Turnkey Real Estate
A basic guide to the most basic way to passive income in real estate
One of the attractive aspects of investing in real estate is the ability to be relatively hands-off but still gain a passive income. Being cash flow positive is all you can ask for in your investment and when it comes to most investors the relatively stable environment real estate yields makes for a great place to park money. Now, as we know, your degree of investment and strategy you choose to direct your investment is based on your overall needs and values and not to mention capabilities. In this post we will address a real estate strategy that is a great option for first time real estate investors, out-of-state investors, or anyone who is looking to gain a passive income by moving their money into a safe investment vehicle.
Introduction to Turnkey Real Estate
This form of investing in real estate refers to buying in on properties that are essentially ‘fully running’. What we mean by that is the building is already rehabbed, relatively occupied (if not fully), has management covered, and is producing a positive cash flow. Now, it is important to realize that these investments are not just lying around for you to grab and benefit from. Like all investments, finding turnkey properties require proper due diligence and thorough research to ensure your money will be moving in the positive direction. We will be getting into this in more detail in a bit, we just wanted this to be clear from the get go. But, if you go about your approach the right way turnkey real estate is a shortcut to gaining positive cash flow, sooner. Now we will get into the benefits of turnkey:
Being able to get in on the advantageous markets outside of your local market is a big benefit to investing in turnkey. Your local market may not offer the price point you desire or even the type of building you want to invest in. Perhaps you want to get in on a market that is up and coming and has unique amenities and great schools surrounding it. This would be a situation that is definitely more hands-off on the real estate spectrum and requires a great deal of trust, knowing your investment will be well taken care of without your presence. Some people, however, want to be able to be close to their investment and visit it if need be. This would not be for those types of investors. Your willingness to invest out-of-state, again, is based on what your most comfortable with.
As already mentioned, after getting through the necessary due diligence to ensure you are putting your money in the right place, you can start gaining cash flow. Turnkey is the easiest way to get involved in real estate and make a passive income. It is the best way for investors who do not want to make real estate their full-time job, but just something on the side to get involved with that can help increase wealth. Remember, a big aid in managing your investment is finding a professional management company that can take care of the day-to-day issues of the building – allowing you to be more passive.
First Time Investors
As opposed to more complex forms of real estate investing, turnkey has the easiest learning curve. For those completely new to real estate there are turnkey real estate companies that can take care of the majority of the heavy lifting associated with finding the ideal property for you to invest in. This way you can quickly start making cash flow. It does go without saying that this service will eat into your investment a bit as they must be compensated for their work. However, until you feel comfortable investing completely on your own, professionals are a good route to take to leverage expertise and gain comfort. Essentially, you learn as you go.
Because turnkey is quite passive, it has the potential to really grow your portfolio. Overall, real estate is a fantastic way to diversify your portfolio coupled alongside more conventional investment vehicles, like stocks. Turnkey specifically is great because it does not take much room in your portfolio. Say you committed to one turnkey property, done the proper research and due diligence, and what do you know, your cash flow positive and don’t have to be on-site everyday (if at all in some cases). This is exciting! What is more exciting is you don’t have to stop there. You already have the knowledge and expertise of what it takes to successfully turnkey. Why not add another property, and… another. Like we’ve already mentioned, the learning curve is not very difficult. Once you understand the fundamentals and have the right management in place, the potential to grow your portfolio cannot be hindered. With passive investments, one has more room to capitalize on other opportunities as well.
By delving into turnkey properties, regardless of the location (local or out-of-state), you have insider access to information about that specific market. Inherently through your due diligence and research you gain insights into the nuances of various markets you are involved with. This is invaluable information you can only gain from first hand experience and information that can greatly assist you throughout the growth of your investment portfolio. Turnkey companies can also help foreigners to a specific market better understand what is going on, as they are the experts of those areas. In some situations, the location of your turnkey properties can be a very ‘hot’ real estate market, and the influence of a turnkey company can greatly leverage you in bidding wars for attractive properties. Again, your willingness to hire a turnkey company to guide you is based on your capabilities and needs as an investor… and comfort.
