What is turnkey real estate (and is it right for you)?
If you’ve spent a little time searching investment homes, you’ve probably come across articles or forums that discuss the merits of turnkey properties. People are pretty passionate on both ends of the discussion.
In this article, I’m going to share my experience buying turnkey properties through two different types of companies, the pros and cons of each, and how to determine if this investment method makes sense for you.
First, let’s quickly define what a turnkey property even is.
What is a turnkey property?
Definitions vary depending on who you talk to, but most people in the industry will agree that a turnkey property is one that is occupied or move-in ready, with appliances in working condition and no obvious structural or electrical issues. Although “turnkey” homes are not fixer-uppers, they may nonetheless require cosmetic upgrades or a refreshing.
Pros of turnkey properties
The property is in rent-ready condition. The process to get a tenant should be rather seamless.
There should be minimal repairs or renovations needed on the property.
In the first few years, it is possible that repair costs are low as some turnkey properties are recently renovated. This could result in strong cash flow for the first several years.
Cons of turnkey properties
Turnkey properties can be on the more expensive side in real estate investing, requiring more investment upfront. This is often driven by the high level of rehab and repair.
The higher price point of a turnkey property doesn’t leave much, if any, additional equity beyond the down payment. This is often where you hear that there are “no deals” from some investors who prefer to fix properties themselves.
There are companies that specialize in turnkey real estate investments all around the country. I have found that the greatest concentration of properties seems to be in Midwestern and Southeastern cities, such as Indianapolis, Memphis, Birmingham and Kansas City — all markets in which Roofstock has properties for sale.
The two types of companies with turnkey properties
I have firsthand experience buying from a traditional turnkey company and buying a property on Roofstock.
I chose to buy turnkey properties because I live very far from the markets in which I wanted to invest. I was brand new to real estate investing, so it was important for me purchase properties that were going to be low maintenance and immediately rent-ready. My purchases with both Roofstock and the traditional turnkey company worked out well, so I wanted to share the two types of experiences I’ve had.
Experience 1: The traditional turnkey company
I’ve purchased a property through one of the larger and more traditional turnkey companies out there that focuses on a few key markets in the Midwest. There are two arms of the company:
One that handles the buying, rehabbing and selling of the property.
Another that handles the property management aspect, i.e. the leasing, turnover process and year-to-year general maintenance.
Here’s how the process works:
The turnkey company buys fixer-uppers at below-market prices. Then they rehab the properties, which might include replacing significant systems, such as the roof, HVAC, electrical, plumbing, flooring, and major kitchen appliances. Lastly, they market and sell the revamped properties to investors looking for rent-ready homes. They also vet tenants and manage the property going forward.
In terms of budgeting expectations, turnkey companies typically operate in a specific price point of the market. Expect to find homes in the $100K, $125K and $150K brackets. If you plan on using financing, keep in mind that most lenders typically require a 20%-25% down payment for investment properties.
The property I chose was a three-bedroom, two-bathroom home for $125K, located in Memphis. I’ve found that a ~1500 square foot home with three bedrooms and two baths, renting between $1,000-$1,250 per month, is very appealing to renters. I’ve had no trouble keeping it occupied.
The actual buying experience was pretty smooth. Over a few months, as different properties were being renovated, the company would send me a digital booklet on each home. These booklets contained information such as sale price and suggested rent. I looked through about a dozen booklets before finding the right property. The closing process was very similar to the process I experienced with Roofstock, which I discuss in detail later on.
Experience 2: The marketplace with buyer safety nets
While not a turnkey company, marketplaces like Roofstock offer features that give buyers a similar peace of mind. One of the many benefits of purchasing an investment property through Roofstock is that connect buyers with a vetted local property manager.
One of the homes I purchased through Roofstock was at the $100K price point and located just outside of metro Atlanta. I was very impressed with Roofstock's buying process, which you can read all about just below.
While the cash flow for the Roofstock property has been comparable to the one I purchased through the turnkey company, the appreciation on the Roofstock property has been much higher. This is because the Atlanta real estate market has seen significant growth across home prices, rental rates and population.
