Turnkey properties make it incredibly easy to invest directly in real estate without the hassles of wrangling contractors, pulling permits, or dealing with power-tripping government inspectors. Turnkey properties require little or no work to rent. Many even come with paying tenants already in place.
If you’ve been considering dipping your toe into the waters of real estate investing, turnkey real estate often makes the perfect place to start.
Why Invest in Turnkey Properties Over Fixer-Uppers
Many real estate investors opt for the “BRRRR” strategy of rental investing: buy, renovate, rent, refinance, repeat. It involves buying fixer-uppers that need quite a bit of work.
There’s nothing wrong with that strategy. But turnkey properties bring their own advantages because they require virtually no repairs.
No Renovation Hassles
Renovating a house is stressful.
First, hiring and managing contractors is a challenge, to say the least. The ones who return your calls promptly, show up for work on time, and stay on schedule tend to also be the most expensive.
Then there are the permits. Beyond the bureaucratic tangles and permit fees, I’ve unfortunately run into my fair share of permit inspectors who are capricious, inconsistent, self-important, and selective in their enforcement. I’ve also experienced corruption in local permit offices.
Finally, renovating a home lends itself to unforeseen complications. When you open up a wall, you can uncover a plethora of hidden problems. Contractors are all too aware of this, and many find ways to inflate their initial contract price by claiming they discovered a new problem that wasn’t budgeted for.
In short, renovations come with headaches. New investors who haven’t developed relationships and trust with specific contractors are often wise to avoid renovations entirely.
Instant Revenue
Turnkey properties are ready to rent right now. They may even have a tenant already in place who’s making rent payments each month.
You don’t have to wait out months of renovations before you can advertise the property. You can list it today and start collecting rent tomorrow. No delays, no carrying costs — you can step right into earning a return on your investment.
Ease of Buying
Turnkey properties are easy to find because the sellers make them so. They actively market the properties for sale, which cuts out all the hassles of researching foreclosures or messing around with auctions.
With a quick online search, you can find the turnkey sellers in your market of choice. A few clicks later, you can sign up for their mailing list. Every time the seller finishes renovating a new property, they send out an email blast — first come, first served.
You can make life even easier by going straight to a turnkey property platform like Roofstock. It provides extensive details about both the property itself and the surrounding neighborhood. You can see value history and appreciation, appraisal reports, home inspection reports, rent payment history in the case of rented properties, and much more. See our Roofstock review for more information.
Ease of Investing Long-Distance
It’s hard enough renovating a property in your town. But in another state or city? Forget about it.
The rise of turnkey property platforms like Roofstock has made it easy for anyone to invest directly in real estate anywhere in the U.S. In fact, 90% of Roofstock buyers live in another state from the homes they purchased.
That’s especially welcome news for investors who live in pricey coastal cities with bad price-to-rent ratios. Check out our list of the best cities to buy a rental property to find the perfect market for a turnkey.
Predictable Returns
Not many investments offer returns and monthly income you can predict before you invest.
When you buy a turnkey property — or any rental property, for that matter — you can easily calculate its cash flow. You know the rent, you know your mortgage payment (if you have one), and you can calculate the long-term average of other expenses like vacancy rate, repairs and maintenance, property management costs, insurance, and property taxes.
On a month-to-month basis, your expenses may vary. But over the course of a year, your expenses usually reflect the long-term average.
When you can predict an investment’s returns in advance, you can choose to only buy good investments for the rest of your life.
The #1 Challenge With Turnkey Properties
If turnkey properties are so great, why don’t more people invest in them?
First, rental investing requires both labor and education. Second, turnkey properties come with one major drawback compared to fixer-uppers: It’s hard to find good deals on turnkeys.
Someone else has already done all the work for you. Another investor already found a bargain property that needed repairs and did all the work to renovate it. They packaged the property in ready-to-rent condition for you and maybe even placed a paying tenant in it.
So they expect to earn a profit for their trouble. That means you can expect to pay market pricing as you compete with other investors making offers.
Rental investors have a simple choice. They can either go through the considerable trouble of trying to find off-market deals, and then even more trouble in renovating them, to potentially earn spectacular returns. Or they can outsource all that labor to other investors and pay more, accepting more moderate returns.
Tips for Profitable Turnkey Investing
Turnkey properties make a great first real estate investment. They require less work, less skill, and less education than fixer-uppers.
But that doesn’t mean they take no work or education. As you mull over your first foray into rental investing, keep the following tips in mind.
Research All Expenses Carefully
Many new investors make the mistake of thinking their mortgage payment is their only expense. They say things like “The rent is $1,500, and my mortgage is only $1,200, so I’ll make $300 each month.”
That investor is about to lose their shirt.
Many laypeople love to hate landlords because they don’t understand all the expenses and labor that landlords incur. Beyond the cost of the mortgage payment, landlords pay for:
- Repairs and Maintenance: Typically 12% to 15% of the rent over time
- Property Management Fees: Another 12% to 15% of the rent, including both ongoing fees and new tenant placement fees
- Vacancy Rate: Usually 4% to 10% of the rent, depending on the neighborhood
- Property Taxes: 5% to 15% of the rent
- Property Insurance: 5% to 10% of the rent
- Legal, Accounting, and Bookkeeping Expenses: 2% to 4% of the rent
- Rent Default Insurance: $350 to $600 per year in most cases
- Utilities: Often 5% to 15% of the rent, but many landlords require tenants to pay these directly
- Homeowners Association or Condo Association Fees: Anywhere from 5% to 20% of the rent, when applicable
In the industry, investors refer to the 50% rule: On average, landlords lose 50% of the rent to nonmortgage expenses. But each property comes with its own unique expenses. In a high-demand neighborhood, landlords might only see a 2% vacancy rate. Other neighborhoods, suffering from high crime rates and low demand, might see 20% vacancy rates.
