5 Things to Know About Turnkey Real Estate Investments for Retirement
Real estate can offer passive income and protection against market downturns over the long term. Turnkey rentals offer an alternative to the traditional direct ownership model and can generate a profit.
"A turnkey property is a property that has generally recently been remodeled or renovated and comes with a tenant already in place," says Kevin Ortner, president and CEO of Minneapolis-based Renters Warehouse. "This means that as an investor, you should be getting an investment property that will require less maintenance in the early years and you'll be able to generate a return from day one since there's a tenant already paying rent."
Turnkey homes may appeal to someone looking for streamlined property investments, income and diversification for retirement.
"Turnkey properties can be bought in a variety of regions, so that if one market falters there are still other properties in other regions that can remain strong," says Daniel Hill, president and CEO of Virginia-based Hill Wealth Strategies. "This allows for better opportunities of continued growth for a retirement strategy."
When adding turnkey rentals to a retirement portfolio, experts say there are five keys to success.
-- Consider the holding period.
-- Fully vet rental opportunities.
-- Invest in quality management.
-- Gauge long-term income potential.
-- Pay attention to taxes.
[See: 9 REITs Ideal for Beginning Real Estate Investors.]
Consider the Holding Period
Being a landlord for a turnkey rental property can simplify real estate investing, whether it's renting a single-family or multi-family home. But it's important to understand the time commitment involved.
"Your hold period is the most important factor as market dynamics change often," says Kathryn Landow, a real estate agent at Warburg Realty in New York. "Given that an investment property isn't liquid like a real estate investment trust, you need to be able to weather corrections and downturns in the market."
With a REIT, the investment is in a company that owns the property, not the property itself. It's easier to sell a REIT versus selling a turnkey home or any other property that's directly owned when concerns over market volatility.
Landow says REITs can be better for short-term investing, while turnkey properties require investors to take the long view. The holding period also matters for the purchase of the property itself when investors leverage loans, rather than paying cash.
"How you finance the property will also force your hand when it comes to considering a disposition," Landow says. "Make sure you finance the property with the same length of term you're preparing to hold the property for."
[See: How to Invest in Real Estate Without Buying Property.]
Fully Vet Rental Opportunities
A turnkey property may look good on the surface but don't take the seller's word for it.
"Something might seem turnkey but the workmanship may be of poor quality, which can lead to additional headaches and expense," says Josh Rubin, a licensed real estate broker at Douglas Elliman. He says this can be avoided by working with a professional home inspector who can detect potential issues before the purchase goes ahead.
Aside from the property itself, consider its surroundings and the seller's overall reputation.
"Look at the upkeep of neighbors' homes, not just the property you're considering buying," Rubin says. "Check to see if the seller has a track record in the community, whether it's good or bad and see what their other properties have done."
Assuming the property checks out, factor in the reliability of the tenants already in place.
"If the tenant placed in the property was not properly vetted, you might find yourself having to replace them at an added cost," Ortner says.
Not only that but vacancies can diminish returns and affect cash flow until the property is re-rented.
Invest in Professional Property Management
Turnkey investments have a hands-off quality, in that there's much less legwork to be done in terms of making renovations or finding tenants. But there's still ongoing turnkey property management that needs to be handled.
This can be done by a real estate investor, but it could make more sense to hire an expert who's well-versed in turnkey real estate services.
"It's important to get quality property management in place right away," says Ortner, who adds it makes the transition as seamless as possible.
He suggests talking with other turnkey property investors along with the seller to get recommendations for property management companies.
When choosing a property manager, consider the range of services they offer in relation to the fees they charge. Services should be comprehensive, but the associated cost shouldn't detract significantly from returns.
Gauge Long-Term Income Potential
Turnkey investments can come in varying shades. Over time, for instance, turnkey rental homes that stay occupied year-round may generate more income than turnkey vacation rentals, which are occupied six months out of the year.
It's important to consider how a property's projected rental income aligns with retirement goals. If a property underperforms, that could result in a shortfall when it's time to begin drawing on a portfolio for income.
[See: 8 REIT Categories With the Wind at Their Backs.]
Rubin says to look at historic rents for the area to better understand whether expected income from a turnkey home is viable. Reviewing overall market conditions and local trends can offer additional perspective on how well an investment is likely to perform.
Turnkey investors should also take care to keep overall asset allocation in sight to maintain balance.
"While physical real estate is an important part of any truly diversified portfolio, like any investment, it's important to not get over-leveraged or invest more than you're comfortable with," Ortner says.
Pay Attention to Taxes
Owning turnkey homes comes with certain tax advantages for investors.
"Expenses allotted to the mortgage interest, property management fees, operating expenses, property taxes and repairs or maintenance can be claimed as deductions," Hill says. He adds that investors can also deduct travel expenses associated with inspecting or maintaining a rental property.
But there are some caveats.
"Investors aren't always aware that the rent received is taxed within the year it's earned and not when it's due," Hill says.
This can affect tax filing, for example, if a renter makes advanced rent payments several months or years ahead.
Additionally, turnkey investors need to be aware of what is or isn't a deductible expense. This can help avoid surprises when it's time to file income taxes for the year.
Ultimately, consulting a tax pro can ensure that a turnkey rental property remains an asset, rather than becoming a tax liability.
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