What do you need to know before buying a turnkey rental property?
Turnkey real estate investing is picking up momentum in America. As more individuals are made aware of its potential, turnkey properties could become the next big niche. Some investors have found them to be profitable already, and others are just waiting for the chance. However, results can vary substantially between turnkey opportunities. So what do you need to know before picking up one of these income property deals?
1. The Provider: Real estate education is important. Aside form everything you can learn from books, courses, and coaching, there is a lot to be said about the experience you gain from actively investing in the industry. To that point, experience comes with practice. It takes time to familiarize yourself with everything, and even to establish a reputation you can count on. So how long has the company you are shopping with been in business? Do they have a valuable reputation that they are unlikely to risk? Remember, experience is as important to others as it is to you.
2. Sustainability: How long a company has been in business can say a lot about their current practices. Of course, that is not to take away from new businesses, but sustainability is a great asset. Very few companies actually have the financial stability, infrastructure, and business models that can sustain their promises for more than a couple of years. Don’t be afraid to ask what a promoter is doing to ensure the preservation of their company. If they don’t have answers, it may be a red flag.
3. Value & Price: There are a number of different ways that turnkey real estate companies price and advertise their properties. Their values are typically based on comparable sales, cap rates, build cost, after repair value, previous values and more. All of these factors influence a respective deal in its own unique way. They impact the deal you are really getting, the ability to resell the property in the future, and how long it will take to build up the same amount of equity.
4. Location: There are turnkey properties all over the U.S. However, the bulk of these investment properties are in less than ideal destinations. They are bread and butter properties in mid-ranged neighborhoods. These are often promoted as being more affordable, better for diversification, and stronger cash flow candidates. There are advantages to all types of locations, but it is important to check out these destinations for yourself and do your homework before you buy in them. You may never have to go and look at the property or manage it, but you should at least have an idea of what you are working with.
5. Market Strength: How strong is the local rental market? If the unit isn’t already rented, how likely is it that the company will be able to make good on their cash flow promises? If the tenant they place fails to perform, or needs to be replace in the future, how hard will it be to find another? And at what rates? You need to have a good understanding of how demand works in the area. Neglecting to understand your clientele could really hurt business.
6. Management Philosophy: What is their property management philosophy? Are your goals and style in alignment? Will they take a proactive approach to property maintenance and alerting you to potential rent increases, or will they neglect to act? What approach do they take with tenants? Learning how they manage themselves and their properties can go a long way in helping you make a decision.
7. Decisions on Maintenance Costs: How are decisions made on repairs and maintenance costs? Do you get to approve every dollar? Will you give them a limited budget to make decisions if you can’t be contacted for small or emergency items? Do they have their own in-house team of contractors? If not, how do they choose them? Can they get you discounts on contractor services? Do they get a kickback on contractor services that charge premium rates? Learn how they allocate their money for these situations, and keep yourself informed.
8. Financing: How easy will it be for you to obtain attractive financing on a property? If the company offers financing connections, how do they compare to what else is out there? Are there any balloon payments or pre-payment penalties which could potentially cause issues later?
Turnkey real estate investing is a powerful income and wealth building tool. However, there is a massive difference in the short and long term results and performance investors can expect. How does your provider stack up?
