Turnkey real estate investing has become extremely popular. This trend has been partly driven by the need for investors to seek out-of-state markets.
But it was also heavily fueled by ultra low interest rates.
And while some of the air has come out of the turnkey real estate craze (more on that in the future), it’s worth understanding a few key components to this strategy.
There are three big things to know when considering turnkey real estate:
- There is no equity
- Truly turnkey does not exist
- Your property manager is everything
Some of these may seem obvious, but I assure you there are lots of important nuances and details to all of it.
Let’s dive in and better understand this real estate investing strategy so we can make better decisions.
Turnkey Real Estate Has No Equity
Whenever you’re investing, it’s important that you have realistic expectations. Turnkey real estate is no different.
I think it’s fair to say we all want a unicorn deal.
If you told me I could buy a rental property, fully renovated with a paying tenant, have instant cash flow AND pay below market price for it… I’d be asking you where to sign.
But that’s just not realistic.
With turnkey real estate you simply aren’t getting equity. In fact, you’re likely paying ABOVE market price for the property you’re purchasing.
Why would anyone do that?
Turnkey Real Estate Is Convenient
The reality is real estate investing is hard.
It’s time consuming.
If you want to truly be a real estate investor you’re looking for projects you can buy, add value to, and then either flip or refinance and hold.
Many people simply don’t have the resources to do all that, whether it be time, market knowledge, or capital.
And that’s why turnkey real estate is so attractive. It makes it easy to invest in real estate without a lot of the work.
You are paying for convenience.
It’s like ordering takeout versus cooking at home.
If you don’t already see that, it’s pretty easy to grasp. And it makes sense. You’re outsourcing nearly all of the work and you’re going to pay up for it.
Most people investing in turnkey real estate understand this and are ok with it.
But there’s plenty they don’t understand.
There Is No Such Thing As Truly Turnkey
Let’s go back to our food example for a moment.
You order that takeout. You’re hungry, and it finally arrives.
Do you expect it to be exactly as advertised? Taste as good as you anticipated? Probably not.
That’s kind of how it is with turnkey real estate. Most turnkey providers are selling you on returns and low friction investing.
But that’s generally not the reality.
Houses Have Stabilization Periods
I don’t care if it’s a newly renovated home or completely new construction. Houses need time to fully stabilize.
If your tenant hasn’t lived in the home for at least 3 – 6 months, you can expect issues to pop up.
The reality is properties need a little wear and tear before we truly know what’s going on.
There’s a big difference between running the water for a few minutes to make sure things work properly and multiple people showering each day.
So expect turbulence.
It’s bound to happen no matter who you work with. But it’s worth noting which turnkey providers are being forthright and honest about it from the get go.
Knowing there will be a stabilization period for your turnkey rental makes this next part extremely important.
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Your Property Property Manager Is Basically Everything
Who you decide to employ as your turnkey rental property manager will make or break you.
I cannot stress this enough.
Choosing a real estate investing market can be a pain. And sourcing a great deal is tough, yes.
But once those things are done, they’re done.
Property management never ends.
And if you’re looking at turnkey real estate, chances are you’re investing from out-of-state. You must have an extremely strong property manager to ensure your success.
Here’s the thing…
Most Turnkey Providers Outsource Property Management
Chances are, the folks you work with on the buy side of your turnkey rental are NOT the same folks that will be managing it.
That’s a big deal, and you probably don’t realize why.
Imagine I sell you a turnkey property and refer you to a handful of property management “partners” that I work with.
It is now up to you to vet these property managers and choose one.
That means your turnkey provider has successfully removed themselves from any future blowback.
Things aren’t going well? Ahhh… must be your property manager.
The property manager might blame the rehab. The turnkey company, if they even respond to you, will blame the property management company.
You’re left not knowing who to believe.
Property management is a tough job, especially in lower price point markets. So I understand why turnkey companies prefer to outsource it.
But it doesn’t align incentives between the investor and the turnkey provider. Furthermore, a strong turnkey provider will want you to have a good experience so you continue to buy more properties.
Unfortunately, many folks are short sighted and simply focus on turning and burning new turnkey real estate deals.
I genuinely believe it’s in everyone’s best interest to keep the property management in-house with the turnkey provider. This is exactly why we decided to aggressively build out our internal property management division the other year with our non-traditional turnkey service.
So when you work with a turnkey real estate company, be sure to ask who the property manager will be. Chances are they’re outsourcing it, and you deserve to know if that’s the case.
The sooner you know this, the sooner you can start doing your due diligence.
Turnkey Real Estate Is More Complex Than It Seems
On the surface, turnkey real estate investing seems pretty straightforward.
You buy a newly renovated home with a tenant in place and start collecting cash flow.
Sounds good, right? Maybe too good…
The reality is there are things below the surface you need to be aware of. This post is a brief overview of a handful of them.
I’m not a huge fan of the traditional turnkey model, and that’s why we’ve flipped it on its head to offer something more untraditional.
But I can see the appeal of the traditional turnkey model for many folks.
And as long as you understand you are not getting a “deal”, that there will be turbulence, and you have a rock solid property manager… you’ll probably be just fine.