Why You Might Not Want A Turn Key Property
When people get into the rental housing industry and buy their first income property, they often buy a distressed house and fix it up, even if it is a personal home that they are turning into a rental. However, this solution can be expensive if the new housing provider can't do much work on their own. A more expensive, albeit easier, option is to buy a rental property that has been fixed up. The so-called "turnkey" rental property is an attractive option for investors who like a more hands-off approach to their rental property and don't want to put in time to fix up the property and make improvements. On the surface, this can seem like an ideal solution for an investor who is ready to jump into the industry.
Let's talk about some of the advantages and disadvantages of turnkey properties.
Turnkey properties are ready to rent and sometimes have tenants already in place. While sometimes these properties are available from people who are leaving the industry, they can also be available from developers who flip properties for investment. These developers take a distressed property, rehab it and then put tenants into the property and sell it to another investor who doesn't have to do anything beyond management (which is often already hired). The property is already generating revenue and is an attractive option for someone who can afford to buy this kind of investment. However, there are some down sides as well.
- No expensive and time consuming rehab
- Tenants are in place
- Already producing income
- Higher price for the property
- Non-RHA lease (unless you are lucky)
- Unknown screening criteria
The negatives on a turnkey property aren't exactly deal-breakers but they can make life difficult as you incorporate this property into your portfolio. Most people are used to having a certain relationship with their tenants or having certain standards of tenants. If the property already has tenants, they might not be the people that you would normally rent to in your other properties. The cost is always a factor and it is important to make sure that the income the property is generating makes financial sense for your business.
If you decide to keep the management company, instead of self-managing, there could be problems ahead. You don't know how they work, how good they are communication, and you could be over-paying if their fee structure is more expensive. If there is one area where online wisdom indicates difficulty with turnkey properties is on the management side of things. If you are going to continue with the management company, interview them carefully and decide if they are the right company for you. On the other hand, RHAWA makes it easy to self manage. So while you might not have rehabilitated the property, there is no reason not to take over management on your turnkey property!
If you are buying a turnkey property from someone there are a few things to think about:
1) Make sure to do your inspections (You would carefully inspect a non-turnkey property)
2) Understand the neighborhood and location (The same homework that you would do for a property that required work)
3) Ask any questions of the management before taking over (You'll want to work with them on the transition once the sale is complete)
Turnkey properties are a great investment options if you can manage them properly. Do your homework, find a deal that makes sense, and grow your business!