the company.

• Overpromising or offering guarantees: Any wise investor can tell you that there’s often risk and occasionally reward. Be on guard for companies that seem to overpromise big results and offer huge, immediate returns. 

• Selling above market value: Want to know if your turnkey company is being totally honest as they seal the deal? Research the market values for yourself. Companies want to profit for their work, but it shouldn’t mean extra inflation at your expense.

• Low-level property management: In the case of turnkey companies, a team might be experienced at renovations and woefully unprepared for managing tenants. In this scenario, it’s important to niche down. Go with an experienced, trusted property management company instead. 

Turnkey vs. Fixer-Uppers

As you’ve probably realized, investment real estate options differ according to how much work you want to put in. In this case, there are two main options on the table: turnkey and fixer-uppers.  

As we’ve established, turnkey properties are often sold through a third party company. The work and renovations are complete. This means that the company is literally ready to turn the keys over to you as soon as you make an offer and close on the property.

Fixer-uppers are perfect for the investor who is willing to put in more work. These homes are also great if you’re incredibly handy or want personalization options. If you’ve dreamed of owning a fixer-upper, it’s wise to consider the following:

• Market availability: For a true fixer-upper success, you need an outdated home at a cheap price. Are these properties available in your area? 

• True cost of renovations: Unless you’re an experienced contractor, it might be easy to underestimate the true cost of work involved. With a fixer-upper, budget for unexpected expenses that you might not see on the surface.

• Costs while you repair: When you purchase a fixer-upper, the deal is done. Can you afford to pay the mortgage on the property in addition to repairs? Each passing week is an opportunity to find renters.

Which type of rental property is best for my situation?

As with any rental investment property, the decision is extremely personal. If the upgrades to a home are simple and the timing makes sense, a fixer-upper could allow you to flex those design muscles. You’ll have more creative freedom and a longer window of time to work.

If you live far away from the location where you want to invest, considering turnkey properties could make more sense. You won’t be able to oversee a full renovation in person, and the amount of time required for travel might not be feasible. 

Base your investment decision on facts, numbers, and the advice of trusted real estate personnel in your city or town. Making a rash, emotional decision is not the way to approach a rental property investment.

Steps to Buying a Turnkey Rental Property

Let’s say you’ve weighed the pros and cons and have decided that turnkey is the right choice for you. Congrats! Your next steps involve learning how to buy a turnkey rental property.

Fortunately, the process is not too complex. It begins the same way as the traditional home-buying process. Your first steps will be to choose and research your market and to secure the appropriate financing. 

Then, you’ll want to find a reputable turnkey property and do diligent research on the homes that company has listed. After you’ve located the best home choice, you’ll need to:

• Make an offer and sign a purchase contract
• Request a professional home inspection and any corresponding repairs
• Negotiate a suitable price based on the inspection outcome
• Order an appraisal to determine the property’s true value
• Choose property management or self-management to fill the vacancy

It’s important to note that a complete, unbiased home inspection is perhaps the most important step in the process. Although you’ve received information from the turnkey company, an inspection provides a third-party perspective. This means that you and your tenants won’t be surprised by any significant, yet hidden issues.

Potential Rental Property Investment Challenges

When you invest in a turnkey property, part of the process has been done for you. The work of preparing the property is complete. That being said, smart investors know how to anticipate potential challenges and roadblocks. 

When buying your first rental property, consider the following:

• How to secure financing. It’s not often that rookie investors come to the table with a ton of extra capital. Financing a rental property is as important on a rental as it is on a primary residence. Do you have a plan for your down-payment and mortgage calculations?

• How to handle vacancies. In the rental business, vacant properties mean missed income opportunities. Unless you’re planning to market the property yourself, a property management team could help you avoid long periods of empty homes.

• How to pay the right taxes. Investing in property is certainly something to celebrate! Despite this big financial step, becoming an income-generating investor also means you’ll pay new taxes. If you’re unsure of what these taxes are, consult an accountant or real estate tax professional.

• How to anticipate ongoing costs. As an owner, you’ll be shouldering some traditional operating costs. These costs may include typical maintenance repairs, home association fees, or other unexpected expenses. You should adjust rental rates accordingly. 

How to Ensure Profitability

Although it would be nice to have a profitable rental around the clock, success isn’t guaranteed. Fortunately, with a bit of strategy and professional oversight, you can ensure a high rate of return. The following cash flow fundamentals will serve you well as you buy, maintain, and manage a rental property. 

• Location – According to our team of experts (and long-standing beliefs), location drives real estate value. You may predetermine your profitably from the moment you select a market, town, or neighborhood. It’s always important to review trends and look at past growth over several years.  

• Expense control – Several factors go into your expenses. These include everything from the type of tenants you select to the age of the house you’re renting. Your goal is to keep monthly costs to a minimum. 

• Effective marketing – How are the locals finding rental properties for sale? You need an in-depth marketing strategy to get the word out as people search. If this isn’t a personal specialty, consider hiring a property management team. 

Generating income from rental property investments requires understanding your own skills and desires. In fact, it may require having an honest conversation about how much you’re willing to do to generate a full-time income. Whether you decide to go the DIY route or hire help, remember that investment success is achievable. 

Your Next Steps

Are you ready to make the investment process simple now and in the future? If so, it’s time to check out a property management team that can do the lifting for you. 

Century 21 Northwest Realty provides customizable service to help landlords with basic tasks like maintenance, tenant mediation, rent collection, and more. 

Learn more about property management services in your area.