Happy Turnkey Day! As we celebrate the Thanksgiving holiday our thoughts turn to real estate investing, don’t they? Maybe just mine. I’m certainly grateful for what I have.
Many investors, such as me, look for the value-add properties. These have some deferred maintenance or have not been keeping the rents up. They offer ways to force appreciation, which makes money, but they do mean more work. Some people don’t have that time available. It’s natural to think about turnkey.
Turnkey Investing
The idea of turnkey is that you can just purchase the property right now and get ‘they key’. Turn that key and you unlock returns on your investment. The place is move-in ready or even has a tenant in place and usually the turnkey operator will even provide property management. They will do it all so you can collect a check.
There are turnkey companies whose business is to find the value-adds, do the work, then sell as turnkey. They are essentially flipping+, where they flip it to an investor and add management. These companies need to make a profit somehow, so they take most of the upside in the form of the value-adds. All that is left is collecting rents and hoping for passive appreciation, something we talked about last week.
Benefits of Turnkey
- You don’t have to do much. You do need to vet the turnkey operator and make sure they won’t be swindling you or giving you a bad product. This happens a lot, so most of your work, by far, will be in researching the operator.
- Lower risk. All the estimation and work has been done. You can sit back and collect the rent. The property’s major systems are working so you will have less worry about paying out for capital expenditures.
- A known quantity. You often find an operator you like and begin to trust them and you can continue using them, whereas with buying properties yourself, you always have a different seller to deal with.
- Can invest anywhere. If the operator knows the area, you can be an out-of-town investor and have few worries.
- Diversification. You can have a few of these in addition to your other investments, minimizing your risk.
Turnkey Downsides
- Lower income. Much of the gravy has already been taken off the deal by the turnkey operator. Expect cash on cash returns in the 3-4% range
- Reliant on the Operator. If you find a bad one, they can give you a lemon of a property or set you up with some bad management.
- Higher cost. The rehab has been done, so the value has been increased. The property often sells for retail prices.
- Operator’s lease agreements. The turnkey operator has likely already put a tenant in the property and you have to abide by their agreement, not yous.
Happy Turnkey Day! For me, I avoid these deals because of all the downsides above. They are not for me, but maybe they are for you. This week as you enjoy your turkey also think about turnkey as a way to diversify your portfolio.
