Real estate investing is a great way to diversify your investments. Whether you’re saving for retirement or another financial goal, real estate investments can bring monthly cash flow while earning you capital gains too.
A simple way to invest in real estate to earn cash flow right away and take some of the headaches out of investing in real estate is to buy turnkey real estate. Not many people know this type of real estate exists, so we’ve created this helpful guide to show you how it works.
What Is Turnkey Real Estate Investing?
Turnkey real estate investing means you buy a rental property with tenants and an active lease in place. In short, you become the landlord the minute you buy the property. You don’t have to worry about finding tenants or creating leases - everything is ready for you when you buy the home.
Why would anyone sell their investment property with tenants in it?
While it’s not ideal, it happens. Some people want to move on with their lives and feel they’ve gotten what they needed out of the property, and others just can’t afford it financially or physically any longer. Rather than disputing their tenants, they sell the property with the tenants in it.
Turnkey real estate investing isn’t much different than buying any other investment property. In fact, it’s easier on you since you’ll have tenants and cash flow from day one.
How Does It Work?
There are two ways turnkey properties can operate - you buy a property that an investor bought undervalued, rehabbed, and sold to you ready for you to ‘turn the key and rent to tenants,’ or you buy a property with tenants in it, and you take over the lease.
No matter the option you choose, they end up the same. You buy a property ready for tenants or that already has tenants in it. If you choose the former option, you’ll need to find tenants yourself, increasing your carrying costs if you have trouble getting it rented. With the latter option, you earn cash flow right away, offsetting the carrying costs.
How do you know which option is right for you?
It depends on how much control you want and how much work you want to put into the process. If you want a passive investment, the traditional turnkey property option works best. You buy a property with tenants in it, so all you have to do is collect the rent. If you work with a platform like Roofstock Marketplace, they’ll pair you up with a reputable property management company, so you don’t have to do anything except collect your monthly check.
If you are more of a DIYer, you can buy a property an investor bought and rehabbed, finding the tenants yourself. It’s more work on your part, but if you work with Roofstock Marketplace, they do all the number crunching for you. This makes it easier to decide if a property is worth the financial investment and if there is room in the pricing to make a profit while covering the average costs to own a rental home in the area.
Who Is Best Suited for Turnkey Real Estate Investing?
Like any investment option, turnkey investing isn’t for everyone, but there are plenty of investors it is a good fit for including:
If you’ve never invested in real estate, buying a turnkey property can be a great first investment. You have the benefit of investing in real estate without all the work involved. You can see how it’s done and decide if you want to expand your portfolio and do it yourself or keep investing in more turnkey properties.
If you already have a real estate portfolio, you have your plate full. Investing in more properties may feel like more than you can handle, but the profits can be nice. Investing in turnkey properties gives you the chance to expand your portfolio without adding too much work or stress to your plate.
Investors Comfortable With a Passive Investment
Most people invest in turnkey properties located out of state. They hire a property management company and let them handle the investment while they collect a check. If you’re more of a hands-on investor who wants their own wording in a lease or wants to pick your tenants yourself, you may not like turnkey property investing.
Pros And Cons Of Turnkey Real Estate Investing
Like any investment, there are pros and cons to turnkey real estate investing that you should understand.
Benefits Of Turnkey Real Estate Investing
You Can Invest Long Distance
Investing long distances may seem like a logistical nightmare. How will you care for the property or deal with tenants? With turnkey investing, you work with a property management company that handles all aspects of managing the property. You don’t have to be there to fix the property or even see it in person before you buy it. With a platform like Roofstock Marketplace, you can make a decision based on the information provided.
You Earn Cash Flow Right Away
When you invest in a typical real estate investment, you don’t make cash flow right away because you must find tenants. There’s no timeline when this may happen. Some people find tenants right away, and others take months, which means carrying costs and lower profits.
With a turnkey property, you become a landlord on day one, collecting rent from the day you close on the property. There are minimal carrying costs and less risk of a loss before you’ve even found tenants.
You Know It’s a Desirable Home
If the home already has tenants in it, chances are it’s a desirable property. Working with a reputable platform, you can get more details about the property and its demand and even rental history.
