Turnkey investments offer a great deal of promise for people who want to make money and grow equity. But Turnkeys are not for all investors, and there is risk involved. Below are 10 things to know about, and be aware of, when purchasing a Turnkey property.
1. What is Turnkey real estate?
A Turnkey property is one that is in move-in condition, meaning that it does not require repairs. Turnkey real estate can be either a single-family home or an apartment building, and they generally have people living in them already, such as tenants. A company may be already managing the property. Turnkey real estate can include new homes, as well as ones that have been rehabbed. These properties have already passed required inspections, and are sold with clean titles. These real estate options are usually not listed on the Multiple Listing Service or MLS – more on that later.
2. What is a Turnkey company?
A Turnkey company finds and rehabs a home. It then sells it to a person who is looking for properties for investment. These companies usually offer property management so that investors who purchase the Turnkey company can easily manage the properties and get cash from their investment. When purchasing a home that will become a Turnkey, property companies usually rehab to make the property livable and in good condition (they usually have fresh paint and updated appliances, for example), but generally, companies avoid installing high-end options such as wood flooring, garbage disposals and high-grade finishes. They will manage the company for you – you will only need to sign occasional forms and ensure enough money is available for emergency repairs that may come about.
3. Do your research
As you would with any home purchase, research the area where the home or apartments are:
A. Is it a good neighbourhood, would you be able to keep the place rented with reliable and long-term tenants? To actually drive around the area and talk to residents. Go to the area during the day and at night to see what the neighbourhood is really like at all times.
B. Do some comparison “shopping” by trying to find out what other places in the neighbourhood are selling for – are you getting a good deal?
C. Find out what the property management company lists as fees you will pay – 10 to 20 percent is good, but anything more might cut into your equity and cash in hand.
D. Find out about the company itself – if you are purchasing an apartment complex, ask if they have up-to-date software that tracks rents and if they can provide you with a monthly report. There are several questions you should ask:
- How long have you been in business as a Turnkey company?
- How many cities do you sell in? Multiple cities and markets means that they may not really know the properties they are selling.
- Do you have any investor referrals I could speak to? Ask to talk to previous clients who invested two or three years ago – or more. Ask the other investors what they wished they had known before working with this company. Ask them if they would do business with them again.
- What do you replace in your buildings? Ask about replacing mechanicals like heating, roof, water heater, electrical and plumbing. Those will also be the most expensive to repair if they break once you have purchased the property.
- Can you provide me with a step-by-step of the process Turnkey purchasing takes with your company?. Do you manage your property on-site or through a third-party company? Make sure that if they are outsourcing the property management that the company or people doing the property management are doing a good job and are reliable.
- Is your property team licensed?
- Do you offer maintenance warranties to shield me from unforeseeable costs such as tenant issues?
- What is your eviction experience? Especially with the unit you are buying!
- How long does it take them to rent out a unit?
- How will you communicate with me if there are issues? This is especially important if you are investing out of state so you can keep on top of any issues with your investment.
- How will you pay me? You need to know on which day of the month you will be paid for and how you will be paid – by check or through automatic transfer into your accounts. How you get paid is probably the most important question to ask!
E. Stay on top of market trends—make sure you are aware of what homes are selling for in the area so you have a good return on investment.
F. How much will the mortgage and other insurance cost you? Will you come out on top after paying for all those “extras.”
G. Create for yourself an investment plan with goals and strategy. This will not only help you figure out what you are looking to do, but it will give the Turnkey company an advantage to aligning their services with your needs.
H. If you don’t really understand the real estate market, find an agent – someone not involved with the Turnkey company – and ask them questions, really pick their brains so you can learn. Ask specifically about purchasing and owning multi-resident properties.
I. Visit the property before you commit to it: Never, ever buy a property without seeing it first. Inspect it and make sure it is all it is cracked up to be. Make sure that there is no additional work to be done to get the property in shape. As mentioned, it should already have been rehabbed and in move-in condition. And since most property companies purchase the properties and list them separate from the MLS, you want to make sure you are not getting scammed and that the property actually exists – more on that later.
