Many beginning or aspiring investors ask about the concept of buying a Turnkey Rental, which is just like it sounds: a rental property that is stabilized, or occupied by a tenant and needs (or should need) no work.
The Appeal
Turnkey rentals are appealing to many for obvious reasons:
- No work up front: the appeal of turnkey is that the property needs little work or maintenance so there should be little or no capital expenditures or expenses associated with repairs
- Already have a tenant: the difficult part of finding rentals is done, tenants occupy the units and you can collect rent on day 1.
Sounds Great, Right?
There are some important downsides to consider before you write your check for a turnkey rental:- Familiarity: In purchasing a turnkey rental, you are taking the word of the seller that the property and tenant are of satisfactory quality standards. Of course, you can get an inspection, but there are some things that may not be known until after you buy, such as shoddy workmanship on the renovations as previous or continuous repairs. Further, the property is occupied by a tenant that you or your property manager would not have vetted. My opinion is that this is great risk, as the primary income source for rental properties are rent-paying tenants. For more detail, check out our article on the #1 Cause of Real Estate Horror Stories.
- No Forced Appreciation: when you buy a turnkey rental, you are paying the price for the value the turnkey provider has created: a renovated property, an existing tenant, etc. As a result, you the price will reflect that value. You will not obtain investor-grade prices for this value. This affects cash flow and the opportunity to force appreciation through value-add.
- Minimized Learning from Experience: derived from the first two downsides, in buying turnkey rentals, an investor may not grow from learning the real estate acquisition process full-cycle and buying great deals. Instead, turnkey buyers are buying at retail prices and missing out on the opportunity to pull the cash flow and value add levers of real estate.
- Unrealistic Expectations: Many turnkey buyers may approach investing with the idea that by taking this path, there will be no problems and headaches. Real estate is all about problem solving and that is where value is found. Even with a turnkey rental, problems will inevitably happen. Tenants can still not pay, things can still be broken, the list goes on. The best approach to any sort of real estate investing is to modify your mindset to think of this sport as problem solving. You may be less likely to be surprised when problems do occur.
Final Verdict
Most of the time, if I hear new investors ask about turnkey investing, I get the feeling that they are looking for a shortcut. Shortcuts do exist in real estate, and the best shortcut, in my opinion, is to do things right the first time and avoid mistakes if possible. It is likely that turnkey buyers get out of the business altogether if it does not meet their wealth building expectations. Since we are talking about wealth building, there are better ways to invest your hard-earned funds in real estate. Maybe your attraction to Turnkey rentals is that you are a working professional and do not have the time and attention to actively invest in real estate. Rather than buy a set of turnkey single family houses, which will keep you actively involved in real estate, consider passively investing in apartment buildings. For more information and familiarity, check out my article, What is Multifamily Syndication?.
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