Are Turnkey Rental Properties Worth the Risk?
Any type of investment carries some type of risk. When it comes to properties, the level of risk is based on multiple factors, from the value of the home to the current market in the area. One type of property investment is known as a turnkey rental property.
For many, turnkey rental properties are a smart choice for investment. Others believe these investments are a “get rich quick” gimmick rather than a sound fiscal plan for long-term investment.
As with many topics related to property investment, it’s unwise to make broad generalizations. Every turnkey rental property is unique. Additionally, your success with a turnkey rental property investment may also be affected by your own decisions. Ultimately, the choice to invest is yours and a certain amount of risk should be accounted for.
If you’re wondering whether turnkey rental properties are worth the risk — or if you’re advising a client who is considering the purchase of a turnkey rental property — continue reading to learn more about this type of investment.
What Is Turnkey Rental Property?
First, before you can decide whether a turnkey rental property is worth the risk, it’s important to understand what defines a turnkey rental property and how it’s different than other properties. A turnkey rental property is any home or residential building that can be purchased and immediately rented out.
Whereas another property may need repairs or renovations before it can be occupied, a turnkey property is ready to go. Usually, turnkey properties are sold by real estate brokers or other individuals that specialize in this. The seller handles any new construction, restoration, permitting, or other obstacles before placing the property on the market.
Benefits of Turnkey Rental Properties
Compared to other types of real estate, turnkey properties offer many benefits. For some investors, these advantages can make a turnkey rental property well worth any potential risks.
#1. Fewer Renovations
One of the worst parts of buying a home or residential building is the work that’s required to make the property livable. A “fixer-upper” may seem like a great value, but these properties often require extensive renovation.
Older properties will need to be thoroughly inspected for compliance with current civil codes and zoning laws, as well as general decline and damages from previous tenants. Repair costs can quickly add up. You may also lose money upgrading an old property simply because construction can take so long. From acquiring permits to fixing a leaky roof or replacing old pipes, getting an older property into habitable shape can take months or even years before it begins generating rental income.
With a turnkey property, the seller has already handled any repairs, renovations, and upgrades that the property may have needed. A turnkey property may be more expensive at first, but you may also save in the long run because you won’t need to spend extra money on construction. You can also begin collecting rent immediately.
#2. Existing Tenants
Similarly, many investors like turnkey rental properties because the property often comes with existing tenants. This means you won’t have to spend time screening potential tenants for credit and background checks, or negotiating lease agreements. When you “inherit” the tenants in a turnkey property, you’ll begin receiving rental income from them right away.
#3. Distance Management
Because a turnkey rental property often has existing tenants, as well as existing infrastructure for collecting rent and processing work orders, these investments can be a great choice for individuals who don’t want to be involved in the day-to-day, on-site management.
Real estate investors often caution against purchasing a rental property that isn’t local to you. However, a turnkey property is easy to manage from a distance because it requires comparatively little work to upkeep.
Potential Risks of Turnkey Rental Properties
Now that we’ve discussed some of the advantages of purchasing a turnkey rental property, let’s consider the potential risks. These are some of the reasons why a turnkey rental property might not be for you.
#1. Equity Can Be More Difficult
First, it can be more difficult to finance a turnkey rental property. When you purchase a home or apartment building that needs renovation, investors may have an easier time getting equity. After all, fixer-uppers are lower in cost.
When you buy a turnkey rental property, you’re also paying for the profit margin of the seller’s renovation efforts. They’re making money off their investment; you’re not. Additionally, these sellers are often individuals or small firms that aren’t in a position where they can negotiate with buyers.
#2. Pre-Existing Leases
As mentioned, one of the advantages of a turnkey rental property is that it may include pre-existing tenants. Unfortunately, this can also be one of the disadvantages to this type of investment.
When you buy a property with renters who are already on a lease, you have no say over their rent or other details outlined in their renter’s agreement. If you don’t like the terms of the lease, you’ll need to wait until the lease ends or make the renter a buy-out offer.
You may also find yourself in a similarly uncomfortable position if you inherit bad renters because you didn’t screen them.
#3. Questionable Construction Quality
Lastly, a turnkey rental property carries risks because you don’t know the quality of the construction used during renovations. If the previous owner cut-corners by choosing the lowest bidding contractor, or using cheap materials, you may find yourself with a property that still requires work due to shoddy workmanship.
Is It Worth the Risk?
If you’ve weighed the pros and cons of purchasing a turnkey rental property and decided it’s worth the risk, the next step is finding a seller. Then, raise funds for your investment, purchase the property, and begin collecting rent.
Once you own a turnkey rental property, you may find it helpful to use association management software like CINC Systems to help you manage your tenants. To learn more about CINC Systems’ turnkey rental property management solutions, click here to request a free demo.
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