4. Financing your Turnkey investment
There are many ways to fund a Turnkey investment. Having cash on hand, as from an inheritance is always nice, but that’s not the way most investors find the money. Many go for a traditional mortgage, but there are some other options to consider:
Conforming loan: A conforming loan is a low-risk, long-term financing for owner occupants and investors who are looking for single-family, condos and multi-family units. The terms are generally low – 4 to 7 percent interest, 15- to 30-year terms; and are funded by such organizations as Fannie Mae and Freddie Mac. You usually have to have at least a 620 credit score and make a down payment of 5 percent of the cost of the property.
Multifamily loans: These loans are usually procured by people looking to purchase a property with 2 or 4 units. There are both short-term and long-term loans you can get, depending on what you qualify for – and varying interest rates such as 4 to 12 percent. Loan amounts generally start at $100,000 and require you to have a credit score of 650 or more, have about six months of cash reserves on hand for any repairs that come up, and the property is usually in very good condition.
Portfolio loans: These are loans that existing investors make from their own monies and their view that debt as an investment. As such, rates are usually 3 to 11 percent, and you will need at least a 600 credit score. The building should have a 90 percent occupancy rate and you will need 6-months of cash reserves on hand.
Apartment loans: These loans are for people looking to purchase apartment complexes with five or more units. There are generally three types of loans to purchase apartment complexes: government-backed loans, permanent balance sheet loans, and short-term loans. They are generally fixed interest rates, especially for short-term loans, you must have a 650 or higher credit score to qualify and you need nine months of reserve funds on hand.
5. Having a reserve fund
As mentioned in most of the loan information above, it is a good idea – and sometimes a requirement – to have a reserve fund on hand. The way to figure this out is to do more research. For example, if this is an existing apartment complex with tenants, the property company should know how much they have in income each month, and how much they generally spend on things like repairs, snow removal, grass maintenance, etc. Look over the cash flow for the past 6 months.
So, how do you figure out how much you would need to set aside for reserve? If your average costs per month are $20,000 and you want a six-month reserve, multiply $20,000 times 6 months and your reserve would be $120,000. You may be able to build one up by simply saving, but also look at if you qualify for a bank line of credit.
6. Reliable tenants
If the home you are interested in has tenants, find out how reliable they are – do they pay rent on time, and in full? Were they subjected to credit or background checks before moving in?
7. Try not to bite off more than you can chew
Don’t spread yourself too thin when it comes to investing.
It’s tempting to just go in head first when an exciting opportunity comes your way. But really step back and think about how much you will spend vs. how much you will get back. Make sure all of this is manageable before taking the plunge.
8. Pros of investing
Think about the positive aspects: there are generally no rehab costs involved; you don’t have to deal with a timeline and contractors; and if you hire a reliable property management company, they can manage the property for you.
9. Cons of investing
As with everything, comparing the cons to this risk is advisable. You will spend more money to purchase the property as it is move-in ready; you are at the mercy of the tenants regarding cash flow and you have less control over the property if you hire a management company.
10. Be on guard for Turnkey scams
As with any risk, there are scam companies out there and it is buyer beware – or in your case, “investor beware.”
A. Check the background of the real estate company, its experience and track record, make sure they meet up to what they say. Make sure they are good property managers, as well. They should collect rent on time, pursue those who don’t pay rent, and quickly and efficiently make repairs.
B. If they tell you it is “zero risk,” they are lying. All investments carry some risk and legitimate companies will do everything to minimize risk for investors.
C. With scams, promoters of real estate try to convince unsuspecting investors not to visit the property. They come bearing glossy brochures and false advertising and try to sell everything from seaside condos to homes in the mountains – and sometimes it never exists.
D. When you visit the property, really look at the work that was done. If the rehab is shoddy they will have cut corners because they don’t want to invest much money into the scam.
Is a Turnkey property right for you? Turnkey properties are generally not for people who want to be hands-on landlords. They are designed as just what they are – investment opportunities – where investors get their money back and then some. Generally speaking, a Turnkey investment is right for you if:
- You want to purchase a property that isn’t in the same place as where you live and work;
- You are a first-time landlord who wants to get his or her feet wet with investing in real estate;
- You are a hands-off landlord who is just too busy to manage your properties;
- You don’t want the risk of flipping a property and hoping it sells; or,
- You don’t want to live in the home.
Now that you have read this article, you will be able to make an educated decision on whether becoming a Turnkey investor is really for you.