Some get to financial independence through investing until they get to “their number”. Others prefer creating passive income streams until their monthly costs are covered. While I prefer the hybrid model between these two approaches, today we will focus on the passive income side of the model when we discuss Investing in turnkey real estate.
This post was first published on Passive Income MD, and comes from an expert in this niche. Take it away, Peter!
If you’ve done any research into real estate investing, you’ve likely heard the term “turnkey real estate.” Businesses calling themselves “turnkey companies” claim to take care of all the hard parts of real estate investing – helping you with all aspects of purchasing and managing a rental property – leaving you to sit back and collect passive income.
That sounds great, but surely there’s a catch, right? Well, sometimes the only way is to try and find out, or talk to someone who already has. Fortunately, having had some experience with turnkey companies myself, I’ve decided to share what I know and hopefully this will be a nice primer for you on the subject.
What is a Turnkey Property?
The definition of a “turnkey” property is pretty straightforward. Basically, it’s a property (house, duplex, apartment building, etc.) that has been fully renovated and is ready for purchase (and for renting out).
For the prospective investor, this is great because it means that little to no additional work is necessary in terms of renovation or repairs, and the property can be rented out immediately after purchase. On occasion, some of these companies will sell you a property that is already “performing”, which means a tenant is already in place.
Turnkey Companies and Property Management
Most turnkey companies also offer property management services. The goal is to streamline everything as much as possible so that an investor can hit the ground running.
Finding a property manager can be a hassle for many investors, and utilizing the turnkey company’s property management services definitely makes things easier. However, know that you’re not wed to this property management for the life of your investment. You can hire another if needed, however, they’re banking on the fact that they’ll do a good job and you’ll have no desire to seek another one.
Downsides of Turnkey Companies
But as with anything, convenience comes with a cost.
What turnkey operators charge is pretty variable. Some have acquisition fees, which are additional fees added on to the purchase and paid at closing.
Others own the properties and sell them to you at a slight upcharge. Some might own the property management company and they get paid through fees.
Either way, as the buyer, it’s important for you to understand what the fees are. Of course, fees are sometimes the unavoidable cost of doing business.
How do you find out what those are? Simply ask if it’s not laid out clearly on their platform or website. All reputable turnkey companies should be transparent and open about the fees they are charging and it’s your right to know what they are.
Understand the Numbers
As an aside, I think it’s important to reiterate the importance of research. Learn as much as you can about how this process works. Read anything you can get your hands on. Know numbers like cap rates and other financial numbers.
Sure, most people who look to turnkey companies typically want a more passive investment because they don’t have the time or connections to build the team on their own. However, that shouldn’t mean that they walk into this process blind.
You don’t have to understand every aspect, but you should have a basic understanding of the numbers involved and how that affects your projected rates of return. None of the math is super complicated, in fact a lot of it is as easy as calculating I’s and O’s.
If you’re looking to purchase any rental property, then going in prepared will make all the difference.
Local Markets Offer Different Returns
One important thing to know is that different areas of the country offer different types of returns. Most people think about real estate investment returns in terms of appreciation and cash flow (appreciation is the increase in price that happens over time due to local and nationwide economic factors). But some places tend to appreciate faster than others. For example, urban coastal areas like San Francisco, Los Angeles, and New York tend to appreciate much faster than the middle of the country.
However, places in the middle of the country often offer investors more cash flow opportunities — where the income exceeds expenses by a decent margin, leaving more money in investors’ pockets on a monthly basis.
Of course, people invest differently depending on what their goals are. Personally, cash flow is king for me as my goal has always been financial freedom through monthly passive income – as soon as possible. That means I need income from places other than my career as a physician.
Therefore, I’ve focused for the most part on cash flow. Still, I’m a huge fan of diversification, so I have invested for some appreciation as well, although that’s a smaller part of my portfolio.
How Much Does It Cost?
Cost really depends on the property that you’re attempting to purchase. I live in Los Angeles so it’s hard to find a single family property here for less than $1 million. However, my turnkey purchase in the midwest cost me just over $100,000. I put down 35% as a down payment and it cash flowed right away.
So the amount of capital you invest can vary dramatically depending on where the property is located and the quality you pursue.
I will tell you that I know some people who invest in $50k homes. But I find they can be quite a headache with the quality of tenants and the repairs involved. So I tend to only look for properties at least $100,000 in price.
Again, this depends on what your goals are. Personally, I’ve always thought that the best way to ultimately build long-term sustainable and generational wealth is through owning your own real estate. For diversification’s sake, I do invest in crowdfunding, syndications, and funds, but I think owning your own properties should be the foundation of your portfolio.
Utilizing a turnkey company for my first rental property helped me learned so much about the process. I have that property run by property management so I can easily balance that while practicing medicine and running all the passive income side hustles that I do.
The cash flow isn’t life changing on its own, but I can see how consistently stacking some of these properties can make a huge impact over time, for example, if I was able to buy one property a year for 10 years. Plus, it helped me get over “analysis paralysis” and start moving to the life of financial freedom that I dreamed of.
So in that sense, it has helped me achieve my goals and I don’t regret it at all.
Where Can You Find Some Turnkey Companies or Turnkey Website?
There are a ton of options out there. Which one do you choose? Well, obviously I haven’t looked at them all or used them all, but I have gotten comfortable with a few. I base my preferences on personal experience, reputation, and just talking with the principals and understanding their process.
In fact, I’ve created a list since I started getting asked that question all the time. You can find the list of my recommended turnkey real estate companies here.
So Should You Purchase Turnkey Real Estate?
It’s completely a personal decision. In essence, it all comes down to these questions:
1) Are you someone who can find the whole team (realtor, lender, contractor, property manager) and performing all the initial analytics on these properties on your own? Is it something that excites you and you feel you can handle?
2) Are you a busy physician who wants to start buying a property a year and building your cash flow, and you simply don’t have the time to find this team. Perhaps you want a little more hand-holding. Perhaps it’s your first investment in a rental property and you want someone to lay out the numbers and projections for you.
Do you have the time to do all these things, are you willing to pay a fee for the convenience and the saving of time to make owning a rental property a reality?
If you find yourself relating to the 2nd scenario, then utilizing a turnkey company might make sense for you.
Do you have an experience purchasing a property through a turnkey company?
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