What is a turnkey house? A guide for investors

If you’re new to the world of real estate investing, chances are you’ve stumbled across the word “turnkey.” Turnkey properties are a popular type of investment that allows owners 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 it’s a sound investment can be the bigger challenge.

To make the right decisions for your real estate portfolio, you’ll need to know more about turnkeys, how they work and their pros and cons.

What does turnkey mean in real estate?

Turnkey properties are real estate – like a house, duplex or apartment building – that are fully functioning and ready to rent out immediately. They require little to no upfront effort from investors, which means you can generate income from the property faster than you would with a more time-intensive project, such as flipping a house.

How do turnkey properties work?

In most cases, turnkey properties are repaired, renovated and sold to investors by companies specializing in the turnkey market. Some of these businesses also offer property management services that fulfill the duties of a landlord on an investor’s behalf. Not only does this save you time, but it allows you to invest remotely and rake in an income from afar.

What are the costs of buying a turnkey house?

Because they’re convenient and require minimal (if any) repairs, turnkey homes have quickly become one of the most popular investment property types in recent years. However, you’ll pay a premium for their characteristic move-in ready conditions.

The upfront amount you invest will reflect the cost of a property's completed renovations and management services. Investors would be hard-pressed to find a turnkey property listed below market value.

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 requires minimal renovations and repairs. Seasoned investors or landlords may pursue a turnkey property because they already own other investment properties and want a hands-off property.

Some investors buy this type of property to avoid the hassle of budgeting for a remodeling project. Buying a move-in ready property can free up more of a real estate investor’s time and money because the home requires minimal upfront effort.

The pros of investing in turnkey properties

Before you decide between investing in a turnkey property or putting 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:

• Minimal renovations: The obvious advantage of buying a turnkey property is not having to spend the time, energy and money that would go into a fixer-upper project.

• Jump-start your cash flow: Between paying for home improvements and searching for eligible tenants, rental properties can take a while to generate Purchasing a move-in ready home or apartment narrows the gap between your upfront investment and your first rent check.

• Generate passive income: Fully managed turnkeys are a great way to enjoy the benefits of real estate investing without taking on the responsibilities of managing a property.

• Diversify in different markets: You’re not limited to local real estate You can purchase multiple properties in several cities, which can help protect you from portfolio volatility.

• Attractive to renters: A fully renovated apartment can attract renters looking for a modern residence with state-of-the-art With the high demand for quality rentals, a good turnkey investment won’t stay empty 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 with a turnkey home:

• Not always personalized: Real estate investors with a knack for integrating unique features into a space will find turnkeys don’t offer many opportunities to flex their creative muscles because they won’t have a say in how the property is updated.

• Less control over location: Because the turnkey company decides which properties they want to refresh, you won’t have much say in the property’s location.

• Smaller profit margins: All those extra management fees add up quickly. You might find that you’re not making as much profit as you would if you had bought, repaired and maintained a property.

• Subject to property management: Property managers don’t have a personal stake in the success of your property. A bad property management company can drastically impact your net operating income (NOI) and the rent you can charge tenants.

• Less direct control: On one hand, you’ll collect rent without active involvement in the But at the same time, it may be more challenging for remote owners to check in on the property and verify everything is running smoothly.

How to find a turnkey house

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 highly saturated with renter demand, you can earn a profit based on the difference between what you paid for the property and the going rate for rent. A city with a growing population, inexpensive real estate and low vacancy rates could be the ideal location for your first turnkey rental.

How are turnkey properties different from traditional rentals?

Turnkey investing follows many of the same core principles as any other type of rental property. When searching for a turnkey investment property, you may want to:

• Look at areas with low tenant default rates
• Find properties that fit your budget
• Estimate your potential cash flow
• Consider the appreciation of your investment over time
• Research 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 market.

A turnkey property is one that has already been targeted by a real estate professional – either a business that renovates turnkeys or a local real estate agent who revamps properties. That means you can find and buy a property without establishing connections in the local market or using a multiple listing service (MLS).

How to successfully invest in turnkey properties

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, well-run business. Fraudulent turnkey companies are known to take advantage of out-of-state investors or investors buying an investment property for the first time.

Even if a company has your best interests in mind, you’ll still need to evaluate whether they have the resources to manage your property. Look at reviews online to determine the quality of service they provide clients. And try to speak with current turnkey owners to learn about their experiences with the company.

Inspect the turnkey property

While a turnkey property usually appears ready to rent, an inspection may uncover significant and expensive issues. As with any real estate investment, vet the property before you agree to become its owner.

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 securing a loan. The loan you choose will depend a lot on your current investment situation. For example, if you plan to finance multiple properties at once, the available loans will have higher down payment requirements and interest rates than mortgages for primary residences.

Starting with a mortgage preapproval, also known as initial mortgage approval, can help you focus on investment opportunities in your price range and help you make strong offers to sellers.

The bottom line

At the end of the day, turnkey properties won’t serve the needs of every investor. But if you’re looking for an easy entry point into real estate investing, a turnkey property may be right for you. If you don’t mind putting time and effort into updating a rental, your talents may be better suited for other investment property types.

Ready to start searching for your first investment property? Unlock real estate opportunities and start an application only with Rocket Mortgage^®?  today.