Hey there. So you’re wondering about turnkey real estate investing? Well, a full turnkey property can be an easy entry into real estate investing for a first-timer.
But there are some major pitfalls to consider as well (I know from experience). Let’s take a look at all the pros and cons before you jump into this kind of real estate investment.
What Exactly Does Turnkey Mean in Real Estate?
Turnkey real estate investing refers to buying a piece of property that comes rent-ready, usually from a company that provides a full service to an investor.
Here's what a turnkey provider does: they find the properties, rehab them, get them rented, sell them to you (the investor), and then manage the property for you (at least while they remain in business!). A nice tidy “turnkey” investment package.
There isn’t much you need to do personally, other than to find a good turnkey provider, and BAM, you're in. Sounds pretty straightforward, right?
Alternately, some providers might offer a “semi-turnkey” service. This is what I call a seller who does the flip, and gets a tenant in there, but then refers you to an independent management company that they don't own or manage.
It's slightly different in that the seller is not “sticking with you” through property ownership. The advantage with the full turnkey management is that potentially, they would produce a better product, being they would also be the ones getting calls for repairs.
Is Turnkey Real Estate a Good Way to Buy Real Estate?
Generally speaking, turnkey companies can provide a valuable service, and it’s one of the few answers to the question of “How can I invest in real estate passively?” Or at least, “How can I invest in personally owned real estate passively?”
When I lived in Los Angeles, CA, it was difficult to find many affordable properties available in my area to increase my real estate portfolio. That’s when I started looking out of state to make some investments, and I was introduced to turnkey properties.
So here’s the rub…you are relying on the turnkey provider, quite significantly, to do a good job on all of those fronts (from rehab to renting) in order for your investment to be an ongoing success. And there is a lot in there that can go wrong.
As with most things, the more you put in, the more you get out. This definitely applies to real estate. When you go out and find a property yourself, assemble your own team, and do the rehab yourself, you will most likely see the most profits.
So, is it worth it? Let's break down all the pros and cons!
Property managers and/or turnkey companies provide value when you want to invest in real estate but cannot (or don't want to) manage those properties yourself. They make out-of-state investments possible.But it comes at a cost, which you must factor into your analysis (and you have to be VERY REALISTIC, when you do this).
The Pros & Cons of Turnkey Real Estate Investing
PROS:
1. Totally Passive Income (Or as Close as it Gets)
It's about as passive as it gets before moving down to crowdfunded real estate like Fundrise, or the public market's offering of REITs (real estate investment trusts). Even if you wanted to save some money and do a repair yourself…you can't!
2. Invest Out-of-State in Cheaper Markets
The turnkey concept, or even property management in general, offers you the opportunity to invest in far away markets. For people who live in the expensive markets of major cities, this is often the only way to invest in personally owned RE.
3. Diversify Your Real Estate Markets
You can buy turnkey properties in a variety of regions so that if one market sees a downturn, you have other properties in other regions that will keep you afloat. If you diversify, you have a better chance for continued growth.
4. Positive Cash Flow & Equity
If you can survive the gauntlet of your lending term of 15-30 years, you would eventually reach a time of significant positive cash flow and equity…the IRR of which would likely beat the public market averages given sound investment choices. (Though in reality, you make far more money selling more regularly, and maintaining a leveraged position.)
5. Somewhat Simple & Relatively Convenient
Turnkey real estate investing opens up real estate investment to people who don't want to be bothered too much. And you don't need any experience in construction or remodeling.
Personally owned real estate is a relatively simple investing concept, that has a proven track record. The average person will always “understand what's happening” with their investment…for better or for worse.
Even with the significantly higher costs of turnover and maintenance, the IRR on rentals in markets that have good financial stats, but require management, can still outperform self-managed properties or other private or public hands-off investments.
CONS:
1. You Have to Rely Too Much on Others
The quality of your turnkey property management team directly affects the success of your investments. The old adage, “If you want something done right, do it yourself” often applies.
For a long-distance investment, you can't walk thru the property yourself, and you must rely on the inspectors to give you an accurate report. Of course, if you invest in a turnkey property locally, then this point is moot.
Furthermore, if tenants leave and your property manager has to find new renters, what is their incentive to move quickly? If it takes them a few months to find you a new renter, it's no skin off their nose.