Alongside these benefits are definitely some considerations one should ponder prior to fully committing to this type of investment. Again, it is very important you have all the information so when the time comes you know you’re fully confident with your decision. With that being said here are a few things to consider:
Not for those who need income
As mentioned, the most attractive aspect of turnkey (and really any real estate) is the passive income. However, turnkey is not for those who are in dire need of income and are going to be relying on this investment to keep their life afloat. If you are in a position that requires this passive income to pay significant bills and expenses in your life, turnkey investing is simply not for you. Turnkey is best approached by those who have at the very least an active income, and interest income definitely helps. Different incomes act as a buffer to allow you to make investments and prepare those investments so they can meet their fullest potential. Capital reserves are something we will get into more detail in later posts, but is something all investors should have in order make improvements or fix issues that arise throughout your holding of the investment. Just a passive income simply will not give you the long term cushion you need to be successful investing in real estate.
Not for those looking to build a One-House Portfolio
Real estate is a relatively sporadic industry when it comes to the tenants that occupy your space. There can be periods where real estate is unbelievably demanding and you have to turn people down because you have so many attractive offers for move-ins. However, on the other end of the spectrum are the downsides in the market when it almost seems like people would rather live on the street than in any apartment. This sway in demand simply comes with the territory and is something you will learn to adapt with. When you have no other properties to offset the volatility associated with one, you can put yourself in a pretty deep hole – one that could be very difficult to get out of. If you want to get into turnkey, be prepared to grow your portfolio for added security during times of distress. This is the best way to ensure you reach your investment goals.
Now that we have addressed the benefits and considerations one should weigh when deciding to get into turnkey properties, it is important to dive into what it takes to get it done, and get it done right. In this section, we will be focusing on the necessary steps one needs to take in order to invest in the right type of property. Because after all, any investment requires some sort of investment.
With turnkey, it is imperative to fully consider the property and the market it is located in. Whenever you purchase a property, you are also buying into the local market. Thus, a thorough understanding of the local market is one of the strongest ways you can start the search for your dream property. Questions you should ask yourself are “What are the vacancy rates in the area?”, “Are homes appreciating in value?”, “What is the historical tenancy rate of this specific property?”. Understanding the overall demand in the area you’re investing in is key. You simply cannot move forward without getting a solid idea of demand.
When your looking into an area to invest in, act as if you will be living in the property itself. What are some questions you would ask yourself? (and if you don’t have kids, act like someone who would). These questions would include, “How are the nearby schools?”, “Who else lives in this neighborhood?”, “What are some of the amenities nearby?”. You need to ask yourself overall, “What are aspects of this neighborhood/market that make it attractive for buyers?” Odds are, quality neighborhoods attract quality tenants who will be staying in place for the long-term. That’s what you want.
When your tenants move into a quality neighborhood, they expect a quality home. You must ensure the building you are going to be investing in has been well-taken care of and has a quality manager in place. Questions should include, “Has the HVAC been replaced?”, “How old is the boiler?”, “When was the last time the roof has been looked at?”, “Is there a positive inspection record?”, etc. Using cool before and after photos are one thing when attracting potential buyers to your location, however, they mean nothing if the buildings essentials have not been taken care of and if a quality manager is not present. People want to live in a place with limited problems, wouldn’t you?
Your overarching goal when it comes to due diligence is to attract quality tenants. To do so, you must use the questions above as a guideline and really put in a reasonable amount of time to find the right place to invest in. Depending on your expertise and time, you may want to get involved with a turnkey company that can pull the majority of the weight for you. Remember, there are trade-offs associated with this, including trusting a third party and also compensating them for their work. Your decision to get help is dependent on how confident you feel you can find the right property to add to your portfolio – hopefully you can reach a point where you won’t need to rely on anyone. With the right attitude, portfolio and due diligence, turnkey properties are a great way to diversify your investments or simply get into real estate investing for the first time.