Pros and Cons of Turnkey Real Estate Investing
Turnkey real estate investing is essentially buying into a property, which is managed through a third party, typically from a great distance. In many ways, the relationship is similar to hiring a property management company. However, turnkey companies usually find the property and make the purchase for you, or you buy the property directly from the company. Either way, in most cases, all the investor has to do is write a check. Sounds good? Well, before you take the plunge, consider some of the pros and cons of turnkey real estate investing.
A key advantage of this strategy is that it gives you the capability to invest in a potentially more lucrative environment than the one in which you reside. Let’s say you live in a mature real estate market such as Manhattan or San Francisco and you’re just starting out as an investor. It’s going to be difficult for you to acquire a property at a reasonable price from which you can derive positive cash flow right off the bat.
If you can get into an up-and-coming market at a reasonable price you stand a better chance of growing your investment more rapidly. But if you don’t want to live in such an area, you are kind of stuck. After all, it’s very difficult to manage such an investment if you don’t live nearby. This is where the turnkey company comes in. They’ll buy the property, rehab it if needed, sell it to you and manage it, while you continue to enjoy your big-city lifestyle.
Yes, you could just buy into such a market on your own — but without specific knowledge of the area, you’re basically taking a shot in the dark. Because they know the local market, turnkey companies tend to be better positioned to acquire a profitable property on a good street, near a great school, close to where the jobs are. While it’s true you could do the research and find this on your own, the time you’ll spend doing all of that research could be better used making money doing something at which you’re more of an expert.
Now, let’s say you decide to go it on your own anyway and find a wonderful property in the perfect town. The first time it needs maintenance, you’re going to be calling around an unfamiliar community to try to find someone to handle it for you. Then, there are all of the other considerations of managing a property from a great distance. Turnkey companies usually have all of these factors in check.
On the other hand, turnkey investment companies are businesses and the goal of every business is to turn a profit. This could manifest itself in a number of different ways. For example, the price you pay for the property will likely be inflated to give the turnkey company a degree of margin on the transaction. Then, on top of selling it to you, they’re going to make more money by managing it for you.
What’s more, you’ll be giving up a great deal of control. After all, you’re buying something in a place with which you have no familiarity, taking the word of someone whose goal is to maximize their investment — potentially at your expense. Further, you’re relying upon them to maintain the place and keep it occupied. The property could turn out to be a money pit into which you’ll dump an infinite amount of capital and never see a return on your investment.
For these reasons, performing extremely thorough due diligence is paramount. Seek references, request records and investigate the company with every means at your disposal before making a decision.
It really is possible to make money in turnkey real estate investing without lifting a finger — as long as you use your fingers to make the right calls first.
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