After buying a rental property, real estate investors often find themselves needing to carry out renovations such as fixing of flooring, a fresh paint job, repairs to plumbing, replacement of electrical fixtures, and fixing of the roof. Since such refurbishment could take weeks or even months, investors have to wait for a long period before getting a return on their investment. One of the solutions for this problem is turnkey real estate investing.
What Is Turnkey Real Estate Investing?
This is a type of real estate investment where people buy turnkey rental properties. A turnkey property is a fixed-up apartment building or home that requires little or no refurbishment. This means that a real estate investor can buy it and rent it out immediately, thus generating revenue as fast as possible. Such investment properties are usually bought from companies that purchase and restore rundown buildings. At times, these companies also offer property management services, thus saving real estate investors the trouble of handling the day-to-day running of the rental property.
Learn More: What Is Turn Key Real Estate and Should You Invest in It?
However, even though turnkey real estate investing is hassle-free and promises a quick return on investment, it comes with its own share of challenges.
Here are some of the risks of real estate investing in turnkey properties:
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Getting What You Pay For (or Paying Too Much)
Real estate investors are bombarded on a daily basis with ads for cheap turnkey rental investment properties. While such offers may look appealing, making a buying decision merely on the basis of price can be very risky. Some investment properties could be low priced because the quality of refurbishment on the building is poor. In addition, cheap properties often mean low rental prices, and consequently low profits for real estate investors. Therefore, anyone venturing into turnkey real estate investing should be willing to spend more to acquire property that will bring good returns.
However, investors should also be wary of overpriced properties in turnkey real estate investing. Some turnkey companies have been known to sell overpriced houses or apartments, especially to out-of-state investors that don’t have a clue about the actual value. Real estate investors should consult local agents to find out how much similar rental properties were sold for.
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Investing in a Bad Real Estate Market
Proper research is very crucial for successful turnkey real estate investing. Before investing in turnkey real estate, investors need to carry out thorough research of the area in which it is located. If the investment property is located in close proximity to good social amenities, transportation systems, and schools, it is more likely to attract the perfect tenants. Investors should also find out who their competitors are and how much tenants in similar rental properties are paying. The best way of getting all this information is by spending enough time in the area and talking to the residents.
A real estate investor also needs to find out if a neighborhood is profitable by looking at average property metrics. You can do this with online tools like Mashvisor’s real estate heatmap.
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Dealing with an Unscrupulous Company
One of the main risks in turnkey real estate investing is dealing with a turnkey company that is not credible. To avoid this risk, investors must do their due diligence to find the best turnkey real estate investment companies. Find out how long the company has been in operation and who they have worked with in the past. Make an effort to talk to a few past clients to get their direct feedback about the company’s turnkey services. In case it is not possible to contact former or current clients, a quick Google search on turnkey real estate investing companies can reveal any negative feedback. Real estate investors should also find out if the firm has its own portfolio of turnkey rental properties. Any company that does not own and manage their own investment properties should be avoided.
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Ending Up with a Poorly Renovated Property
Buying a poorly renovated property is another major pitfall in turnkey real estate investing. Investors should not just rely on the inspection report from the turnkey company since it might be biased in favor of the company. Before committing their money, real estate investors must first carry out an inspection of the property. If they cannot carry out the inspection themselves due to lack of time or knowledge, they should hire a third-party inspector to do it for them. The inspection should involve checking the interior and exterior condition of the home or apartment. Make sure the workmanship of the refurbishment is up to standard to avoid incurring unnecessary repair costs later.
Related: 11 Home Renovation Tips to Increase the Value of Your Investment Property
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Having No Warranties
Buying a turnkey property that doesn’t have warranties is a great risk. Real estate investors should look for turnkey companies that are willing to back the quality of their work with a warranty. Firms that cannot give at least a one-year warranty should be avoided. Some companies even provide multiple-year warranties on major items such as roofs, water heaters, and HVAC. A good warranty will protect property investors from unexpected expenses several years down the road.
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Not Getting Landlord Insurance
Many people who buy turnkey rental properties don’t see themselves evicting tenants at some point. However, tenants could find themselves in a sudden financial crisis, thus failing to pay their rent. As a result, the landlord might have no choice but to evict such bad tenants. Eviction can be a lengthy and messy process, resulting in negative cash flow for property owners. Getting landlord insurance makes the process of eviction more manageable and protects real estate investors from losing money in the process.
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Using the Wrong Property Management
Property management is a very crucial aspect of turnkey real estate investing. The responsibility of the property management company is to find the right tenants and maintain the rental property for real estate investors. Choosing the wrong company could mean trouble finding good tenants and having poorly maintained facilities. Therefore, investors should thoroughly investigate property management companies to ascertain that they are up to the task.
Related: Real Estate Investing 101: Rental Property Management
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Focusing on ROI Only
Anyone that ventures into turnkey real estate investing is motivated by the expected yield. While the return on investment is very crucial in choosing whether or not to invest in a turnkey rental property, it should not be the only one. It would not make sense to have a high yielding rental property that is under-renovated or poorly managed. In the long run, such investment properties end up becoming liabilities rather than assets.
Conclusion
Turnkey real estate investing is one of the best ways of growing an investment portfolio. While the decision concerning whether or not to purchase turnkey investment properties is very personal, real estate investors should keep the risks above in mind to avoid losing money or wasting time.
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