This is less risky than buying a home that isn’t currently rented and hoping renters will find it attractive.
Turnkey Properties Are Move-in Ready
There’s less work involved in a turnkey property than a traditional property. Most turnkey properties are ready for tenants or already have them. This takes a lot of the pressure off of you to make the right renovation decisions.
You’ll Receive Ample Information to Make a Solid Decision
Turnkey properties come with the information needed to learn about a property’s financials. This helps you decide if the investment is worth it. Are the profits there, or will it be a considerable risk? You can assess the information and determine what’s suitable for your situation.
The Disadvantages Of Investing In Turnkey Real Estate
You Must Trust the Platform or Seller
Most investors buy turnkey properties sight unseen. You’re trusting the seller or platform to tell the truth about the property and provide ample details about its financial worthiness. If you use a subpar company, the investment may not be as good as it seems on paper.
Properties May Sell At a Slight Premium
Since you don’t have to do any of the work and the properties come with tenants, you may pay a slight premium in the sales price or pay the platform providing the property’s information a premium.
This is only a downside if you don’t figure it into your finances and figure out the actual bottom line based on the higher costs.
Potentially Lower Returns
Not all turnkey properties have lower returns, but if you buy a property for convenience and don’t look at the rental income and how it affects your bottom line, you may have lower returns than anticipated for investing in real estate.
5 Steps To Do Turnkey Real Estate Investing
If you’ve decided investing in turnkey real estate is right for you, here are the steps.
1. Browse a Turnkey Property Platform’s Listings
Most turnkey property platforms, like Roofstock Marketplace, let you browse their listings for free. Look at the listings, searching for one that has the features or parameters you’ve set for your investment. When you invest in turnkey properties, you can invest long distances, so you’re better able to broaden your options.
2. Evaluate the Financials
Pay close attention to the property’s finances. What is the rent charged per month? How much time is left on the lease? What’s the net operating income, cash on cash return, and cap rate?
3. Make An Offer
After you find a suitable property, make an offer. This is no different than when you bid on the property you live in. Come up with an offer and prepare yourself for a counteroffer if the seller doesn’t like what you offered.
Your offer should include any stipulations or conditions you want on the contract to ensure you get the terms you want. You can go back and forth with the seller until you reach an agreement, at which point you’ll sign a purchase contract.
4. Sign the Contract and Secure Financing
Once you sign the contract, you’ll process your financing. Working with your lender, you’ll need the appraisal and title work done, all of which Roofstock handles for you. You’ll have everything you need to close the loan and become a real estate investor.
5. Close On the Home
Once you have financing, it’s time to close on the house. This is when the money exchanges hands, and you become a landlord and a property owner. If there isn’t an active lease on the property, you take possession of the home, look for suitable tenants to put in it, and start earning cash flow.
Tips To Make Turnkey Real Estate Investing Work For You
Don’t discount long-distance properties - Part of the appeal of investing in turnkey properties is the ability to invest long-distance. You don’t have to worry about property management or even fixing up the home. You can often find more affordable homes outside your own area, allowing you to stretch your budget further.
Work with a platform that matches you with a property management company - Finding a property and a property management company yourself can be a lot of work. What if you choose a bad property management company? Since your entire investment is on the line, consider working with a platform that vets local property management companies, so you know you’re hiring a reputable company.
Get all inspections and research done - Don’t just assume a turnkey property is a good investment. Work with a platform that does the due diligence for you and shares the information with you. This includes a property inspection, fair market value appraisal, and financial analysis to determine if the property is a good buy.
Know the property’s history - No two turnkey properties are created equal. Do your research and learn about the property. How long has it been a rental? What renovations have been done recently? Knowing a property’s history can help you determine how it may perform moving forward.
The Bottom Line
Investing in turnkey real estate can be a great way to start investing in real estate or expanding your portfolio. Before you do, make sure you understand all aspects of the property and the property management company you are paired with to ensure it’s a good fit.
The turnkey property promises immediate cash flow, but do your due diligence and ensure it’s the right property for you. Investing long-distance and using a property management company can be a great way to enhance your monthly cash flow and long-term capital gains.
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