Within the real estate market, there are a variety of investment opportunities. Depending on the skill, capital, location and / or interests of the investor, several options may be available. Investing in public versus private real estate is often an important consideration. Public investments offer a piece of a very large pool for shareholders. Private investments often offer the opportunity to get more involved in a variety of ways. Fix and flip is becoming more popular in the private market, as online loans provide easier access to capital, but many private investors are looking for something faster and easier. For these investors, turnkey properties are often the best option.
- Turnkey real estate investments are one of several options available to investors in the private property market.
- The turnkey properties are ready to rent at the time of purchase.
- With due diligence, turnkey properties can start generating income immediately with very little time and effort required by the owner.
Turnkey properties require very little time and effort to rent. Although they are not always the cheapest option, what makes these properties unique is that they have already been rehabilitated, usually by a specialized turnkey real estate company, before they go on the market. In fact, there is often a tenant in the house when the sale closes. Typically, those same companies also offer property management services to the investor. That means the property manager is the one who gets a call when the air conditioning goes out, not you.
In any case, having a rental property can be a great investment. You get a steady stream of rental income that helps pay costs and generate a profit. However, buying any type of property and specifically a property that you plan to rent to others carries risks. That’s why it’s important to make good decisions in the following areas when going through turnkey property due diligence.
Know your property
While turnkey homes generally require considerably less time than other types of real estate, investors should not underestimate the amount of due diligence they have to do. The most important question, of course, is whether the property itself is of good value. Some novice investors are so delighted with the term “turnkey” that they assume that all homes with that label are fail-safe. Unfortunately, that is not the case.
Experts say that you should always visit the property in person before sealing a transaction, even if it means flying to another city. Real estate is a major purchase and investment, so knowing exactly what you are buying is crucial. Viewing the property up close also gives you a better idea of the neighborhood, which will have a significant impact on the long-term marketability of the property.
For added security, seasoned investors say it’s always a good idea to get a professional property inspection as well. The rehab company may surprise you with a stunning kitchen and completely renovated bathrooms, but you want to make sure the less conspicuous features of the house, for example, the oven and the ceiling, are in the same shape.
Meet your property manager
If your turnkey property comes with a property manager or property management services, it is important to understand their terms. Property management may be available to provide a full range of services such as maintenance, rent collection, and building cleaning. Some property managers may also be responsible for filling tenant vacancies, conducting background checks, and signing leases. Since the services of a property manager generally vary, it is important to know exactly what they are responsible for and to get it in writing through a contract.
When considering a property manager associated with a turnkey property, here are some more questions to ask:
- How much experience does the firm have?
- On average, how long does it take to find a new tenant for vacancies?
- Does the company provide financial reports through monthly and annual statements that can help you keep track of income, expenses and income?
- What are the fees?
Know your property agreement
There can be a variety of ways to structure real estate investments, especially within the private market. Knowing your property agreement is often a factor in your overall investment decision. There are several structures that can be used. Real estate investment groups (REIG), partnerships and limited liability companies are some of the options. In these types of business structures, the company generally has the most responsibilities and offers many convenient benefits. Typically, these structures also pass on income to the owners as partners. This means that income can be reported on a K-1.
Less complex arrangements may also exist. In many cases, the financier becomes an independent owner. Independent ownership may require personal management or the contracting of third party services to assist in the management of the property. In some cases, independent owners may seek to establish separate expense accounts authorized for use by third-party property management.
In general, it is important to know your arrangement and feel comfortable with partnerships. Each type of structure comes with its own provisions, so you need to understand and agree to all the nuances before making a final decision.
Financing your turnkey investment
Interest rates are always changing with different types of economic environments. Ideally, finance when rates are the lowest. Even if you don’t enter at the best time, there can always be options to negotiate the best rate. Borrowers with the best credit rating will have the greatest advantage. The mortgage loan market also offers a wide variety of loan products.
Bankrate.com can be a great place to check average rates on all types of home loan options. Not all banks will offer all types of loans, but here are a few to consider:
- 30 years fixed
- 20 years fixed
- 15 years fixed
- 5/1 ARM
- 7/1 ARM
- ARM 10/1
- 30 Year Veterans Affairs (VA)
- Federal Housing Administration (FHA) for 30 years
- 30 year fixed jumbo
- 15-year fixed jumbo
The longer the loan is financed, the lower the monthly payments but the higher the interest. FHA loans offer special rates to some qualified borrowers. Adjustable rate mortgages (ARMs) with specific intervals will require a fixed payment over a certain period of time followed by a variable rate that resets on a schedule after that. Giant loans are for relatively taller directors.
Getting pre-approved for a home loan can be a good idea for investors looking to finance themselves through a home loan.
As of July 2021, the average annual percentage rate for loans on a 30-year fixed-rate mortgage is approximately 2.78% versus 2.12% for a 15-year fixed-rate mortgage. Government assistance loans, such as those backed by Veterans Affairs or the Federal Housing Administration, will have lower interest rates for those who qualify.
Know the pitfalls
While it may seem like a great way to generate additional income, it is important to realize that investing in real estate is not for everyone. There is always the threat of some unforeseen calamity, from a sudden increase in property taxes to chronic maintenance problems and accidents (fires, falling trees, etc.). As such, buyers should have additional capital and cash on hand to rely on in the event of any surprise or emergency.
Experienced investors also say that it is often better to view turnkey properties as a long-term endeavor. Unlike stocks and other relatively liquid investments, real estate can take a while to sell. Property values also fluctuate, so selling for any kind of profit may not be possible until after a few years of mortgage payments have been made.
The bottom line
Turnkey properties are an interesting alternative in the real estate market. They require little renovation or maintenance. They are also typically available to tenants immediately, which means an immediate income stream once vacancies are filled.
To be sure, investing in real estate is never a risk-free endeavor. However, with due diligence, turnkey properties can carry low risks and high returns.