As an investor, it’s up to you to do your own thorough due diligence and research. If you get cavalier about picking properties, you can expect to lose money each month rather than earn it.
Thoroughly Screen Tenants — Including Existing Ones
Your rental returns are only as good as your tenants. Lease to reliable renters and you’ll enjoy steady rental income and minimal wear and tear. Lease to deadbeats and every month becomes a battle, constantly chasing them for rent, enduring complaints from neighbors, and paying to repair the damage they inflict on your property.
Start with tenant screening basics like credit checks and criminal background checks. But then pick up the phone and call employers and personal references. Also call current and former landlords. The latter is especially important — current landlords may provide a glowing review just to be rid of nightmare tenants, while former landlords tell it to you straight.
All of these screening tips go for existing tenants in turnkey properties as well. Don’t take the seller’s word that the tenant pays on time and treats the property respectfully. The seller has a vested interest in pitching the tenant as perfect.
Screen existing tenants as if they’re applying to move in. Ask the seller for copies of their background checks and their rental application. Contact all their references as outlined above. If the seller refuses to provide that documentation, consider it an enormous red flag.
Plan Your Financing Before Making Offers
New investors talk to one lender who gives them a prequalification letter and pat themselves on the back for a job well done. Experienced investors think in terms of a “financing toolkit,” with many different ways to fund deals.
They work with several hard money lenders for purchase-rehab financing. They build relationships with a range of conventional mortgage lenders and understand the mortgage approval process inside and out. But they know conventional mortgages only work for the first few properties due to credit reporting limitations. Conventional mortgage lenders report data to the credit bureaus, and they don’t lend to borrowers with more than a preset number of mortgages appearing on their credit. That limit typically sits at four mortgages, including your home mortgage, any second homes, and your rental properties. That means conventional mortgages don’t work as a scalable solution.
Experienced real estate investors go on to build relationships with private, commercial, and portfolio lenders specializing in rental loans.
In some cases they open rotating lines of credit such as HELOCs through Figure.com or unsecured business credit lines. I’ve even bought a house with a credit card before.
The last place you want to find yourself is having a house under contract only to struggle to find financing. Start putting together your own financing toolkit now, before you start making offers on properties.
Hire a Home Inspector
Inexperienced real estate investors need to lean heavily on experienced support teams. Regardless of what the seller says about the condition of the property or how shiny the new countertops look, hire a home inspector to examine every inch of the property carefully. If you need help finding a reputable home inspector, check out HomeAdvisor.
A home inspector can help you discover hidden problems like termites, rotting joists, or foundation problems. These are problems you would probably miss otherwise, and then pay thousands of dollars to rectify later.
Home inspectors also give you a sense of the condition and remaining life expectancy for the mechanical systems on the property. “Turnkey” doesn’t mean “brand new” — it means “habitable.” A turnkey property could still have an aging furnace, air conditioning condenser, hot water heater, and pipes. Although older systems don’t necessarily mean you shouldn’t buy, you need to know the condition of every component in the property so you can budget accordingly.
Form a Management Plan
Good investment properties can still lose money if badly managed. Before buying a rental property, you need a plan for who will manage it.
That could mean you, of course. But it requires additional skills and knowledge on your part. If you plan to manage your own properties, prepare to spend plenty of time learning those new skills — and time managing the properties.
You should also still subtract expenses for property management. Whether you manage the property or someone else does, it still constitutes a labor expense. To ignore it is to overstate your returns compared to truly passive investments like index funds.
Besides, you never know when you will become unable or unwilling to manage your own properties.
If you plan to hire a property manager, invest many hours in collecting referrals from experienced local investors and then conducting interviews. Ask detailed questions about their tenant screening process, how frequently they inspect rental properties, and how they report performance to owners.
Also, get very clear on their fee structure. Unscrupulous property managers charge a wide range of hidden fees, sneaking in fees for property visits, for sending contractors to make repairs, for vacancies, or for anything they think they can get away with charging.
The most transparent property managers charge exactly two fees: an ongoing fee as a percentage of rent collected (typically 7% to 10%) and a new tenant placement fee (typically one month’s rent). Nothing else.
Remove Bad Tenants
Remember: The quality of your renters determines the quality of your returns. Fail to renew or evict bad tenants at your own own peril.
If the tenant directly violates your lease agreement, file for eviction. Contracts go two ways, and each party must honor them.
For bad tenants who don’t flagrantly breach your lease contract but are noisy, rude, dirty, and otherwise high-impact on your property or other renters, non-renew their lease when it comes up for renewal. You don’t have to continue leasing to them indefinitely, just as they don’t have to continue renting from you indefinitely.
Be courteous and professional but also decisive. The world is full of reliable, conscientious people, so rent to them rather than unreliable and combative tenants who drive away their neighbors.
Final Word
Turnkey properties offer an easy way to invest in real estate directly with a rental property. You get to skip the headaches of renovation and scouring the countryside to find off-market deals, moving straight to “Go” and collecting your rental income.
The downside to turnkey rental properties is that high returns are hard to come by. Someone else has already done all the work and taken on the headaches for you. By outsourcing that labor to another investor, you effectively pay them a premium and accept market pricing for a rent-ready property.
That’s the tradeoff: higher pricing for fewer hassles. But for investors who aren’t looking for a home-run deal and simply want an easy, ongoing stream of rental income, turnkey properties can be a perfect fit.
Have you ever invested in rental properties? How did it go? What do you plan to do differently next time?
