How Does Turnkey Real Estate Investing Work?

Owning a rental property is an enticing opportunity for investors and can be a great way to earn passive income. However, not every investor has the time and energy to spend flipping or rehabbing a property. These investors may be interested in turnkey real estate investing. This real estate investment strategy requires few or no construction or renovations, meaning you can start earning returns on your investment almost immediately.

What Does Turnkey Mean in Real Estate?

In real estate, the term turnkey refers to a fully renovated and updated property. The home or property is ready to be lived in. Typically, turnkey properties were recently flipped and renovated by prior investments. They may have started as distressed or outdated homes but were purchased by investors and underwent thorough construction and updates.

Turnkey homes often have updated, desirable features that will make them competitive in the market. The homes may include all-new appliances, redone floors, fresh paint and other amenities that tenants and homeowners desire. These homes don’t need work before welcoming new tenants.

How Turnkey Real Estate Investing Works

Turnkey investing involves buying a turnkey property and then immediately re-selling it or renting it out for a steady income. Because these properties are already renovated and updated, they require a much larger initial investment than purchasing a distressed property. Investors should plan to pay 20-30% of the price in a down payment and mortgage the rest or split the cost with a group of investors.

However, turnkey real estate investing doesn’t require the time or work that other investing strategies like house flipping require. Once investors purchase the property, they can immediately list it for sale or rent. Often, renting a turnkey property is more lucrative than selling it. Investors may not profit from purchasing and then re-selling a turnkey property, since it will already be listed for a higher price. However, investors can immediately list the property for rent and begin earning steady income that can pay back the mortgage and grow overall wealth. 

Investors may want to consider partnering with a turnkey company. These companies purchase distressed homes, perform necessary renovations and updates to turn them into turnkey properties, find a property manager and then sell them to investors. Purchasing a property from a turnkey provider takes the work out of identifying a property and finding a property manager. Investors can purchase the property, list it and trust the property manager to work with the tenant and care for the property.

Pros of Turnkey Properties

Turnkey properties may be more expensive upfront, but they have many advantages that make them a strong investment for some investors.

• In-demand: Turnkey properties are recently renovated and therefore include up-to-date appliances and are designed to meet the needs of the current market. These features will likely attract several potential tenants or buyers, so it probably won’t take long to find a renter.
• Minimal repairs: The investors or company before you have already spent the money and taken the time to renovate and update the home, turning it into a turnkey property. You may pay more for the property, but you’ll have to make few or no repairs. You won’t need to spend months waiting for construction and energy trying to coordinate the project. Once you buy the property, you can list it almost right away.
• Strong cash flow: Since the home is updated and in demand, you can list it with a higher monthly rent. The updates make it competitive with other rental options, and prospective tenants will be more likely to pay more per month for a turnkey property. This feature allows you to pay the mortgage with monthly rent and potentially pocket the rest as profit. 
• Quick return on investment: Since you’re not making repairs to the property, you can immediately list it and begin looking for a tenant. Unlike house flipping, you won’t have to wait months before your investment property begins generating returns. You’ll have to pay more upfront, but you could potentially start earning returns within a few weeks.
• Tax advantages: Rental income does need to be reported on your tax return; however, legal deductions can lower your overall taxable income. Things like mortgage interest, repairs and renovations, property management fees, property taxes and operating costs can all be deducted. These expenses can greatly lower the amount you owe in taxes to leave you with more profit.

Cons of Turnkey Properties

Investing in a turnkey property can be a great opportunity to expand your portfolio and earn passive income. However, this isn’t the right strategy for every investor and has disadvantages to consider.

