What Is A Turnkey House? A Guide For Investors
Victoria Araj6-minute read
May 19, 2023
If you’re new to the world of real estate investing, chances are you’ve stumbled across the word “turnkey.” As a popular type of investment, turnkey properties provide owners with the opportunity to generate relatively passive income through rent.
But what exactly is turnkey property investing? Understanding how a turnkey house works is simple enough, but determining whether this kind of property is a smart investment choice proves to be a much greater challenge.
To make the smartest decisions for your real estate portfolio, you’ll need to know more about turnkeys, how they work and their pros and cons.
What Does A Turnkey Property Mean In Real Estate?
Turnkey properties are pieces of real estate – be it a house, duplex or apartment building – that are fully functioning and ready for you to rent out immediately. As such, they require little to no upfront effort from investors, which means you’ll be able to generate income on your property much faster than you would with a more time-intensive project, such as flipping a house.
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How Does A Turnkey House Work?
In most cases, turnkey properties are repaired, renovated and sold to investors by companies that specialize in the turnkey market. Some of these businesses also offer property management services, which means they fulfill the duties of a landlord on the investor’s behalf. Not only does this save you time, but it also allows you to invest remotely and rake in an income from afar.
By combining convenience with minimal repair expenses, turnkey homes have quickly become one of the most popular types of investment property in recent years. However, these move-in-ready conditions do come at a cost. You may not pay for renovations directly, but the total amount you invest will certainly reflect the cost of those renovations as well as any management services. This is also why you could be hard-pressed to find a turnkey property listed below market value.
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Who Should Buy A Turnkey Home?
Turnkey houses aren’t only popular with professional real estate investors. Many turnkey home buyers are first-time landlords who want a rental property that won’t require immediate rehabbing. Others may already own investment properties but prefer a more hands-off approach.
For instance, let’s say you want to purchase a single-family rental property in a high-cost area, such as New York City or San Francisco. If you’re planning to spend a lot of money on a new home for your portfolio, you might appreciate a property that already has upgrades, like stone countertops, fresh landscaping or a brand new HVAC system. These features will cost more, but you’ll probably have an easier time attracting renters and could start collecting an income from the property sooner.
Some investors additionally buy this type of property to avoid the hassle of budgeting for a DIY remodeling project. Not only would they have to continue to manage the day-to-day operations of their business if they bought a fixer-upper, but they’d also need to function as a general contractor, hiring professionals, buying building materials and scheduling home inspections. Instead, buying a move-in-ready property can free up more of a real estate investor’s time.
The Pros Of Investing In Turnkey Houses
Before you determine whether you should invest in a turnkey property or put your resources elsewhere, you should weigh the pros and cons of this investment strategy. Let’s start with the benefits of purchasing a turnkey rental:
- You’re not responsible for renovations. The most evident advantage of buying a turnkey property is you don’t have to worry about the time, energy and money that goes into a fixer-upper project.
- You can jumpstart your cash flow. Between paying for home improvements and searching for eligible tenants, rental properties can take a while to start generating income. Purchasing a move-in-ready home or apartment accelerates the time between when you invest and when you see the first rent check.
- Turnkeys provide passive income opportunities. Fully-managed turnkeys are a great way to enjoy the benefits of real estate investing without having to take on the responsibilities of managing a property for your tenants.
- You can diversify with out-of-state investments. Instead of being restricted to only your local real estate markets, you can purchase multiple properties in several cities, which can help protect you from volatility in your portfolio.
- Renters love them, too. A fully renovated apartment is sure to attract renters who are looking for a modern look and state-of-the-art appliances, and the high demand for quality rentals means a good turnkey investment won’t stay vacant for long.
The Cons Of Investing In Turnkey Properties
Of course, no evaluation of an investment opportunity is complete without examining its negatives. Here are a few drawbacks you may encounter if your next investment is a turnkey home:
- Turnkey properties aren’t personalized. Real estate investors who have a knack for integrating unique features into a space will find turnkeys don’t offer many opportunities to flex their creative muscles, as they won’t have a say in how the property is updated.
