Turnkey investing is one of the more controversial forms of investing in real estate. Depending on who you ask, you may hear that turnkey is one of the best forms of passive real estate investing or that it just doesn’t deliver the profit margins and, therefore, isn’t always worth it.
As is always the case with any type of investment, though, it’s important to be asking the right questions. And what you should be asking about turnkey investment is not whether it’s good per se but whether it’s a good option for you specifically.
To a novice, it can seem that by its very nature, turnkey doesn’t require you to do as much research as, say, the BRRRR method. That’s anything but the truth, however.
Yes, you won’t spend time looking for below-market-value properties or renovating them. In some cases, you may not even have to spend time looking for tenants because the turnkey company will provide you with an investment opportunity with sitting tenants.
Top 3 Strategies for Analyzing Turnkey Opportunities
You will still need to do due diligence and a thorough analysis of your potential investments. You should focus on your turnkey analysis on three main areas:
- Your own capabilities and expectations as an investor.
- The profitability of specific markets.
- The reputability of the turnkey company.
Let’s take a closer look at each of these essential focal points for turnkey analysis.
1. Be realistic about your time, resources, and experience level
The short version: If you have plenty of cash but no time to flip and/or manage real estate or are diversifying your portfolio to out-of-state properties, turnkey can be a great option.
The longer version: The beauty of turnkey is that you are buying a property that has been renovated and is ready to be rented out. It really is that simple; hence the name. You don’t need to worry about sifting through potential homes worth renovating, finding and hiring contractors to carry out renovations, or screening tenants because turnkey management companies will typically take on that responsibility.
We’ll be upfront here and say that this convenience comes at a cost. The whole ethos of turnkey is pretty much the opposite of the BRRRR method. Turnkey companies are businesses, and they, too, have to make returns on their investment by flipping the homes they then sell.
So, as a turkey buyer, you will pay more for the privilege of someone else rehabbing the property. If the turnkey company then also manages the property while it’s being rented out, they will also charge you a percentage of the rent as a monthly fee (typically around 10%).
However, some investors argue that whatever money you’ll save on doing the rehabbing and renting out yourself is negligible and not worth the time and effort involved. One example of price comparison estimates the amount saved on a BRRRR investment versus a comparable turnkey investment at only around $3,000. The thinking is by the time you’ve paid for the renovation and holding costs on your BRRRR investment, or the period during which the property was being renovated and didn’t have anyone paying rent on it, there just isn’t that much of a difference than paying someone else to do it.
So far, so good. But what are your goals as an investor? How soon do you expect to reap the rewards of investing in real estate? You really need to have a plan before you start buying turnkey—because turnkey takes time, and it always takes longer to generate wealth than quicker investment methods like BRRRR.
Typically, with the turnkey method, you will be generating your returns from rental cash flow for a long time before you can benefit from appreciation. This will work if you’re planning on renting out the property for the next 10 to 15 years; if you were hoping to sell it in about five, not so much. In fact, if you sell a turnkey investment too soon, you’re at risk of just breaking even or losing money.
2. Understand which markets are right for you
Of course, there are exceptions. There are significant regional market variations across the U.S. that mean, in some areas, you will have more of a chance of generating a return on appreciation. That’s where our second tip for analyzing turnkey comes in.
One appealing feature of turnkey is that all of a sudden, you have potential access to pretty much any real estate market in the country. This choice opens up all kinds of opportunities—and you need to be clear on which ones are right for you.
In a sense, local market conditions where you decide to invest will dictate your investment strategy. Let’s say you decide to invest in a turnkey property somewhere in the Midwest or Northeast. You don’t necessarily need to be looking at the sexiest metro areas, just the ones with reliable and steadily growing rental prices and affordable sales prices.
You can get an investment property within the $150,000 to $200,000 price range in a popular metro area like Flint, Michigan, or Rochester, New York, and expect a rent-to-price ratio of 0.62%. That’s steady cash flow in an area with little market volatility. Your turnkey investment will still appreciate, but you’re much better off letting it generate cash flow over the next decade or so.
