By Dan Miller, WCI Contributor

Investing in real estate can be a great way to diversify your investments, especially for someone with a high net worth and/or a significant investment balance. Real estate can be a great complement to investing in the stock market, providing a counterbalance to a portfolio that is heavy in stocks, bonds, or other market investments. There are many different ways to invest in real estate, and one that we will explore in this article is buying turnkey rental properties.

 

Understanding Turnkey Rental Properties: A Comprehensive Guide

Turnkey real estate properties are a method of investing in real estate where you buy a property that is ready to rent, usually with a tenant in place and a team of professionals (often including a property manager) ready to take care of the property. The name “turn key” comes from the fact that ideally you simply “turn the key,” and you can start collecting rent and capitalizing on your new investment.

It's important to understand that buying turnkey rental properties is one possibility on the continuum of investing in real estate.

 

 

Investing in turnkey rental properties is in the middle of the real estate continuum, but slightly on the right side. This means that you may have less control and lower returns than other real estate investments, but you could have more control and experience higher returns than real estate investments further to the right on the real estate investing continuum, such as investing in syndicated properties or REITs. 

 

Researching the Market: Identifying Profitable Opportunities

The first thing that you'll want to do when buying turnkey rental properties is to set up your team and start looking for deals. One nice thing about investing in turnkey rental investments is that you can potentially broaden your search outside of your area. While you might be hesitant to invest in other cities or states if you are managing a property yourself, it becomes much more feasible to invest in cities where you don't live when you have a team in place to help manage things.

When you compare the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method vs. turnkey investing, there are a few crucial things to keep in mind. With BRRRR investing, you are typically involved in buying and rehabbing the property directly. It is possible to hire out some of the rehabbing work, but you'll definitely cut into your profit margin. Turnkey rentals are usually further along in the process—in fact, you may be buying a property that someone else has already rehabbed and wants to sell (rather than refinance). 

More information here:

Diversification Always Matters (My Syndicated Investment Goes to Zero)

 

Navigating the Buying Process: Tips and Pitfalls

 

Tips for Buying Turnkey Rental Properties

  • Work with a trusted and recommended real estate agent, especially if you're investing out of state.
  • Research and vet your property manager
  • If you're using a turnkey rental provider, make sure it's one that has a long track record of success and comes with several different testimonials and reviews.

 

Pitfalls to Avoid

  • Turnkey rental investing is not a very liquid investment, so make sure you have a plan to be in it for the long haul
  • Make sure you have sufficient cash reserves to handle unexpected expenses
  • Location, location, location—make sure your potential investment is in a great location.

 

Risk Management and Long-Term Success: Building a Solid Portfolio

As we mentioned earlier, turnkey rental real estate investment is not a very liquid investment. This means that it may be difficult to sell your investment on short notice. Because of this, you want to make sure that you have sufficient cash reserves to handle things like unexpected repair bills, increased property tax assessments, or extended vacancies. 

You'll also want to make sure that your other investments are in such a place that you won't need to quickly sell your turnkey rental investment properties. This might include having separate cash reserves or other liquid investments. That will give you a cushion where you can use other investments if you run into a situation where you need cash without having to touch your turnkey rental (or any other real estate investment). Remember, investing in most types of real estate is something you should do with a long time horizon.

More information here:

How Our Portfolio Performed in 2023 (Including Real Estate!)

 

The Bottom Line

Turnkey rental properties are named such because you should just “turn the key” after purchasing one and immediately start collecting rent and generating a return on your investment. Turnkey rental properties give you more control than investing in a REIT or syndication, but you'll generally have less control and lower potential profits than a BRRRR or a short-term rental investment strategy. Because you are ceding some of your control in a turnkey strategy to your property manager or turnkey provider company, you'll want to make sure to fully vet your team and make sure they are set up to succeed.

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