Is a turnkey property right for you?
When it comes to this question, I’ve found that there are three main camps:
Those who prefer to handle the major renovations themselves to keep the purchase price as low as possible.
Those who are looking for a rental that is move-in ready. They are often short on time and have cash available to invest.
Those who are somewhere in the middle.
The first group might say that turnkey is too expensive. They’re generally gung-ho about handling it all themselves or with their self-assembled team.
The second group might live very far away from profitable rental markets, as I do, or have their hands full with their primary job. For example, a busy professional in New York City might not be able to afford investing locally, but could afford a rental property in a market such as Indianapolis or Atlanta. And that same person’s time might be better spent focusing on their work rather than laying new floors, tearing out walls, or installing toilets.
Everyone else tends to fall somewhere in the middle. They’re interested in investing in real estate and they want to find a company that can help them achieve their rental property goals.
Turnkey properties are made for those who fall into the second and third groups.
Disadvantages to turnkey real estate investing
In the interest of being fair and balanced, there are also some potential disadvantages to turnkey real estate investing. Here are some things to be aware of with these types of properties:
Turnkey properties are usually sold at a bit of a premium
Some turnkey companies buy houses, fix them up, then resell them as turnkey investments. When it comes down to it, they’re no different from home flippers or wholesalers who make their profits by selling investors property with a very high mark-up.
On the other hand, companies such Roofstock operate an online platform that puts real estate investors together with sellers. They receive a small transaction fee, but that’s quite a bit different from some other companies that might mark up a property by 30% or more.
Lower risk-adjusted returns
Since turnkey real estate is move-in ready – and oftentimes already cash flowing with rents from qualified tenants – some of the risk has been removed from the investment. Because there’s generally lower risk, there may also be a lower risk-adjusted return from turnkey rental property.
That’s similar to the way that bonds work. As of this writing, U.S. 10-year Treasury Notes yield less than 1%, compared to U.S. corporate bonds with a 3.3% yield or high-risk CCC rated bonds with a yield of almost 18%, according to The Wall Street Journal.
Real estate investors expect returns much higher than 1% but aren’t willing to gamble their capital on a high risk investment. Instead, they aim for risk-adjusted returns somewhere in the middle.
That’s exactly what can be found with some of Roofstock's properties, where annualized returns from houses in 4-star and 5-star neighborhoods run around 5-7% and 1-star to 3-star neighborhoods run around 7.5-12%.
Important things to consider before buying turnkey real estate
If you’re not interested in dealing with the uncertainty of managing your own rehab projects and want to buy a property that shouldn’t have any major expected expenses (HVAC, roof, water heater, etc.), most investors will find that there are far more benefits to buying turnkey real estate than there are drawbacks.
However, before deciding to take the plunge on investing in turnkey rental property, there are several important things to consider:
Financial metrics such as cap rate, cash-on-cash return, and ROI to make sure that the numbers “make sense” compared to alternative investment options.
Obtaining a loan for long-distance rental property can sometimes be more expensive than buying in your own market, so be sure to shop around for a lender and explore different financing options.
Having a qualified local property management and real estate team can be the difference between having a turnkey rental property with robust positive net cash flow, or a place that barely breaks even.
Always conduct thorough due diligence, even if the property is turnkey, using a professional inspector to examine structural and mechanical items such as the HVAC and foundation, and the quality of any renovation work that was done.
Where to find turnkey rental property
If you’ve stayed with us this far, you’re probably curious about how to begin looking for a turnkey property.
There are a number of places to begin your search:
Websites such as Zillow and Realtor.com are good places to look for homes listed by real estate agents for sale, although you will need to do your research to evaluate the property condition and the local market dynamics.
Craigslist is a good resource for buyers hoping to find a good deal from FSBOs (for sale by owners), but remember that the “buyer should always be aware” with these types of sellers.
Check out Roofstock’s selection of properties. Roofstock has a variety of investor-friendly features, such as detailed financial performance for each property listed and full transparency for all parties throughout the deal process.
Search for “turnkey companies” on Google for whichever markets you’re considering investing in.