They can just insist that it's “not their fault and you should probably just lower the rent.” But for you, unfortunately, a few vacant months could erase all of your positive cash flow for the entire year!
2. Property Managers Mark-Up Repairs & Fees
Your interest (of saving money and increased returns) and your manager's interest (of making money on their client's properties) are in significant misalignment. Property managers don't make much of their money off monthly fees…they make more of it off in-house (or marked-up) repairs and placement fees. They don't go out of their way to save you money.
While it's true that most of these expenses can be claimed as deductions, you are still paying more money than if you handled property management, repairs, etc., yourself.
3. Lazy Tenants
I believe that when tenants know they are dealing with a property manager, they are far more likely to complain, are much less willing to fix simple problems themselves, and will do less preventative maintenance on their own.
Alternatively, when a tenant knows that every time they call for a repair, the owner will show up with their toolbox, they think twice. Most tenants don't want owners coming over and seeing their personal space, or realizing they have a pet, even though their lease forbids it! ha!
4. Possibly Less Quality Tenants
When your turnkey property comes already rented, you have no idea if the renters have been properly vetted. You can't interview the renters yourself. Again, you have to put your trust in the property manager to get you quality tenants.
If you find yourself with bad tenants that need to be evicted, this can be a HUGE money drainer.
Added Benefits of Personally Owned Real Estate Over Other Investments
If you find yourself conflicted after reading all the cons, let me elaborate on a few more pros that aren't specific to turnkey real estate investing, but to real estate investing in general. I want you to be aware, if your only options are turnkey real estate investing or just investing in the stock market, that there are some more points to consider.
Real Estate Investing vs. Stock Market Investing
Leverage: Real Estate vs Stocks
-You can use a loan and have Leverage working for you. (Usually its 96.5%-75% leverage, or a 3.5%-25% down payment.)
-Leverage in the stock world is called Margin…but it usually maxes out at 50%. And it can be called if the value of your stocks falls to a certain level.
Appreciation & Equity: Real Estate vs Stocks
-You are capturing Appreciation Equity on the full value of the asset (there in lies the value of leverage), while you own the asset (4-5% on average). At 75% leverage, a 5% increase is a 20% actual appreciation on cash.
-You build Amortization Equity while you loan is being paid down.
-Appreciation in stock would be a Rise in Share Price. (5% on average for S&P)
Cash Out: Real Estate vs Stocks
-You can Refinance out appreciation and amortization tax-free.
-Refi. you might be able to get a Line of Credit using your stocks as collateral. You can also use your Margin as a line of credit.
Insurable: Real Estate vs Stocks
-Your RE investment is Insurable for the full value.
-Your investments are Not Directly Insurable. Though your brokerage account is insured by the FDIC for 100K.
Tax losses: Real Estate vs Stocks
-You can take annual Depreciation of the asset to offset rental income, on your tax return. Though you have to recapture that depreciation at the sale. Still very valuable though.
-You can take a total 25K Allowable Loss on your RE assets while carrying over the rest, without selling the asset.
-You can take a max 3K Allowable Loss from stock sales, and carry over the rest. You can only buy back into the asset 30 days later, without it being a wash sale.
Cash Flow: Real Estate vs Stocks
-RE offers a possible Cash Flow stream. I say “possible” because unforeseen expenses and turnover can often wipe out a year's worth of cash flow on a property with leverage.
-Possible cash flow streams are available if your stocks pay higher Dividends. If you go with a high dividend stock, this may actually be more reliable than RE cash flow.
Is Turnkey Real Estate Investing Right for Me?
That depends on your end goal.
If you want big profits quickly, then no. You'll see bigger results if you can buy something on your own and make improvements.
But if you don't have the time or money (or patience) for that, and you want to get in the real estate game with smaller investments in cheaper, diversified markets then, possibly, yes…barring any major disasters, turnkey real estate investing could be a good idea!
Overall, turnkey real estate investing has produced (mostly) market-beating returns for me. Even with some missteps and bad management companies along the way. On the other hand, I have always had more financial rewards when I bought and renovated the investment property myself.
The 5 Critical Components of Real Estate Investing Returns
If you have the desire to get into real estate investing, whether it's turnkey or not, there are 5 critical components you have to understand about returns…if you want to make any money. You can assess each property like a pro if you check out all 5 of the fundamentals here: The 5 Critical Components of Real Estate Investing Returns.
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