Consider a Turnkey Property
Within the real estate market there are a variety of investing opportunities. Depending on the skill, capital, location, and/or interests of the investor, several options may be available. Investing in public vs. private real estate is often a leading consideration. Public investments offer a piece of a very large pool for shareholders. Private investments often offer the chance to become more involved in a variety of ways. Fix and flip is becoming more popular in the private market as online lending provides easier access to capital but many private investors are looking for something faster and easier. For these investors, turnkey properties are often a top choice.
Turnkey properties require very little time and effort to rent out. Though they might not always be the cheapest option, what makes these properties unique is that they’ve already been rehabbed, usually by a specialized turnkey real estate company, before they’re put on the market. In fact, there’s often a renter in the home already when the sale closes. Typically, those same firms also offer property management services to the investor. That means the property manager is the one who gets a call when the air conditioner breaks down, not you.
In any case, having a rental property can be a great investment. You get a steady stream of income from rents that helps to payoff the costs and return a profit. However, buying any type of property and specifically a property you plan to rent to others will come with risks. That’s why it is important to make some good decisions in the following areas when going through turnkey property due diligence.
Know Your Property
While turnkey homes usually require quite a bit less time than other types of real estate, investors shouldn’t underestimate the amount of due diligence they have to do. The biggest question, of course, is whether the property itself is a good value. Some novice investors get so enchanted by the term “turnkey” that they assume all homes with that label are fail-proof. Unfortunately, that’s not the case.
Experts say you should always visit the property in person before sealing a transaction, even if that means flying to another city. Real estate property is a major purchase and investment, so it's crucial to know exactly what you’re buying. Seeing the property up close also gives you a better sense of the neighborhood, which will have a significant impact on the property's long-term marketability.
For added security, seasoned investors say it’s always a good idea to get a professional property inspection as well. The rehab company might wow you with a dazzling kitchen and fully renovated bathrooms, but you want to make sure the less-conspicuous features of the home – the furnace and roof, for example – are in just as good a shape.
Know Your Property Manager
If your turnkey property comes with a property manager or property management services, it is important to understand their terms. Property management may be available to provide a full range of services like maintenance, rent collection, and building cleaning. Some property managers may also be responsible for filling tenant vacancies, running background checks, and signing leases. Since a property manager’s services will usually vary it is important to know exactly what they are liable for and to get it in writing through a contract.
When considering a property manager associated with a turnkey property, here are a few more questions to ask:
How much experience does the firm have?
On average, how long does it take to find a new tenant for vacancies?
Does the company provide financial reporting through monthly and annual statements that can help you track revenue, expenses, and income?
What are the fees?
Know Your Ownership Arrangement
There can be a variety of ways to structure real estate investments, especially within the private market. Knowing your ownership arrangement will usually be a factor in your overall investment decision. There are several structures that can be used. Real estate investment groups (REIGs), partnerships, and limited liability companies are a few of the options. In these types of business structures, the company usually has most of the responsibilities and offers many convenient benefits. These structures usually also pass through income to owners as partners. This means income may be reported on a K-1.
Less complex agreements may also exist. In many cases, the financier becomes the independent owner. Independent ownership can require personal management or the procurement of third-party services for help in property management. In some instances, independent owners may look to setup separate expense accounts authorized for third-party property management use.
Overall, it is important to know your arrangement and to be comfortable with the associations. Each type of structure comes with its own provisions so you should understand and agree on all of the nuances before making a final decision.
Financing Your Turnkey Investment
Interest rates are always changing with different types of economic environments. Financing when rates are the lowest is ideal. Even if you don’t get in at the best time, there can always be options for negotiating the best rate. Borrowers with the best credit score will have the greatest advantage. The mortgage lending market also offers a wide variety of loan products.
Bankrate.com can be a great place to check the average rates on all types of mortgage lending options. Not all banks will offer every type of loan but here are a few to consider:
30-year Veterans Affairs (VA)
30-year Federal Housing Administration (FHA)
30-year fixed jumbo
15-year fixed jumbo
The longer the loan is financed for the lower the monthly payments but the higher the interest. FHA loans offer special rates to some qualified borrowers. Adjustable rate mortgages (ARM) with specified intervals will require a fixed payment for a certain period of time followed by a variable rate that resets on a schedule after that. Jumbo loans are for relatively higher principals.
Getting a mortgage loan pre-approval can be a good idea for investors looking to finance through a mortgage loan.
Know the Pitfalls
While it may sound like a great way to bring in some extra revenue, it’s important to realize that real estate investing isn’t for everyone. There’s always the threat of some unforeseen calamity, from a sudden property tax hike to chronic maintenance issues to accidents (fire, falling trees, etc.). As such, buyers should have extra capital and cash available to rely on if any surprises or emergencies occur.
Experienced investors also say it’s often best to view turnkey properties as a long-term undertaking. Unlike stocks and other relatively liquid investments, real estate can take a while to sell. Property values also fluctuate so selling to earn any type of profit may not be possible until after a few years of mortgage payments have been made.
The Bottom Line
Turnkey properties are an interesting alternative in the real estate market. They require little renovation or maintenance. They are also usually available for tenants immediately, which means immediate income flows once vacancies are filled.
To be sure, investing in real estate is never a risk-free endeavor. However, with the right due diligence, turnkey properties can come with low risks and high returns.