- You don’t have total control over the location. Because the turnkey company is in charge of which properties they decide to refresh, you won’t have much say in the specific location of the property itself.
- You could overpay for what you get. All those extra management and repair costs add up pretty quickly, and you might find that you’re not making nearly as much of a profit as you would from buying, repairing and maintaining a property on your own.
- Bad property managers can impact your bottom line. Property managers don’t have a personal stake in the success of your property. If you’re not careful, a bad property management company could drastically impact your net operating income and the amount renters are willing to pay.
- Remote investing is a double-edged sword. On one hand, you’ll be able to collect rent without having an active presence at the property. But at the same time, remote owners aren’t able to check in on the property themselves to make sure everything is running smoothly.
How To Find A Turnkey House
Turnkey homes are available across the country, but that doesn’t mean every opportunity will yield the same returns. A successful turnkey strategy starts with finding properties that are in the most profitable markets, or markets that are just about to see an increase in value or demand.
If you’re ready to buy a rental house, there are several factors you should monitor as you begin your search. Historically, turnkey properties thrive in areas where the average monthly mortgage payment is cheaper than rent. By investing in areas that are highly saturated with renter demand, you can earn a profit based on the difference between what you paid for the property and the going cost for rent. A city with a growing population, inexpensive real estate and low vacancy rates could be the ideal candidate for the location of your first turnkey rental.
Turnkey investing follows many of the same core principles as any other type of rental. These include:
- Looking for areas with low tenant default rates.
- Finding properties that fit within your budget.
- Determining your potential cash flow.
- Considering the effects of appreciation on your investment over time.
- Researching reliable property management services.
Compared to more traditional methods of spotting new rental opportunities, turnkeys can be easier to find, particularly for newcomers to the real estate industry. A turnkey property is one that has already been targeted by a real estate professional – whether that’s a business dedicated to renovating turnkeys or a local real estate agent who revamped the property on their own. That means you can get by without having connections to the local market or using a multiple listing service (MLS).
How To Make Turnkey Real Estate Investing A Success
No real estate investment provides guaranteed returns, but there are steps you can take before purchasing a turnkey property to put the odds in your favor.
Research Turnkey Companies
The first step is to ensure the turnkey provider you’re considering is a legitimate and well-run business. Fraudulent turnkey companies are known to take advantage of out-of-state investors or those who are buying an investment property for the first time. Although their properties may appear ready to rent, you could uncover larger, hidden issues with a separate inspection of the unit. As with any real estate investment, you should vet the property yourself before you agree to a partnership with anyone.
Even if a company has your best interests in mind, you still need to evaluate whether or not they have the resources to properly manage your property. Look at reviews online to determine the quality of service they provide to their clients, and if possible, speak with current turnkey owners to hear their experiences with the company.
Secure Your Financing
Unless you have cash on hand to buy the property, you’ll need to consider the best way to purchase your new investment. For many investors, that means shopping for a new mortgage with a lender. The loan you choose will depend largely on your current investment situation. For example, if you plan to finance multiple properties at once, the loans available to you will have higher down payment requirements and interest rates than mortgages for your primary home.
An added benefit to considering your financing options before you pick out a property is that you’ll have a much better idea of how much you can afford. Starting with an initial mortgage approval can help you focus on opportunities in your price range and help you make a more enticing offer to the seller.
The Bottom Line: Are Turnkey Properties Right For You?
At the end of the day, turnkey properties aren’t going to serve the investing needs of every type of buyer. If you’re looking for an easy entry point into the world of real estate investing, a turnkey property could be the simple solution for you. However, if you’re willing to put the time and effort into updating a rental space, then your talents may be better suited to other real estate endeavors.
Ready to start searching for your first investment property? If you’re not sure where to look first, apply online today and learn how to navigate the mortgage process with help from Rocket Mortgage®️.
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