• High upfront costs: Another investor already bought the property and spent time and money to turn it into a turnkey. That investor will set the price higher to make a decent profit on their investment. To purchase a turnkey, you should expect to pay in the higher market value range. This action will likely involve needing a financing plan and money saved for a down payment. You may need to get a mortgage or partner with other investors.
• Limited equity: Since you’ll probably need to finance the property, you may not have much equity past the down payment. The more you pay off the mortgage, the more equity you’ll have in the property. However, this could take years.
• Saturated market: The real estate market is full of turnkey properties, especially in midwestern and southeastern cities, such as Memphis, Kansas City and Cleveland. In these cities, turnkeys lose their competitive edge because there are so many of them in the market. You may also find it harder to buy a turnkey property in these areas since so many other investors are looking to grow their turnkey portfolios.

Things to Consider Before Buying a Turnkey Property

Not all properties marketed as turnkey are a worthwhile investment. You’ll need to conduct thorough due diligence into the property and the market it is in to ensure it is likely to provide the returns you want.

First, you’ll want to research the property. You should visit the property in person. Pictures can be strategically taken to hide flaws or major concerns in the property, so you’ll want to look at it with your own eyes. Second, you’ll need to get a professional home inspection. A property may look completely updated, but those renovations could be bandages hiding larger problems. An inspector can give an unbiased report on the home’s condition.

Even the most luxurious property may not be a worthwhile investment if it’s not in the right area. Consider the average income of the area’s residents and determine whether you’ll be able to find a tenant willing to pay the rent you’d charge. You should look at the larger area as well. Determine the crime rate, quality of schools and local amenities such as parks, local transit and shopping centers. A desirable neighborhood will also influence how quickly the property can be rented and for what price.

Property Managers and Ownership Arrangements

To purchase, list and maintain the property, a real estate investor typically needs assistance. That’s where property managers and ownership arrangements come into play. These professionals and opportunities take some of the responsibility off the investor to make turnkey investing a more seamless process.

Property Managers

If you’re going to own a rental property, a property manager is crucial. A property manager acts as a liaison between you and your tenant and takes care of property maintenance and repairs. They’ll communicate with the tenant to collect rent, address concerns and help list and rent the property. Having a property manager you can trust takes a weight off your shoulders to allow you more time to focus on other investments, your career and your family.

Ownership Arrangements

You don’t need to go into a turnkey real estate investment alone. There are many ownership group structures that you can purchase properties from that assist with the management of the properties.

The first option is real estate investment groups. These are businesses that specialize in buying, rehabbing and selling homes, multi-unit properties and other properties. Real estate investment groups (REIGs) rehab properties and establish a property manager. Then, they either maintain ownership of the property or sell it to an investor while maintaining management control. As an investor, purchasing a property from an REIG comes with a built-in property manager. You may pay a higher upfront cost and reduce your return, but it allows you to purchase the property and then turn around and list it.

The second option could be forming a real estate partnership. This partnership may include one or more other investors, and together you’ll purchase real estate investments. Partners split the financial responsibility and the returns. This can be a great way to finance a real estate venture, but you want to be sure you trust your partners. As a partnership, you’ll need to be aligned on necessary business decisions such as rental price, property management and making decisions to buy or sell.

You can also form an LLC, a limited liability company. Forming an LLC turns your investment into a formal business, providing some tax advantages and protection if there are multiple investors involved. An LLC is responsible for its debts and liabilities, which provides a separation of your real estate finances and personal finances. This arrangement can provide some protection when working with other investors and can protect your personal assets as well.

Or, if you’d like to go into the investment alone, you can purchase a turnkey property outright by yourself. You’ll need to either pay for the property upfront or finance the property. After the property is purchased, you’ll need to personally manage the property or hire a third-party property manager.

Grow Your Portfolio With a Turnkey Property

Real estate is an exciting way to grow your portfolio and earn passive income. Turnkey properties provide the unique opportunity to purchase real estate and then almost immediately turn it around to list it. Many ownership group arrangements can make listing and managing your property easier, or you can remain hands-on and manage it yourself. Purchasing a turnkey property may not be the right strategy for all investors because of their high upfront costs and competition. For personalized financial advice, talk to a trusted adviser.

Frequently Asked Questions