Turnkey properties, popular among real estate investors, allow for passive income streams but often may come with hidden costs.

NEW YORK – If you’re in the market for an investment property, there’s a good chance you’ve heard about turnkey real estate. A turnkey property can seem like a surefire way to see a quick return on your investment. But, as anyone who has dabbled in real estate before surely knows, if something sounds too good to be true, it probably is.

Whether you’re toying with the idea of buying a turnkey property or have just heard about it, it’s good to do your research before deciding it’s the right move for you. In this guide, we’ll take a deep dive into what turnkey properties are and how they work before examining the various pros and cons.

What is a turnkey property?

In its most basic form, a turnkey property is ready to move into as soon as you’ve purchased it. These properties would typically have been recently renovated and have had all maintenance and repair tasks carried out. As a result, the new owners don’t have to worry about anything – they can just move in and make themselves at home.

However, in real estate terms, turnkey properties generally refer to as investment properties. As mentioned above, such properties will be good to go the moment you’ve closed the deal. Investors can immediately rent the unit out, meaning their turnkey property can make them money from the get-go. Indeed, in some cases, tenants will have already been found.

How do turnkey properties work?

Nine times out of 10, turnkey properties are sold by a company specializing in restoring homes before selling them to investors. Often, these companies will also offer a property management service to buyers, taking care of everything from finding tenants and fixing maintenance issues to end-of-tenancy cleans and liaising with utility providers.

As a result, the investor can more or less sit back and wait for the money to roll in. In fact, many turnkey properties are marketed as buying a passive income stream since, beyond actually purchasing the property, investors don’t need to do much else.

Many successful real estate investors use turnkey properties and property management services to generate a regular income stream. They will most likely purchase property in a relatively affordable location to keep their costs down.

This hands-off approach enables them to pursue other projects or continue working their regular job. Meanwhile, the income generated from rent can be used in many ways, from simply going into a savings account or being reinvested in additional properties to paying off their mortgage, freeing up more money for other things.

Advantages of buying a turnkey property

There are plenty of advantages to owning a turnkey property, mostly stemming from the fact that it’s almost entirely managed by someone else.

It’s quick and hassle-free. Investment properties lose money when not rented out. When you buy a property requiring attention, you’ll need to spend time and money taking care of repairs and renovations before renting it out. All the time spent renovating can be planned for, but it’s not uncommon for delays to occur, which can soon eat into your budget. With a turnkey property, you don’t have to worry about this, as all the necessary work will have been completed before you close the deal.

But turnkey properties often save you time in other ways, too. With a property management service taking care of finding tenants for you, you’ll save time by not having to worry about marketing or conducting tenant interviews and viewings. Plus, most companies will also be able to deal with tenant complaints and requests, meaning you’re free to pursue other projects.

Instant cash flow. With a property management company taking care of the leg work, a turnkey property can quickly start generating income. Many properties already have a tenant in place, which means that you can start collecting the rent as soon as you’ve closed the deal.

Since they’re so hands-off, turnkey properties make it easy for would-be real estate investors to branch out into areas beyond their physical location. The time and expense saved by not having to travel to the property to take care of things like maintenance or finding tenants soon adds up, making it a very viable option no matter where you’re located.

The ease at which investors can expand their portfolios across the country with turnkey properties also provides a safety net. If one particular location declines in value or suffers from a natural disaster, you can have backup options in different areas. Diversifying your portfolio is made easy since everything can be handled remotely via the management company.

Easy to manage. Once you purchase a turnkey property, you’re generally not obliged to continue working with the property management company. You can, of course, take care of these things yourself. But sticking with the company will make life much easier, saving you time and effort as someone else looks after the property and the tenants.

Disadvantages of buying a turnkey property

Many advantages of buying a turnkey property come from employing a property management company to take care of things. However, this can also be the source of many of the disadvantages:

Your income is reduced. Turnkey property management companies may seem like the answer to your prayers, but they do come at a cost. You might find that the fees associated with such companies take a substantial chunk of your potential earnings.

However, it’s worth noting that they’ll generally save you money on renovations and repairs since they typically have long-standing contracts with contractors. Pair that with the travel expenses you’ll be saving on, plus the time it takes to manage a rental property, and you might find that it’s a cost worth paying.

No say in the tenant screening process. Buying a rental property with a tenant in place is a definite perk. Still, it’s worth noting that the tenant screening process used by the management company might not necessarily meet your expectations. Indeed, some companies might not screen tenants at all to get someone in there as quickly as possible.

This lack of control can be frustrating, but worse, if a tenant damages your property or skips payments, things can soon become complicated. If you continue to work with the management company, you’ll likely be charged additional fees to repair the damage and find a new tenant.

More expensive than other options. Turnkey properties are often more expensive than other real estate investments since the renovation costs will be added to the price tag, along with any other fees the management company has in place. In extreme cases, this can see the cost of a property almost double. Plus, older units that require regular maintenance often pack hidden ongoing costs that can detract from your income over time.

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Author: marlam