This article analyzes the pros and cons of purchasing turnkey rentals, and reviews several top companies investors use to purchase them.
If you’ve browsed any real estate listings, the word turnkey has probably appeared — most likely next to pictures of houses that look like they’ve recently had a fresh coat of paint.
These ready-to-go properties seem like an easy way to break into the real estate investing game, but are they actually a good deal?
JUMP TO SECTION
- What does turnkey mean?
- What is a turnkey rental company?
- How do you make money on a turnkey rental?
- Are turnkey rentals a good choice?
- So, should you get a turnkey rental?
What does turnkey mean?
Put simply, a turnkey property is one that is “move-in ready.” This phrase comes from the fact that owners should be able to close on the property, “turn the key,” and move in right away — no repairs or improvements necessary.
For many buyers, this is a pretty ideal scenario. Buying a home that needs renovating before you can move in means covering the costs of two properties simultaneously — unless you’re planning to crash on a friend’s couch for several months. Either way, you’re going to save a whole lot of time, money, and stress.
Turnkey properties can also be tempting for investors. If a new rental property is turnkey, you can close on the property and have tenants move in immediately — there’s no need to wait for your investment to start working for you.
In addition, if you’re working full time or otherwise unable to successfully rehab your property, turnkey rentals might be the only viable way for you to get into the investment property market.
Taking the turnkey concept even further, some prospective landlords buy turnkey rentals that already have tenants. This sounds like a no-brainer, but it’s important to consider this move from all angles before diving in.
>> LEARN: 5 Things to Know When Buying a Tenant-Occupied Home
What is a turnkey rental company?
As you might expect, many investors like the idea of buying a ready-to-go property, as it takes one step out of the new investment property equation. In response to this, many turnkey rental companies have sprung up in recent years.
Instead of having to go out and find a turnkey property yourself, these companies claim to do the heavy lifting for you and present a curated list of potential rentals, financial modeling included.
These financial breakdowns help show the investor what the long-term financial success of the property could be. In some cases, these companies even manage the property, so that all an investor has to do — at least in theory — is sit back and watch the rent checks flow in.
Of course, these companies take fees or percentages along the way, which obviously eats into your own cash flow. . But with features like rent guarantees and pre-inspected homes, turnkey rental companies can often still be a tempting idea.
The truth is that a good all-in-one turnkey property management company can make real estate investing incredibly passive. Because of this, many investors view turnkeys as the best way to get into the market — especially if they don’t live in the area they want to invest in.
Since most turnkey rental journeys start via turnkey rental companies, I’ll focus this guide primarily on them, explaining how they work and if they’re a good idea or not.
But, because these companies are mostly middlemen, much of the information will be applicable to general “best practices” for property investing.
Turnkey vacation rental properties
While functionally the same, it’s important to acknowledge that traditional rental units are not the only thing that can be turnkey.
There is a large market for turnkey vacation rentals, so some companies specialize in this area exclusively. Since these properties share many characteristics with traditional, longer-term turnkey properties, I’ll be bundling them all together in this article.
Top turnkey rental companies
While there are many turnkey companies out there, there are a few well known companies that you should investigate if you are interested in learning more about turnkey rentals:
- Roofstock: One of the largest turnkey rental companies out there, Roofstock has generally good reviews and serves a large chunk of the United States
- Martel Turnkey: A smaller, more boutique turnkey company, this is an example of the many small-scale turnkey companies out there (and they have great reviews)
- Turnkey: Turnkey focuses on vacation rentals. While it isn’t a turnkey rental listing service, it provides all the post-purchase help typically associated with other services
Bottom line, what property investment company you choose to use is very dependent on where you want to invest. Find a company that works in the area you want to invest. If you’re unsure of where you want to invest, start with a company like Roofstock to see what’s out there before narrowing in.
How do you make money on a turnkey rental?
If you visit a turnkey rental site, the first thing you will likely notice is what amazing investments these properties seem to be.
Some of the sites I came across advertised properties with a 50% return! If you’re anything like me, this idea is incredibly tempting.
“Buy property and profit” is a great idea, but it’s important to look at how one actually makes money on turnkey properties before whipping out the mortgage application.
Making money on the difference between rent and mortgage price
The simplest way that one makes money on a turnkey rental is by charging more in rent than the monthly cost of maintaining the property.
Although this may seem straightforward, there are a few hidden things to look out for when crunching the numbers.
First off, you’ll need an accurate idea of what kind of rents you can realistically expect in that market.
When looking at turnkey listings, pay careful attention not to the advertised rental price, but what similar homes in the area are renting for and how quickly they get rented.
Remember that your property is statistically unlikely to be occupied for the entire time you own it. You need to make sure that you’re accounting for some amount of vacancies when you consider how much your monthly rent should be to stay profitable in the long run.