On the other hand, let’s imagine you buy a turnkey property in Florida. Home prices in the state have skyrocketed by 158.5% over the past decade, according to statistics from Construction Coverage; individual cities like Miami Gardens and Lehigh Acres have seen even more impressive appreciation rates of 312% and 277%, respectively.
And prices are continuing to grow. The average home price in Miami Gardens was $458,409 in March 2024, up 10% from a year ago.
Average rents are high, too (currently $2,064), although it’s worth noting that some property types, notably smaller apartments, have seen rent prices fall over the past year. Rental prices for studio apartments dropped 13.4% in Miami Gardens over the past year. If you owned a turnkey property in this city, would you be able to manage a market fluctuation this high?
On the other hand, if you’re renting out a four-bedroom home in this city, you’re in luck: Rents have grown by over 7% on this type of property over the past year alone.
Going turnkey in a state like Florida will work better if you have the cash to invest in a more expensive property, as these tend to generate better cash flow in pricier areas. At the lower end of the market, you will experience more volatility and tighter margins. At the higher end, rents tend to grow more steadily, offering better cash flow and better appreciation over time.
As a general rule, investing in a prosperous, high-end area always works out better for turnkey investors. What you’re looking for is an area where you won’t have a shortage of tenants who can afford the local rents on nicer, renovated homes.
One opportunity you should always consider when looking at turnkey investments is in areas with high rates of new construction. Especially in the Southeast, new construction rentals are increasingly in demand. This means that investing in one of these areas can reduce tenant turnover and maintenance costs, but again, you’re looking at higher purchase costs in more expensive areas—which typically are the ones that offer the best long-term returns.
An additional advantage of new construction turnkey properties is that there are many loan options available, with some boasting low rates into the 3% to 4% range, which is great given the current high-interest rate environment.
There are also new build opportunities that allow investors to come into immediate equity, buying homes at 5% to 10% below market value in specific markets. That is another advantage to consider when looking at different markets and asset classes.
Choose the best turnkey management company
Turnkey investments are experiencing a boom. There are countless turnkey companies out there, and not all of them are created equal. The truth is that some, while they look good on paper and seem to offer nice properties, either don’t know the area they’re selling in enough or will blatantly try to sell you a property that won’t give you a decent return because it’s in the wrong area.
One example: An investor bought several turnkey properties in very low-income areas in South Side Chicago. The properties were beautiful rehab jobs with attractive numbers on paper, but the performance of the properties did not go as expected due to high tenant turnover and higher-than-expected vacancy and maintenance.
One obvious lesson to extract from this example is: Always do your research into the local market and specific location you’re thinking of investing in. The other, no less important lesson is to thoroughly vet the turnkey companies you’ll be working with.
Once you’ve zoomed in on a local market, contact and personally interview the team you’re working with. Do it over a Zoom call if you can’t visit in person, but make sure the team understands the area they’re working in and your goals as an investor. They should have a thorough knowledge of local demographics and be able to support their claims of success with past sales. The company should have ample data to verify all claims, including rent comps, market values, vacancy and turnover rates, and typical home and rent appreciation for the area.
If this sounds like the research you’d do for traditional real estate investing, you’re not far off. It pays to do your due diligence, though, because choosing the wrong turnkey company—or worse, a disreputable one— will cost you.
This article is presented by Rent To Retirement
Rent To Retirement is the Nation’s leading Turnkey Investment Company offering passive income rental properties in the best markets throughout the US to maximize Cash Flow & Appreciation! Rent To Retirement is your partner in achieving financial independence & early retirement through real estate investing. Invest in the best markets today with a comprehensive team that handles everything for you!
Ready to explore your first turnkey opportunity? Visit our website or learn more about turnkey investing by texting REI to 33777.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
