First Time Investor Guide To Turnkey Rental Property Investment
Buying your first investment property to rent out requires a lot of pieces to be put into the puzzle. Then there are these Turnkey Rental Properties that can save you from putting a lot of those efforts. Investing in Turnkey Rental Property can be a wise investment if you can act a little careful and know all the in and outs of buying one. Having said that, let’s dive straight into the topic and understand the right way to make a Turnkey Rental Property Investment worth.
Not all the Turnkey Rental Properties make the right Investment Property. Most of them are a way to scam and dupe an uninformed investor. But done right, a Turnkey Rental Property has the power to help you make money from your bed, literally and that too from the Day one.
What is Turnkey Rental Property?
A Turnkey Rental Property, as the name suggests is a rent-ready property that requires little to no work. Buy the property, turn the key and you are ready to put it on rent. Even better, some turnkey sellers sell it with the tenants already at place. This means you can collect the rent from Day one.
Don`t you think, there can be no better way than buying a Turnkey Rental Property for an Investment? Every Rental Investor should rather invest in these Turnkey Rentals than buying an Upper Fixer.
It may sound to be a good idea, but still, not many investors are a fan of buying Turnkey Rental Properties. Do you want to know why?
What’s wrong with Turnkey Rental Property?
No, there is no problem with Turnkey Properties. And you must invest in one of them. The real problem lies with the people you are dealing with. Being a first-time investor and having limited knowledge of rental investing, some turnkey sellers try to captivate the buyer. The result of this is you either buy at a higher price or invest in the wrong property.
Though there are still some more cons related to buying a Turnkey Property that you must be aware of before making a purchase. But that we will discuss a little later in this article. Because the pros of buying one certainly overshadow the cons. The important thing to learn is how can you buy one the right way?
Things To Watch Before You Buy Turnkey Rental Properties
1. Stay off From Turnkey Rental Property Scams
There are tons of Turnkey Rental Properties that are on sale. It can be a chance that the one you are considering buying is a part of a scam. So how exactly, the turnkey property seller scams the buyer.
The seller makes the buyer fall for the package which they present with utmost surety of getting paid immediately after making the investment. The Investor then simply closes on the deal falling to one of such buyer marketing gimmick.
- #Scam 1: Putting up great photos and Hiding the Bad Part
- #Scam 2: Advertising a Foreclosure Property as a Turnkey Property that still needs rehabbing
- #Scam 3: Selling at a Much Higher Price
Most buyers who get scammed with turnkey investment properties are the ones who are out of state or foreign investors. The ones who don’t have time to go to the property and check it first hand. The investors from high priced expensive locations who are now looking to invest in markets where home prices are low and rents are strong.
2. Finding The Right Turnkey Property Sellers
Mainly, the two most common types of Turnkey sellers you will see in the market are the traditional individual operators and Corporate Turnkey Sellers. The individual operators you will find are mostly flippers that buy distressed properties, make renovations, and then flip the property for a profit. On the other hand, the corporate turnkey sellers are big companies that are specialized in selling turnkey properties and have organized operations in place to sell you one.
If you see, it is better if you buy your next turnkey rental from an organized corporate seller. There are various reasons to do so starting from being that they are experts at their work. The renovations are mostly handled by the authorized contractors. The Financing part is also much easier because they already have pre-approved lenders. They too have management teams in place to manage your rental if you want and a lot more.
Anyway, no matter whom you buy with. It is always important to do due diligence on your part. I will be getting to that in a minute. But before that, let’s take into account some noteworthy Turnkey Rentals Selling Companies
Norada Real Estate Investments
Maverick Investor Group
The Benefits of Buying with Turnkey Seller Companies is that they offer some additional features that are really helpful in your Investment Journey. If I tell you some of the benefits that Roof Stock offers to the Turnkey Property Investors are
- Rent Guarantee ( For 45 Days if Property stays Vacant after getting Rent Ready )
- 30 Day Money Back Guarantee (If You aren’t Satisfied with the Purchase)
- Pre Rented Properties
In the coming days, I’ll also be doing a detailed comparison article on Best Turnkey Companies to help you precisely select the right one. Meanwhile, you can read my complete Roofstock Review where I reviewed Roofstock marketplace for buying an investment property.
3. Performing Due Diligence on the Seller
You can’t just buy any of the Turnkey Rental advertised somewhere. No matter even if the financials are looking right to you. Still there a lot of things to watch with Turnkey Rental Properties before you actually buy one. The first being the company’s experience with Turnkey Rental Properties.
It is very important to work with people that are trustworthy and have some experience on their sleeves. You want to avoid buying your Turnkey Rental from someone or some company who is
- New to Turnkey Scene and has no prior experience
- Doesn`t Invest in Turnkeys Themselves
- Do Cheap Jack Renovations
- Lack of Proper Systems in Place
- Have a Poor Management team
These are some of the very important points that you must take into account before finalizing a deal with someone. Never ever come up with any money upfront before you check all these firsthand. It is always better you spend some time meeting the seller personally or have someone do it for you if you are investing out of state. Doing so you can analyze what type of people are you working with. There is no good in working with the wrong people and regret later.
4. Are You Buying an Out of State Turnkey Rental Property?
This is where the actual problem starts. Buying an out of state Turnkey Rental Property can become your worst nightmare if you aren’t careful. The challenges with an out of state investor mostly comes as a Limited Information on the Local Real Estate Market.
