What Is A Turnkey Property?
Turnkey properties are an easy way for an investor to break into the real estate industry, and they allow for an investor to generate monthly income without doing a lot of work. And that’s what it means to be a passive investor.
Turnkey Property Real Estate Investing
- Turnkey Property definition
- Our definition of Turnkey Properties
- Why is it a good strategy to invest in Turnkey Properties?
- What are the risks involved with Turnkey Properties?
- Where to find Turnkey Properties?
The landscape of the real estate investing world can be daunting for an inexperienced investor. Turnkey properties are one of the many strategies that an investor can pursue. Breaking down the basics and understanding the main points can help an investor decide if this is a strategy worth pursuing.
Turnkey Property definition
A turnkey property is a loosely defined term in the real estate industry. You may get a different definition of it depending on who you ask. As an investor, this can cause confusion and frustration.
Realtor.com defines turnkey properties as a property that is ready for you to move in, with no need to make big repairs or improvements. Investopedia defines a turnkey property as a fully renovated home or apartment building that an investor can purchase and immediately rent out. Brandon Turner of BiggerPockets agrees with our assessment on how this term is loosely defined. He defines it as an investment strategy in which the investor buys, rehabs, and has a property managed through a third-party, usually from a long distance away.
All of this can be confusing for someone who is just entering the real estate investing world and can be overwhelming. So what is the definition of a turnkey property? We rounded up our experts who have a combined experience of nearly 70 years in real estate investing.
Our definition of Turnkey Properties
A turnkey property, by our definition, is a real estate investment property that requires minimal or no work at all in order to provide an investor with monthly income from a tenant paying rent. What would be minimal work? Only having to paint, clean, and make the property livable for a renter to be attracted to the property. As we mentioned before, similar to BiggerPockets’ definition. Being able to generate monthly income from an investment property without having to do much work is the best way for a passive investor to break into the real estate industry, since it will require little work or no work depending on the property.
Why is it a good strategy to invest in Turnkey Properties?
There are several reasons why an investor should consider adding a turnkey property to their investment portfolio. Ever heard the famous quote “90% of millionaires become so through owning real estate”? Or have you ready the book “Rich Dad Poor Dad”? Then you know the importance of diversifying your portfolio and how lucrative real estate is.
Turnkey properties are a good way for an investor to break into real estate investing and get into the game. If you are an investor already and are just looking to park some cash somewhere else, this will be an easy strategy that will save you time and effort. Although it will still require some due diligence for an investor, the resources needed to get the basic information is readily available for investors to make an educated decision on buying a turnkey property.
What our real estate investors use to do research:
- Zillow – used for finding recent deals in the area
- Census – used for finding areas with increasing population vs. decreasing
- Rentometer – used for finding rental comps in an area
- NARPM – used for finding property management companies
What should an investor be targeting for a good Turnkey Property?
Turnkey properties can provide passive income for an investor. Below are the top 3 things we think every investor should be considering when doing their due diligence on an investment property.
Minimal effort needed to bring the property to rental condition
- This part is essential to making a property be a turnkey property. As a passive real estate investor, the goal is to spend the least amount of time and resources in order to get a property to rental condition. Some examples are adding small electrical/plumbing repairs, applying new paint fixing flooring, or completing deep cleaning. All of these are things that can be done by investors working from their own home by hiring a contractor to do it.
Know the areas you are interested in targeting
- Location, location, location. There is nothing worse than not having your research beforehand on where you want to invest. Is it in your backyard? Is it 1500 miles away? Both of these strategies can work as long as you research the market. As an example, Zillow is a great resource and tool to use to check out a market and see what kind of activity is going on. There are other resources that can be used to provide information on “hot markets”. Do your research!
Normal Cap Rate Returns for the area
- This is an important and often overlooked aspect of acquiring a turnkey property. This research may require more time to research and determine, but it is one of the most important ones. It will help indicate the rate of return that an investor can expect to generate on a turnkey investment property. Different markets offer different cap rates, ranging from 3% to 15%. Understanding the normal cap rates for the area you are investing in will help you determine how good an investment really is. This information is more difficult to obtain, and the cap rate can differ depending on someone’s risk tolerance. Check out this cap rate calculator that we use.
What are the risks involved in turnkey properties?
No investment will come without risk! An investor’s risk tolerance will play a crucial role in deciding the factors of what makes a turnkey property less risky. There are 3 main risks that we believe are the most important to consider during an investor’s research process.
Not buying from a trusted resource
- A trusted resource will help you understand the information above and will guide you in your buying process. The key component to finding a trusted resource is the credibility of the firm. What are other customers saying about prior purchases? Can the firm provide recent examples of turnkey property sales?
Bad property management company
- Property management companies will typically charge about 10% of the monthly rent (maybe more) cutting into the profits, but will allow for an investor to be passive and not worry about the property. Select the wrong property management company and this can become a nightmare for a turnkey property.
The bottom line
- There are several costs that come with maintaining a turnkey property, from the property management company mentioned above, to the landscaping in the house, to the occasional plumbing issue that can occur, and don’t forget the annual property taxes. We recommend using the 1% rule. That is, 1% of the total property value will go to the maintenance of the property annually.
Where to find turnkey properties?
There are several avenues where you can find great turnkey investment properties.
The most common is buying them directly from the MLS. This will be the least risky and will require the least amount of work to become a passive investor. However, lower risk associated with buying a turnkey property will probably mean lower reward, because these turnkey properties might provide low cap rates.
Secondly, you can buy from your local real estate agent. Your success will depend on the effectiveness of the real estate agent. Will the real estate agent have a solid network and the ability to consistently find off-market turnkey properties?
Lastly, you can buy turnkey properties from a wholesale real estate company. It can be an easy way to find a great deal, but it’s critical that the wholesale real estate company is credible and trustworthy. There are many companies out there, and finding a legitimate one can be challenging. Ask a company how many deals they’ve done. Read their online reviews. Talk with other investors. Once you find a wholesale real estate company you can trust, you are much closer to achieving your goal of passive rental income.