The word “turnkey” conjures up images of laying on the beach and checking your laptop every so often to see if the rents came in. A turnkey property is one you can buy without any of the usual problems. With a turnkey property, everything should be done for you:
  • No rehab needed
  • No advertising for tenants
  • No hassles

The place is in pristine condition and ready for renters or already rented. Oftentimes, these properties are bought from companies specializing in rehabbing old estates. Property management is also offered by these companies to buyers in order to minimize the amount of time and effort poured into the rental.

What do turnkey investors look for?

Finding a turnkey investment property that makes money is not easy. Real estate investors generally think they have to buy a property requiring extensive repairs in order to buy it low enough to make it worthwhile.

It’s true that it is difficult to purchase a single property or two properties in pristine shape and make much money on them renting them out…

That’s why turnkey investors think bigger.

Think of  buying at least 10 to 15 (or more!) properties at a time and rehabbing them. That’s what some large real estate development companies do. They buy the properties in bulk. And it just doesn’t stop there – it just keeps on getting bigger and bigger…

Some companies can purchase and rehab more than 200 properties at a time instead of fixing and flipping properties one by one. This gives them tremendous leverage. Buying in bulk means:

  • Lower prices per property
  • Big discounts on contractors who win the bid on a large numbers of properties
  • Lower prices for materials bought in bulk
  • Smaller commissions per property for real estate agents who sell to the turnkey investor
For example, kitchen cabinets usually cost around $11,000 per piece, but turnkey investors could get them for $5,500 just because they buy in bulk. They are able to put out a product with a superior quality than their competitors and it gives them the advantage of volume discounts or economies of scale.

Plus, often buying in bulk means lots of parts left over after the rehab. The extra set of supplies will come in handy when repairs or replacement are needed. Either the large investment company can take care of their investors through lowering the prices of repairs (which investors will have to pay eventually) or they can save the parts for future rehab projects.

Companies that can purchase in bulk can sell individual properties to the turnkey investor at a price that provides cash flow and the potential for appreciation – without all the work and hassles of flipping it themselves.

How does a turnkey deal work?

Some real estate investors will fix up a property to make it just barely ‘rent ready.’ That means they may cut corners or do a shoddy job, which results in a rental unit barely over the minimum acceptable requirements.

But hey – if the minimum weren’t good enough, it wouldn’t be the minimum, right?

True turnkey investing is not about this at all…

Investing in turnkey properties means buying undervalued properties, redeveloping them – often stripping them into the studs – and creating an almost brand new property out of it. The property is upgraded – a lot.

A beautiful property results in a backlog of tenants ready to move in. After all, if the rehab isn’t done right the first time, it means lots of maintenance headaches further down the line – definitely NOT turnkey!

When you buy property from turnkey investors, they should guarantee it and fix anything that goes wrong the first year. These repairs should not cost much since chances are the investors upgraded everything before tenants moved in – new wiring, new mechanicals, new plumbing, new everything.

So, you buy the property and then the next day there’s a tenant ready to move in…

There is never a lack of people wanting to rent because smart investors strategically position these properties in commuter cities where rental properties are high in demand. This is what makes it turnkey.

It’s up to you to do your due diligence to make sure that investment company is doing what they say they are doing.

The key to a successful business or turnkey investment company is to continue selling properties to existing clients. This is a good indication that a business is nailing the game.

Ask for lots of references from a company that sells a lot of turnkey deals. If they are doing a good job, their investors will keep investing.

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Who is turnkey for?

Generally an investor should not look for a ‘no-money-down’ turnkey deal. Because an investor is hardly putting any sweat equity into the deal, it would be hard to make much money if your debt service is too high.

Instead, think of investing in turnkey properties like you do stocks…

With a stock, you are basically relying on the company to improve your share price and pay dividends. If you are a turnkey investor, you are relying on the management company to improve your ‘share price’ by keeping the property nice and helping it appreciate.

The company should also pay you ‘dividends’ in the form of rent payments. And just like buying stocks on the margin can be risky, it may be a losing proposition to stack up too much debt when buying turnkey investments.

Turnkey is a good idea for your Self-Directed IRAs or if you want to borrow against your 401k. Let the management company run it while you work on other projects.

What makes a good turnkey market?

Rental markets are usually classified like school grades. There are A, B and C neighborhoods.

And then there’s D and F – also called “war zones,” these are properties we want to steer clear of. Lower-grade areas are usually dangerous and have a high crime rate. Every urban city has them.

In ‘A’ locations, these are mostly the expensive neighborhoods. The CAP rate (return on investment) is lower and causes a lower return for your money since you have to pay a higher purchase price. Plus there is less rental demand because almost everybody in A neighborhoods owns their homes.

As you go lower into the riskier parts of the city, the B, C, D and Fs, your CAP rate is higher along with the return of your money. But the hassle factor (and safety factor should you have to go out there!) goes way up.

Generally as a rule of thumb, your goal is to stay around the 10% cap rate. That means you make 10% on the money invested.

A good place to buy turnkey rental properties is a major metropolitan area that has various industries.

Detroit for example, was heavily dependent on the automobile industry. When that industry struggled, Detroit really felt the pain.

If you are an investor who wants to build your wealth and your portfolios, look in B and C (working) suburbs, where the demand for rentals is high. Nice homes in these areas will have lots of competition, high rents and low vacancies. About 65% to 70% of people in these areas are renters.

Chicago and New York City are examples of some of the best rental markets in the country.

Action Items

  • Read, read, read and read – If you’re willing to venture into turnkey investments, do your homework and educate yourself about it. Equip yourself with the knowledge needed before you take the leap. It’s all about researching to avoid making unnecessary mistakes along the way.
  • Get a mentor and ask for help – You can only do so much on your own. Team up with people who are already in the game or someone who has extensive knowledge regarding the industry. You can also ask someone to mentor and train you into making smart decisions when purchasing properties.
  • Do your due diligence – Don’t just take the claims of property development companies at face value. Become an expert in the market they operate in before you buy your first property.

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Got any hard-learned lessons, falters, or good ‘ol fashioned mistakes to warn others about? Share below! We’ll take the best ones and write about them in a future post.

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