But… choosing the right company to partner with is the key to making a turnkey real estate investment work for you.
There’s no doubt that turnkey real estate investing is a hot topic these days among savvy real estate crowds-a concept that has both fans and nay-sayers alike. Even though several definitions for this term are currently in use, a generally accepted meaning for “turnkey investing is as follows: An investment strategy of buying, rehabbing, and managing a property through a third party.”
In other words, a turnkey investment property makes diversifying your financial portfolio with real estate hands-free and straightforward, even from afar. As the term aptly describes, all you need to do is “turn the key, and you’re in.”
Learn how to invest in turnkey real estate rentals with a free webinar from Don Ganguly, CEO of Home Union, and discover what real estate investing with turnkey properties is all about.
What is the Process of Working with Turnkey Third-Party Management?
Finding a Property
In consultation with the turnkey real estate company, you’ll put together your investment goals and find the right investments to help you achieve those goals. Most turnkey property management companies have a pre-screened database of properties. Some even have proprietary software that lets you sort properties based on your criteria and run metrics to determine which properties will provide the best cash-on-cash return.
Funding the Investment
Turnkey property management companies will help you determine the best way to finance your property.
Acquiring the Property
The turnkey property management company will guide you through all the steps of purchasing your property.
- Paperwork
- Home Inspections
- Appraisals
- Loan Documents
- Closing
- And More
Renovating the Property
Whether you need renovations from the get-go or further down the line, your turnkey provider will handle all the repairs, improvements, and maintenance.
Managing the Property
Your turnkey provider will handle everything that managing a property entails, which can be a lot. You should expect to pay around 3% for getting the property, 10% for construction management, and between 7% and 10% for ongoing property management. The fee is worth it because of all services the company provides.
- Prospective tenant screening
- Writing rental property listings
- Quality tenant placement
- Security deposit collection
- Ensure easy rental property turnover
- Setting competitive a month’s rent
- Perform regular maintenance
- Help you make tax deductions
- Tenant relations
- Maximize rental income
- Avoid surprising liabilities
- Property inspection
- Lease agreement signing
- Early lease terminations
- Encourage qualified tenant renewals
- Manage tenant satisfaction
- Responding to maintenance requests ASAP
- Eviction
- And more
Benefits of Turnkey Investments
- First and foremost, they provide attractive simplicity to every real estate investor. Going solo when you invest in real estate means you take on all of the tasks yourself – and there are many! By handing over the day-to-day management to someone else, you get the cash flow benefits without the headaches. As Brandon Turner of BiggerPockets.com states, “A turnkey real estate investment company attempts to simplify the process, so you ideally will only need to write and receive checks.”
- With turnkey investments, you don’t have to woo tenants. Instead, they come “pre-installed” with your property. With folks already in residence, you can count on immediate cash flow and avoid time-consuming and, often costly, marketing activities necessary to advertise your property.
- You can avoid the ROI guessing game. Instead of wondering what your cash flow might be with a specific rental property, you can step into your investment with a solid understanding of what kind of rental revenue to expect.
- And perhaps, most appealing of all, a turnkey investment allows you to stay put, wherever you are, while cashing in on a great investment property-even if it’s far from your backyard.
Cons to Turnkey Investments
Turnkey properties sound like a simple, straightforward way to invest in real estate. However, buyers should be warned. All that glitters isn’t gold. There are pitfalls to turnkey investments, and avoiding them takes due diligence and legwork. For example, you could inherit bad tenants. So, always make sure you thoroughly vet the tenants before you purchase a turnkey investment.
As Erin Lowry of U.S. News notes, “Buying a turnkey property requires a lot of research, a significant chunk of money, and a most valuable commodity – time.” She continues, “Anyone interested in investing in a turnkey property needs to be on the lookout for scam artists and perform their due diligence before taking the keys.”
What are warning signs that a turnkey company may not be legitimate?
Inexperienced Operators
Find out how long the company has been in existence, where they invest, and how many clients they’ve had. Ask for references. Conducting due diligence is indispensable for any investment.
Lack of Direct Investments
One way to gauge the company’s confidence in its properties is whether they invest in their portfolio. If they do, find out what sort of returns they get. If the company doesn’t own or manage its own properties, they might lack the experience to look after yours!
Lacking Infrastructure
How many roles does the person you’re interacting with perform? If they’re responsible for purchases, rehab, tenant relations, and maintenance, then that’s too much for one person! You want a turnkey rental business with many dedicated professionals. If it’s just one person handling everything, it begs the question of how much attention each client and each property is getting.
Low-Quality Renovations
Take a tour of real estate managed by the turnkey company. If you’re told that the property has been renovated, conduct an inspection to be sure. You don’t want to be on the hook for expensive repairs!
Competitive Rent
Knowing how to set the perfect rent price is a skill unto itself. Conduct research into what comparable properties in your area are charging for rent to reduce the likelihood of vacancies. It may be that your property is priced too high or too low for the area.
Overpriced Properties
Turnkey properties have a reputation for selling overpriced homes to out-of-state investors who don’t know better. So, study the local market to see if you’re getting a good deal.
Alternative Investment Strategies
Online Marketplaces
Online marketplaces like investimate collect market research, property data, and other information about single-family rental properties. Using the marketplace, you can find properties that work for you nationwide and take over more of the property management duties.
The advantage of an online marketplace is that your property will come fully leased, so you can start generating rental income right away. You won’t have to worry about buying, fixing, and then leasing the property. Although property managers do a lot, so you may still want to use one to manage your property.
Buying and Holding Properties
Rehabbing properties, unlike flipping, means fixing a place up just enough that you can rent it. If you end up falling in love with rehabbing, then you can quickly scale your investment portfolio.
BURL
BURL is “buying utility; renting luxury.” The strategy entails purchasing properties that generate passive income reliably so that you can invest in a luxury property. You might not be able to pay off 100% of the loan on the luxury property, but the amount it appreciates and the ability to increase rent will make it worthwhile.
Live-in Flip
With a living-in flip, you make the property principal residence for two years while you renovate it, and then you make it a rental property for at least three years. Then you perform what’s known as a Section 121 Exclusion at the time of sale. That lets you write off upwards of $250,000 (if single) or $500,000 (if married filing jointly). Since it’s an exclusion, you won’t have to pay taxes on those funds or reinvest them.
People often pair Section 121 Exclusions with 1031 Exchanges, which allow you to use your investment property’s profits to purchase a property of equal or greater value without paying capital gains taxes or depreciation recapture.
Rental Debt Snowball and All Cash Rental Plans
Snowballing refers to collecting all your money to either pay off your rental property mortgages one at a time or using your money to purchase properties outright without taking out a loan.
Bottom Line
It’s critical to be cautious about what company you choose to invest with. Always do your due diligence as you research potential real estate companies for turnkey investments. Working with HomeUnion®® not only can help you achieve your investing goals, but we can also provide you with expertise in the real estate investing process.
We’ll take the day-to-day pressure of property management off your plate and approach your property management with the utmost professionalism. We’ll help you find quality tenants, collect rents, and take care of any repairs. When you partner with HomeUnion®®, we can help ensure your success-and deliver peace of mind.
To learn more, schedule a consultation with one of our Solution Managers.
