Are Turnkey Rental Properties Worth the Risk?
If you’ve ever considered investing in real estate, you’ve probably heard the term turnkey, or rental home investment. For those unfamiliar with it, a turnkey property is essentially a property which is ready for an investor (or homeowner) to “turn the key in”—hence the name. For investors, a turnkey property gives them the ability to purchase a home ready for renting, or perhaps already rented, meaning they are on the way to gaining monetary revenue virtually immediately.
Most turnkey properties are purchased by out of state investors in areas of undervalued markets. These markets are often chosen for their low cash output but high return on investment. Properties, usually foreclosures, are snatched up by property investment companies which flip them, rent them, and sell them to out of area investors for a slightly higher price. These same companies often tend to stay on as property managers for the new investors, allowing the out of area investors to remain hands off.
What are the risks?
As with all real estate transactions, there is always some risk involved. Market values are subjective. An area which is high in value one year may suffer an economic setback, such as a massive company relocating or a natural disaster, and values may plummet. Trends change. The pillars on the front of the home you purchased, which seemed to be a huge draw for renters at first, are now hindering your ability to rent the home at the going rate. A change in administration at the police force may affect the crime rate. These are factors you just can’t predict, they are rare, but uncontrollable.
Turnkey rental properties come with their own set of risks, set apart from the risks of a general purchase. These risks multiply for first time or inexperienced investors.
Real estate has its own set of sharks in the water. While the majority of companies in the industry are legit, there will always be someone looking to make a profit off another’s lack of experience. Turnkey properties are an easy way for less-honorable companies to target first-time investors to make a quick buck off someone’s experience.
Sometimes, lack of experience falls on the property investment company’s side of the transaction. Companies which are relatively inexperienced can often make poor decisions in purchasing property—selecting property which doesn’t fall in line with market trends or making an uneducated assumption on an area’s future. This can fare badly for investors who blindly follow the company, assuming they understand their market as it is their business.
How to Avoid Risks!
Avoiding all risks in real estate is near impossible to do. Investment will always carry a modicum of risk, that’s just the nature of the beast. However, there are ways to greatly reduce the risk associated when purchasing a turnkey property.
The biggest factor in avoiding risks when investing in rental homes is research. Before you decide on an area to invest in, do your due diligence and research the area yourself. Long before you contact a property investment company, you should have a clear understanding of the market in the area. This will help you catch any red flags in the information the company provides you. Don’t forget, at the end of the day they are there to make a sale. It’s on you to spot any major discrepancies along the way.
Before you select a property investment company, research them thoroughly, as well. It’s not enough to understand the market you’re in, but you need to understand the way the company operates before you rely on them to help you invest a large portion of your money. Ask for references, talk to former and present clients. Research their licenses. Do they have all the appropriate documentation and insurances? Review a sample contract and ask details about how they operate their property management after the sale.
Don’t forget to review the contractors the company utilizes! Are they licensed and insured? Have they had any reports with the Better Business Bureau or the state and municipalities? Are there any liens against them for failure to pay for supplies?
Turnkey can be beneficial!
While there is some risk associated with purchasing a turnkey property, but the benefits are quite clear. Purchasing a turnkey rental home allows you to start recouping the investment costs faster, as you’re not sitting with a vacant property while conducting renovations. You are able to do a one-stop shop when you purchase a turnkey property. The property has been researched, selected, renovated, and rented before your name is added to the title. The property is managed long before the sale by a company familiar with the property and its tenant.