A common way turnkey rental companies fudge the numbers is by assuming incredibly low vacancy rental rates, making it seem like properties would bring in far more money per year than is actually realistic.
Near-100% occupancy rates simply aren't the case in many markets. Modeling a deal based on this false assumption will likely lead you down a problematic path.
Making money through property value appreciating
When you consider buying any property, its appreciation potential is always going to be a factor in determining the long-term success of the purchase. If the property is in an up-and-coming neighborhood or generally good area to live in, it’s more likely that property values will rise over time. Conversely, properties in unsavory areas or struggling markets are less likely to appreciate.
However, future returns via market appreciation can be a difficult thing to calculate or predict accurately. Moreover, many turnkey rental companies customers live out of the area — or are less experienced. Knowing this, some of the less ethical turnkey rental companies will use appreciation to fudge the numbers.
Sadly, many will take the company’s word for it and sit back thinking that their investment is happily appreciating, year after year. This can be a serious issue, but one that isn’t unsolvable.
Working with a well-established realtor — someone that knows the ins and outs of the local market — is generally a much safer bet. Look for agents with 5+ years of experience, a solid sales record, and stellar customer reviews. You can do your own digging on Google and Zillow, or consider trying out a referral service with a pre-vetted network of top-rated local agents. These services are typically free, come with no obligation, and can save you a whole lot of time and headache.
Are turnkey rentals a good choice?
Given all that I’ve said so far about the shady things that can happen with turnkey rentals, it’s easy to believe that I am 100% anti-turnkey. This isn’t the case. But I do believe that in order to protect yourself, you need to know what could go very wrong before you start thinking about any potential good.
The risks of turnkey rentals
Turnkey rentals, specifically through dedicated turnkey companies, can turn out to be bad ideas because:
- They’re misrepresented: If a company skews the rental or appreciation numbers, you can end up with a deal that is not as good as it seems. Without proper guidance, an investor can end up with a house that no one wants to live with in an area that isn’t getting better anytime soon.
- They’re sold for way more than they’re worth: Since buyers see turnkey listings after they’re fixed up, it’s common for companies to price properties for significantly more than they're worth. There are two reasons for this:
- It’s hard to know how much work has actually been done on a house. Tossing new flooring over a serious mold problem costs less than fixing the problem before making it nice. Sadly, this means surface fixes could be unfairly affecting the house’s price.
- To an investor in California, a $200,000 3-bedroom house looks like a steal! Unless they know the market, they may not realize that the property should really sell for half that price.
- Your management property might not care about you: If you choose to buy an all-in-one turnkey property, it’s likely that you’ve also bought into their management company. Because turnkeys are a low-effort way to invest, shady companies might use your lack of time or inexperience as a way to get away with less-than-stellar or overpriced service. After all, leaving the company means having to manage the property yourself or finding a new company to manage it for you.
- You aren’t getting all the profits: Pay attention to what fees are associated with turnkey properties. If you have the time to BRRRR your property, it's probably a better move, financially speaking. (No clue what that is? Check this out.)
Obviously, these negatives aren’t necessarily a given — whether you’re buying via a turnkey company or looking for turnkey deals on your own. But they are common pitfalls, so be sure to keep a sharp eye out for red flags. .
Why turnkey rentals could work for you
Remember that I promised I wasn’t 100% anti-turnkey? Here’s why:
- You live in an expensive housing market: Using a property manager frees you from investing in your city, and lets you invest anywhere in the country. This can be a great strategy for investors with high salaries that live in expensive markets, and decide to invest in areas where the cost of living is lower.
- You know the ins and outs of the area you plan to buy in: If you know the area, you can better tell if something is a good deal or not.
- You have an awesome resource in the area you plan to buy in: If you have a good real estate agent, friend, or management company in the area you are looking to buy, this can also help you be more accurate in your decision.
- You’ve crunched the numbers yourself: Not every company is a lying, scheming mess. If you’ve accurately looked at the numbers and believe the house is a good deal, it very well may be! If there were no such thing as a good turnkey deal, they probably wouldn’t exist..
So, should you get a turnkey rental?
Fundamentally, if the numbers work — well, they work. Just because a property is listed through a turnkey company doesn’t mean it’s automatically a bad deal.
That said, I would strongly warn against relying on the people you’re buying a property from to tell you whether you’re getting a good deal. As you can probably imagine, they’re not going to be a very objective source of information.
Instead, find a good tool to accurately and impartially price out the property and make your decision based on the numbers.
I can’t recommend this rental property calculator enough. It’s one of the few I’ve seen that really breaks down the costs and benefits — plus it’s free and has a very informative how-to video (score!).
If the financials work out, awesome. Enjoy your investing journey. If not, remember there are many ways to make money off property — turnkey rentals are just one of them.
If you do decide to purchase a rental property, remember buying with a Clever partner agent can get you cash back on your home purchase. If you’re going to be buying a home anyway, why not get money back?