The Pros and Cons of Buying Turnkeys
At first glance, turnkey investing looks pretty good, right? You get a rent-ready, rehabbed house, often with a tenant already in place, all without having to do any of the leg work.
And while that is mostly true, there are pros and cons to buying turnkeys.
The Pros of Buying Turnkeys
Turnkey investing has some unique advantages over more traditional real estate investing:
- You don’t have to worry about finding and bidding on deals. You can browse available turnkey properties on your own time and know that the listed price will not change (think of it like CarMax, but for homes).
- You don’t have to do the rehab or repairs yourself. Ideally, when you buy a turnkey property, it will be in a great condition with nothing that needs to be fixed. You don't have to worry about managing contractors or rehab crews yourself.
- You save time by not having to build a network. Turnkey companies can almost always refer you to a lender, property inspector, insurance agent and property manager. If you go with their recommendations, you don’t have to spend any time “building your team”.
- You can start collecting rent immediately. Since there is usually a tenant in place before you close on the home, you can start collecting rental income the day you finish the purchase process.
The Cons of Buying Turnkeys
As with just about anything, there are also some disadvantages of buying turnkey properties. Some of these may not be "disadvantages" per se, but more like things you should be aware of:
- Not every turnkey property is a good investment. Just like with any other rental property, not every turnkey will be worth buying. The home may be old and require a lot of ongoing maintenance, which will eat up your cash flow. It may be in a rough neighborhood and hard to rent out. It may not cash flow after all expenses have been accounted for. The bottom line is that just because it’s advertised as “turnkey”, doesn’t mean it’s a good purchase.
- Many turnkeys are located in bad neighborhoods. Most real estate investors seek higher cash flow. To maximize potential cash flow of their properties, many turnkey companies operate in low-income neighborhoods, where property prices are cheap. Rough neighborhoods often attract lower quality tenants that you may not want to deal with.
- You will pay market value (or above) for your turnkey rentals. When you buy turnkey properties, you will almost always pay the market value for them. If you’re not careful, sometimes you may end up paying more. This means that you will have minimal equity starting off and will not get a discount on the price.
- You still need to research the market before buying. The neighborhood, city and state where your property is located will have more impact on your long-term performance than the property itself. If you don’t do proper due diligence on the market before buying, you’re lowering your chances of being successful.
- Some turnkey companies are better to stay away from. Don’t get me wrong, there are some great, honest people out there, doing quality work on their properties. But unfortunately, there are others who do poor rehabs and use deceptive marketing tactics to get you into buying awful properties. It’s up to you to figure out which type of company you’re dealing with.
Even with the above being said, I still believe that buying turnkey properties is a great way for many people to get started with real estate. The next lecture will help you figure out if turnkey investing is right for you.