The term “turn-key” can be confusing since it’s used so broadly in the real estate investing industry. Most commonly, real estate investors consider properties that have been rehabbed with a tenant and property management in place to be a “turn-key” property.
We want to debunk a few myths or misconceptions out there regarding turn-key properties so that you can decide if it’s the right investment for your business.
The Properties Are Always in Bad Neighborhoods
This is not true. Like all real estate investments, you’ll find ‘B-Class’ properties that are in nice neighborhoods and need just a few minor improvements. You’ll also find many ‘C-Class’ and ‘D-Class’ properties that need much more improvement but come with a steeper discount (in most cases).
You have to figure out what type of property you want to deal with. There are a good number of turn-key providers out there that focus on ‘B’ and ‘C-Class’ properties. This allows less concern for the passive investor.
I Can Be Hands-Off After I Close On The Deal
This can get you into trouble. You’ve invested in a property that has a property management company and tenants in place, so the property management company can do the rest… right? NO!
Every property management company is different. They all have different business styles and you need to make sure your tenants are being taken care of and your property is being well managed.
In the first 3-6 months or so, keep an eye out to see that business is running smoothly. If you’re able to, check out the property and talk to the tenants and property managers. Ask the property manager questions so that you know how they run their operations.
Once you feel comfortable having your property management company handle everyday operations, that’s when you can become more hands-off.
Also, make sure that you’re keeping up with yours books so that you know your profit, loss, expenses, etc. This will help come tax season.
The goal is to get to a point where you are hands-off. Once you have trust in your property managers is when you can back away and focus on other deals. This is when this business becomes much more passive.
Turn-key providers are purchasing these homes at a deep discount, which allows them to turn around and sell them to you after they’re turn-key ready for a small mark-up.
This is the price you’re paying for convenience. They’re providing you with properties they’ve found, rehabbed, and placed tenants in. They’ve done the hard work for you.
It’s important to get comps for market rent and home values in the area so that you know the deal makes sense.
A quality turn-key provider will sell a property to an investor under market value, providing the investor with equity with purchase.
A big thing to consider is the amount of money you’d be spending in marketing and rehabbing if you were to find the deal on your own. Some investors spend thousands in marketing before finding an investment property.
Most people that buy turn-key properties are part-time investors who are juggling a career, family, and are trying to build a portfolio.
Turn-key is perfect because you come in when the property is ready to cash flow.
Remember, your time is valuable. Consider the opportunity cost of you spending countless hours looking for the right property.
You also have to ask yourself where your priorities lie. Do you have the time or team to be able to go and find deals and rehab them (if necessary)? If not, turn-key might make perfect sense, even if you’re paying a bit more for the easiness of it.
Due Diligence Isn’t Necessary
Before you purchase a property, you HAVE to do some due diligence! Ask for the scope of work completed for the rehab and have an inspector go out to insure everything was completed properly.
Ask for referrals from the turn-key provider and the property management company.
Most turn-key providers strive to build long- term relationships with investors who are building their portfolio over time.
If they don’t have a high rate of repeat business, this could be a red flag.
As we mentioned before, make sure to get comps for home values and market rents in the area.
If you’re investing in an area that isn’t local to you, do your research on the city. Is it close to a cluster of corporate offices, near a college, or in a good school system? If so, it might be easy to find new tenants when the time comes.
The Fact Is…
Turn-key properties make sense for a good amount of investors. It takes a lot of the work out it for you, which is especially nice for part-time investors.
They are more passive than traditional rentals and allow for long-term cash flow. For those who don’t have the time (or simply don’t have the desire) to find a property and rehab it, turn-key properties make sense.