You’ve probably already figured out that Mike and I aren’t exactly in the business of buying turnkey real estate. In fact, our business is basically the opposite of turnkey. Instead of buying move-in ready houses that have already been renovated or that are newly constructed, we invest in houses that need a lot of work before we can sell them. While our focus has always been on fix-and-flip houses, we do get a lot of questions from new investors about turnkey deals. After all, they seem like they might be worthwhile in some cases, right?
Because I get questions about turnkey investing pretty often, I thought I’d take a moment to help you understand what this kind of investment involves and how it works so that you can figure out whether or not it’s a good idea for you.
The Buy-In is Always Higher
When you buy a fix-and-flip house, you’re buying it below market value and you’re going to spend a little bit more money (usually a few thousand dollars) rehabbing it so that you can sell it at market value for a profit. Most house flippers don’t have their own investment capital when they start out, but it’s not too difficult to convince an investor, private lender, or hard money lender to invest a few thousand dollars in something that will be turned around and give them a positive return in just a few weeks or months.
With turnkey real estate, though, you’re not going to get that initial break on the cost of the property. You’re talking about a property that’s already been renovated, updated, and upgraded. And in most cases, you’re also talking about a property that comes with property management services. That means you’re not only going to be paying market value for the property, you’re going to be paying market value plus the cost of new appliances and other upgrades, as well as property management fees. In other words, unless you’re already independently wealthy, you’re not going to be paying for a turnkey property in cash.
Your ROI Will Be Much Slower
If you’re not paying cash, of course, that means that you’re going to need to get a loan or to find an investor to back you. Now, because we’re talking about a much larger buy-in, you may have more difficulty finding an investor willing to work with you, which will mean that you’re likely going to have to go with a hard money loan or a loan from a private lender. Either way, you’re most likely looking at a loan with a fairly high interest rate, which you’ll have to start paying back almost immediately.
And instead of getting a lump sum return on your investment when you sell (as you would with a flip house), you’ll get monthly rental fees—minus your property management firm’s fees, taxes, and any other costs related to the property. And those returns will only happen if you have tenants living in the property. Doesn’t sound like a deal that an investor would want to get involved with, does it?
Basically, if you have the capital, you trust the property management company, and you’re in a good rental market, a turnkey property can give you some good passive income. But those are a lot of “ifs”. In general, especially if you’re just starting to build your real estate investing business, I’d stay steer clear of turnkey deals and stick with buying and rehabbing distressed properties for better profits.