This post is for millennials in a unique situation. I realize this might not be applicable to everyone. But it’s still worth understanding what turnkey real estate is, and how it could be implemented in your strategy later in life.
Tell me if this sounds familiar.
You have a ton of student loan debt ($50k+) and buying a house in your area is really expensive. But heck, so is renting your current apartment or house. So what do you do?
I have been in this situation for the past 3 years and it’s frustrating. I realize that by renting I am paying down someone else’s mortgage and that I am missing out on an opportunity to gain equity in an appreciating asset.
But I am also hesitant to jump into a house at the height of the market and be stuck in it because I am underwater.
Recently I have been researching the idea of turnkey real estate as a possible solution.
In this post, I want to break down…
- What is turnkey real estate
- How turnkey real estate works
- Where turnkey rentals make sense
- Why I think turnkey real estate is great for millennials
- The risks involved in turnkey real estate
What Is Turnkey Real Estate?
A turnkey real estate property is a done for you real estate investment opportunity. Here is what typically is involved in a turnkey rental.
The turnkey company finds a property in a desirable part of town that generally needs to be remodeled. They bring in their contractors and fix the place up to be rent ready. The company also has a property management company wrapped into their business model so once it’s rent ready they market for tenants and place a tenant on the property. This allows you to buy the remodeled house with a tenant in it and if the math works out start receiving cash flow from the property.
It almost sounds too good to be true right? What’s the catch?
There isn’t really a catch per say, but you just need to understand the turnkey companies business model and why they are interested in selling the property to investors.
How Turnkey Real Estate Work?
A turnkey property is great for “armchair” investors. If you don’t want to be involved in the rehab process (picking out materials, calling contractors, making sure you are within the budget, etc) then let an expert handle that. If you don’t want to screen tenants and file paperwork, let a professional do that. If you want to deploy some cash and receive a return on your investment, then consider turnkey rentals.
You will be paying retail for these properties. Some real estate investors would rather go out and find a heavily discounted property so they have instant equity in the property and fix up the property themselves to reduce costs.
Make no mistake, if you use a turnkey rental company you will be paying for them to provide their services (finding the property, rehabbing it, property management, etc). There are ways to get into rental investment properties that will yield more money and higher returns. But they involve more work and active asset management. That is why it is critical you do the math to make sure the investment makes sense.
Generally speaking, turnkey real estate opportunities will not be in your backyard so having an active role in the rehab and placing of tenants isn’t feasible.
Where Does Turnkey Real Estate Make Sense?
All real estate is local. One of the biggest mistakes that millennial real estate investors make is assuming they need to find deals in their backyard. You can’t force the deals, you need to go where they are.
Most of the markets on the East & West coast are too expensive to make real estate investments make sense for millennials who don’t own their own house already.
But in the Midwest and South, you can find affordable homes in markets where rents are steady and priced for the market. What I mean by this is that there is a high percentage of the population looking to rent and the demand for houses to rent is high.
Some of the most popular markets (as of this blog post) are cities like Memphis, Indianapolis, Oklahoma, Houston, and Atlanta.
You can find houses in middle-class neighborhoods from $60-$150k that rent for $600-$1,500. You can find examples of this all day on Zillow.com
Some of these might not be great deals because they need extra money to rehab so they command the higher end of the market on rent.
With a turnkey property the work is already done, and often times the tenant is in place. You are just the money man/woman. But how do you know if it makes sense for you and your situation?
Why I Think Turnkey Rentals Are Great For Millennials
Every millennials situation is different. So this is just my personal opinion and not investment advice.
But if you are like me where you have a little money saved up but aren’t 100% sure you want to buy a house in your local market, then I think it’s worth considering a rental property because it will generate cash flow, reduce your taxes, and help you build equity in a real estate backed asset.
You could use the extra cash flow from the rental property (you can figure anywhere from $100-$400/mo) to pay down the principal on your student loan debt.
When you are ready to buy a house you could even sell the investment property and use the proceeds as a downpayment on your primary residence.
To me, this strategy is just a way to get into real estate at a lower price point and enjoy the benefits of home ownership without having to commit to an area or a mortgage payment that you aren’t ready for.
The biggest RISK you have to watch out for with investment properties is knowing the market and making sure you are using a reputable company.
Also, rentals aren’t easy and it’s important to talk about the ugly side of turnkey rental properties.
The Risks Involved In Turnkey Properties
I probably made turnkey investments seem a little too easy. I don’t mean to promote turnkeys as a surefire way to make extra money in real estate. There are risks you take on when buying any investment.
Let’s talk about some of the more common risks involved in buying a property out of state. I will list out some of the common problems I have found through my research
- The property isn’t repaired with high-quality materials and work
- The math makes it so your return is eaten up by the turnkey’s property management fees
- Your tenants destroy your property
- The property management company doesn’t communicate with you
- Your tenants are late on rent every month (or don’t pay)
- The area you invested in has a high vacancy rate
- You can’t get a tenant in the property
- The house needs expensive repairs you can’t afford or didn’t budget for
- You get sued for something that went wrong on the property
- Your turnkey company is less than honest about the area or the property you purchase
You are probably thinking, sheesh that list makes me not want to touch turnkey properties with a 10-foot stick and that’s okay.
I am not saying that turnkey rentals are perfect for every millennial investor. I just want you to be aware that this type of investment exists.
If you are risk averse and too busy to check in on a property every once in a while, this might not be the right investment for you.
Hopefully this taught you a little bit about turnkey real estate. There is a ton of information I didn’t cover in this post but if you are interested in learning more, reach out to me and I would be happy to point you to more resources that I have used to educate myself on turnkey real estate.
About The Author – Alex
I am on a journey of personal growth. I love learning about investing strategies and ways to actively improve my life. Follow along and connect with me if you are looking for a path to financial freedom and becoming the best version of yourself.