Turnkey properties can be an amazing way to make steady passive income; but there are some serious pitfalls to avoid along the way. In theory, all turnkey properties for sale are ready to be rented out, and in fact, may already be performing if there’s a tenant in place. All the work to renovate and repair the property has already been done and property management is in place. All you have to do is sit back and collect from your investment.
Unfortunately, in reality not every property is this good. Does that mean you should avoid turnkey properties? Absolutely not: they can be among the best investments you ever make. The key is knowing what represents a steal you should jump on and pitfalls to watch out for that can harm your investment.
Key Advantages to Turnkey Properties
When you invest in a turnkey rental property, it is by definition ready to be occupied. You don’t need to spend any time fixing things up or investing in upgrades. There’s no worrying that a remodel will go over budget or take three months longer than promised. You simply buy the property and immediately go to renting.
Since turnkey properties for sale are ready to be rented and generally come with property management already in place, you can buy from anywhere. You can live on the other side of the world if you want. You’re not responsible for managing the property and you don’t have to worry about dealing with tenants, services, or repairs.
There’s a System in Place
If you’re buying from a legitimate company that specializes in flipping turnkey properties, in most cases they have a good idea of what areas are best for their investment, what kind of tenants you can expect to attract in that area, and have already built relationships with home inspectors and repair companies that you might need to work with at some point in the future.
Key Disadvantages to Investing in Turnkey Properties
You Don’t Get Design Input
Because you are buying a property that’s already been made ready for occupancy, all the final touches have been done by the seller. You don’t get to put in your two cents about the layout of the property or have any creative input. Everything from the placement of appliances in the kitchen to where parking spots have been placed has already been decided for you. While that could be good, it also means you need to check that this has all been done thoughtfully. You don’t want to drive away tenants with poor interior design or unsafe parking and lighting arrangements outdoors.
It Costs More
It’s fairly obvious that if someone else has done all the work of fixing up the property, you’re going to have to pay more for it than if you were doing that yourself. You’re paying for the property itself but also for all the materials and labor that went into renovation as well as the markup that represents a profit for the seller.
This doesn’t mean turnkey properties aren’t still a great investment! It’s all down to choosing the right property in the right location: one that has solid potential to bring in good income.
Is It a Steal or a Dud?
Calculating the value of property involves doing a little math and knowing what you’re looking for. There are couple standard formulas that you should use to make your initial assessment and narrow down your choices to properties worth looking at more seriously. Once you have, there are some specific things you should look out for.
Calculate Your Formulas
The 1% Rule
This rule simply says that if you can’t expect to rent your property for 1% of its total upfront cost, or more, then you’re not getting a good deal. To use this rule, you do need to remember to calculate all the upfront costs, not just the purchase price.
The capitalization rate, or cap rate, is a way of calculating the potential ROI on your property. Your first step is to calculate the gross income the property can make. Add up your average monthly rents and multiply it by 11.5, which allows you two weeks every year for it to stand empty between tenants.
Your next step is to subtract all monthly operating expenses to find your net income. Don’t forget to include whatever you’re paying to property management as well as any expenses for landscaping, garbage collection, and utilities in shared areas. Any mortgage payments you might have are not part of your monthly expenses.
Finally, divide your net income by the total price you paid to acquire your turnkey property and multiply that by 100 to find the percentage of ROI you can expect off that property. Naturally, the higher this number is, the better.
Don’t Skip Due Diligence
Simplicity is one of the biggest draws of turnkey properties for sale. But to make sure you’re getting a good property, you still have to put in some research. Make sure you get a home inspection so a neutral third-party can verify that the property is in good shape. Don’t underestimate the value of taking a look personally to get a sense for the neighborhood and the long-term marketability.
Talk to some real estate professionals who know that particular area and can give you pointers about trends in real estate, crime, and investment. You’re looking for neighborhoods where local government is investing in business and infrastructure, where people are moving in and not out, and where crime rates are holding steady or even dropping.
Be Smart About Your Property Manager
Your property manager is crucial to your investment. A good property manager replaces tenants quickly when they leave and addresses tenant issues quickly so your renters are satisfied and want to stay. Good management firms are made up of people who fix problems; not people who create more.
When you’re getting to know a property management or management firm, don’t be afraid to ask specific questions about how long on average it takes them to find new tenants for their properties, a list of all fees they charge, how much experience they have, and how they keep track of expenses and income. If you’re not completely comfortable with the property manager, keep looking.
Avoid the Pitfalls of Turnkey Properties for Sale
There are a few pitfalls you need to watch out for when you consider investing in turnkey properties. Some of these are applicable to any kind of investment property, such as not having enough financial flexibility to deal with sudden property tax hikes or the repair bill when that fallen tree damages the roof. But other pitfalls are unique to turnkey properties.
Don’t make the mistake of looking at your turnkey property as a liquid investment. True, you can always sell your property, but you won’t make the best ROI if you aren’t able to hang on to it for a while. For a turnkey property in particular, you must have good reason to believe it will still be popular with renters five years from now.
Talk to the Actual Owner
Make sure that all your negotiations for turnkey properties for sale with the actual owners rather than with middlemen. While not all middlemen are scammers, they are often just an unnecessary expense with little or no power to make any changes truly negotiate.
Be Careful With Distressed Properties
Be very cautious about buying a distressed turnkey property with the promise of renovation to be done after you’ve made the purchase. This isn’t to say there aren’t some good deals out there on distressed turnkey properties for sale, but unless you’re an old pro can, you can really get hurt.
Learn More About Turnkey Properties for Sale
To learn more about avoiding the pitfalls of turnkey properties and how to get a steal, subscribe to the Creating Wealth Show today, where real estate investment expert Jason Hartman gives you the knowledge you need to make the best investment decisions for your future.