Having limited information, you are at risk of paying too much for the property. You have no exact idea of the Vacancy Rates and the average rent rates of the area. What kind of neighborhood are you exactly investing in? I mean there are many more risks involved in buying an out of state property and one has to be very careful while investing in one.
Still I feel, investing in out of state property is a golden opportunity for investors. Here is an exact guide to turning the odds of investing in out of state property in your favor.
5. Is the Rental Property Already Rented Out?
Buying an already rented out turnkey property can cause more harm than benefit. You need to be careful when entering into such deals. The problem with such deals that you are not sure of the quality of tenants living at the property. How the current seller has secured the tenants and whether are the tenants put up on the property just to show it is rented.
Even if the tenants are good, and you buy this property; you are hooked to the current obligations that were stated in the already set up lease with the tenants earlier. So it becomes important you take a proper check on all these things before closing on the property.
6. Sort Out Financing
If you have cash sitting in your bank account, you can make a purchase right away. But if you are required to obtain financing, you must sort this route way before you make the purchase. It is always a good idea that you get pre-qualified by the lender. Try to work up with different lenders and see what financing options are available for you. The most common form of financing includes
- Conventional Loans
- FHA Loans
Beyond these, there are several other options also available for investors to buy an investment property to rent. It is important that you know your credit score before you apply for one. Your Credit Score must be above 580 to be able to secure a loan. But that said, every lender has a different requirement according to the type of loan you are opting for.
7. Run The Cash Flow Numbers
There is no point in buying a turnkey property investment if the numbers don’t work for you. In a nutshell, you need to account for the possible expenses that can occur on the property when you put it on rent. And whether the Net profits are sustainable or not after deducting the expenses.
Also, this is just one way of estimating the profitability of the property and is termed as a Cap Rate of the Property. But there is still more to running the rental cash flow equation.
If you wish to learn about the Rental Cash Flow Analysis in detail, you can read this article on our blog itself. Understanding Rental Cash Flow is not difficult and I made it as easy as understanding 123.
Tips To Buy a Turnkey Rental Property
Once you are able to sort the above things. Then comes the high time that you go on and buy the Turnkey Rental Property. Your Turnkey Seller seems legit, got a good reputation, and the property also seems good to you. Let me put the next steps in a bullet to make you understand better.
- Put the Property under a Contract
- Order a Title Search of the Property
- Get an Inspection Done
- Have an Appraisal
Ensure you perform all the above steps before you close on the property. Because even after putting the property into a contract, there are few things that can go wrong. There can be a chance that there will be some discrepancies related to the title of the Property like a lien on the property. Or, some issues with the structure, foundation of the property. It is possible that the property does not comply with the housing codes.
All these steps are important to ensure a smooth transaction and the worry-free ownership of the property.
- A Title Search will rule out any chances of Title Frauds
- Getting a Home Inspection helps you get an insight into the condition of the property.
- A Home Appraisal helps you understand the right price for the property.
Cons of Investing in Turnkey Rental Properties
Making Money From Bed is what I said you can do with Turnkey Rental Properties. But this choice comes with few downsides. There are some cons associated with Investing in Turnkey Rental Properties.
When you invest in Turnkey Rental Properties, you have to settle yourself with lower returns. If you see, the juice has already been taken out. Someone has already done the work on the property, bringing up its value and selling it at a maximum price. Your chances of doing a forced appreciation are about none. Settle for less or invest in an upper fixer property.
The most Turnkey Buyers are the out of state investors who can just invest money and hope for a rent check every month. Such investors are highly reliant on the Property Management Teams set up by the Turnkey Sellers. Though you can choose to put your own property management. But that’s unlikely that you go there to find a good property manager yourself for your property. So, most investors put their trust in these Turnkey Sellers only.
Roof Stock got a #1 Reputation of always putting the best Management Team for the Property and they certainly don’t receive a financial gain from doing that.
Should You Buy a Turnkey Rental Property?
You may now think that why to invest in something that offers a mediocre return. Well, if I tell you, 8% may sound to be a bad return as compared to 12% you can get when you buy an upper fixer. But think for yourself whether is it convenient for you to go buy an investment property and make all the necessary repairs yourself?
Yes, you definitely can hire someone to do it. But, then you have to wait until your property gets rent ready. Not to tell you that you have to also find the tenants after your property becomes ready to be occupied. Well, What if the rehabbing costs exceed the budget you have in mind. Don`t you think all this makes you lose money faster than if you bought a turnkey rental property which is up and ready?
Decide For Yourself Now
If you are someone who is experienced and can handle an upper fixer property, you certainly must invest in one and waste no time with Turnkeys. But if you are someone who lacks time and wants to make a source of passive income a little fast. Then Turnkey Rentals are your thing.
Industry Leaders on Buying Turnkey Rental Property
♠ Ali Boone, The Founder at Hipster Investments
Turnkeys are a good idea for first-time investors assuming they do their due diligence well on the Turnkey provider, location, property, and management. The Turnkey Properties provide a great opportunity to learn the critical fundamentals of a successful rental investment without the need to do the advanced and riskier tasks.
♠ Brian Davis, Director of Education at Spark Rental
Turnkey properties make it far easier to invest in long-distance real estate, without the need to oversee renovations. And you can simply advertise the property for rent from Day 1. Though, the challenge with turnkey properties is that you’re competing with other investors, and tend to pay near market pricing. After all, someone else has already done the work for you, putting the property in rent-ready condition. In many cases that leaves little meat on the bone as far as cash flow, but if you can find a good deal on a turnkey, it leaves you with fewer headaches as an investor.
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