267 - Are Turn Key Rentals A Good Investment?

Turn key rentals continue to grow in popularity amongst beginning investors due in part to the belief that they are easier to acquire, manage and control.

Although there are differing opinions on what is considered turn-key, it generally means that the purchase, rehab, and management as a rental is done by a third party instead of the individual investor having to do everything.

While for many it's a realistic way to get your foot in the door to the world of investing the end results are often less than exciting.

Ease of Acquisition: 

Most people have a tough time putting deals together, they don’t have the time or desire to work their own seller leads.  To buy a turnkey rental you simply place a deposit and wait for your turn.

The easier something is to buy, the more people are generally willing to pay for it. 

This means that turnkey providers can often pack a hefty profit into each deal for themselves because people love the done for you model.  Such a practice means skinny margins for the end buyer.

Proforma Returns:

Turnkey providers often use proforma documents to outline the expected profits from owning the property they are advertising.  It's important to note that these numbers are rarely ever achieved and the actual returns are often considerably lower.

You should do your own independent research to double-check the expected returns as advertised by the provider.  Call three property managers and ask them what the rent amount should be based on the specific address you are thinking about buying.  Ask them if they would manage it and how much they would charge.  Also, ask them if they would feel comfortable replacing tenants if the need arose in a reasonable time frame.

Be sure to check each expense to verify its accuracy, often what’s listed is an estimate, sometimes it's just a guess.

Repairs and Rehab:

Always get a home inspection done, even if the property was freshly renovated.  Having a third party licensed home inspector to double-check everything and provide a report is a worthwhile minor investment.  Expect to pay between $400 to $600 for a home inspection on a single-family home.  Multi families will cost more and are usually priced per unit.  The inspector will be able to check and report on the electrical system, plumbing, HVAC, Roof, and overall condition of the property.

After receiving the inspection report, be sure to have the provider take care of any needed repairs BEFORE closing, especially safety items such as those that involve electricity, gas, or structural issues.

Summary:

Turn-Key Rentals can be a good investment for those who lack the desire or skill to go at it themselves.  Because more people are involved in the acquisition lower returns should be expected but some return on investment is much better than no return on investment.

Doing nothing will lead to your nest egg being consumed by inflation as time move on, don’t get caught up in that.