Earlier this week I wrote about the disadvantages of purchasing turnkey rentals. Today I will let you know what the advantages are. Everything has pros and cons and it is best that you understand both sides of any investment. If you are not familiar with my blog then you should know that I am a proponent of purchasing turnkeys. The last 4 properties I have bought have all been turnkey rentals and so far they are all working out great.
I have been utilizing rental properties as my primary source of investing for reaching financial freedom. Although I am not quite there yet, I am slowly but surely getting closer. My dream is to have enough passive income each month to be able to retire early and enjoy life the way I want to enjoy it. No rules, no obligations, no bosses!
It is not an easy task finding successful turnkey rental properties, it’s not an easy task finding good turnkey providers and there is a lot of knowledge that should be had prior to going this route. Understanding the basic info on rental properties in general will go a long ways to helping you reach success. All rental properties can and most likely will have problems stemming from repairs, bad tenants, late rent payments, no rent payments to even evictions. It is vital you understand this is just part of the deal of owning rental properties. It does not matter how you acquire them or where you buy them. At the end of the day, it is all about having a solid house, solid tenants and a solid property management team if in fact you decide you do not want to manage your own rentals. I personally do manage one rental property that is close to me and have property management in all my other rentals. Most of my rentals are out-of-state which I have purchased via a turnkey provider.
The reasons you see below are the main reasons why I decided to purchase turnkey rentals and they are the main reasons why I will continue buying them for now.
1) They take a lot less time and effort
- The alternative is to purchase a home via the MLS or through a wholesaler in which you make rent ready. Rent ready consists of updating, fixing and preparing a house to be a rental property. If you search hard enough you may be able to find a rent ready house through the MLS which could alleviate some of the time and effort involved in making a house rent ready. After making a house rent ready, it is up to you to properly locate and screen a tenant of your choosing. You could also get a property manager as well which would make life easier however would cut into your returns. With a turnkey rental property, all of this is done for you and when you close on a property, it should be cash flowing from day one. This makes for a great method to get into rental properties if you have a full-time job, have a family or just to busy with your everyday life to handle all the ins and outs of purchasing and preparing a house for renting.
2) Immediate Cash Flow
- If purchased properly, a turnkey rental can and should provide immediate passive income from day one. They will come with an already paying tenant as well as a property management company. If you live in a hot market like I do, it can be a daunting and time-consuming task trying to find a property that can cash flow. Turnkey properties can be purchased in many cities throughout the united states and can be a good source of passive income. Of course, there is a due diligence process and research phase that should go into purchasing any rental property. Not all turnkey providers have good products and not all will be good investments. It is very important to properly vet a turnkey provider and any house you are considering purchasing.
3) Cheaper entry point
- Mainly in the mid western united states, you can find great properties at really affordable prices. These types of markets have a great price to rent ratios and make for a good source of income. Depending on where you live, it is not always possible to find properties that will even make money because they cost too much money and the rental income is not sufficient to cover mortgages, repairs and vacancies. Purchasing a turnkey rental in a different market can give you access to cheaper properties.
- I’m sure you have all heard to never put all your eggs in the same basket. This applies to any kind of investments including real estate. If you are going to own rental properties, lots of them, it would be a wise strategy to diversify into different markets. My personal strategy will consist of purchasing no more than 5 houses per market. If there were ever some sort of natural disaster or macro economic crisis in a given city, it would be beneficial to not have all your rental properties in one given market. Turnkey properties can be found in multiple cities and states and can be a great way to diversify your rental property portfolio. I personally like to buy turnkey rentals in Indianapolis and Kansas City. These cities both have steadily increasing populations, good price to rent ratios as well as vibrant economies. Perfect for rental properties!
5) Retire Early
- The same obviously could be said for all rental properties but my favorite reason for purchasing turnkey rentals is that they will make for a great source of income that will allow me to retire early. Passive income is a critical component to add to your investment strategy and can also change your life if you make enough of it.
These are the main advantages of buying turnkey rental properties. As mentioned above, not ALL turnkey rentals you find will hit these advantages and it is very important you research your butt off when deciding to purchase a turnkey or any other real estate property in general. I have my own criteria that I use when researching these houses and you should build a criteria as well. If you are interested in purchasing a turnkey rental, you should check out this step by step guide which will help you get started.
Thanks for sharing Alexander. The “out of state” component is the big one for me. I can see huge advantages to using a turnkey outfit, if you’re looking to diversify your real estate holdings away from your local area. I’m sure the folks that are just starting out in expensive markets likes California, New York, Vancouver, etc, would benefit from the lower cost entry point and geographic arbitrage.
I hope your week is going great!
Hi Bryan! Honestly, if I lived in a market where I could find cash flowing properties at affordable prices, I would not do turnkey. But that is just the thing, I dont have that luxury and I still want to play so in my case and sounds like yours too, turnkey is a great option!
Thanks for stopping by and yes my week is going great so far. Really love this time of the year with the holidays and all!
Thank you so much for sharing your knowledge. My ultimate plan is to also receive passive income from rentals. My first plan is to purchase a place for myself first to secure the home for me and my daughter then start investing in real-estate in Japan. Not the greatest market, but if done right there is a lot of money to be made. I’m learning a lot from your blog….thanks so much for the information.
Youre very welcome. It makes me happy to hear that you are learning from my blog. Thanks for saying that! I think you have a great plan to purchase a primary residence first. That is what I did and eventually I turned that house into a rental property. Japan!? Wow that is awesome. I have no idea what the market is like there but Japan is definitely on my bucket list of countries to visit. Is that where you currently live?
Immediate cash flow is always a good thing 🙂
I concur to each of the advantages stated above. My last 2 purchased properties were turnkey, and although I have an upcoming vacancy, the cash flow from the other property offsets that. The first investment property I bought in 2006 was not turnkey, and I bought it at the absolutely worst time. It was cash flow negative from the outset, and I was counting on appreciation to bail me out . After several property managers, and some less quality tenants, I now have a great property manager and a great tenant for the last 2 years. It’s still cash flow negative, but not as much since I refinanced via HARP.
Fast forward to late 2015, and I’ve learned a lot. It all seems to simple now, that the property cash flows from day one. You’ve got to have reserves. My first rental was brand new (leftover inventory from a home builder), so I didn’t have much capex; but I got a bill for the a/c duct work that came out to $600! It’s so relieving to know that the turnkeys that I bought were gutted from the inside out so the potential capex should be way down the road. You get what you pay for– it’s close to retail, but the property is brand new (for the most part).
I also now follow the 1% rule as stated on Bigger Pockets. My first rental was closer to 1/2 of 1%! No wonder it didn’t cash flow! My last two turnkey rentals within the last two years have been cash flowing nicely, and therefore I will never stray from this rule. I think the closer you get to 2%, the area or property starts getting into the war zone. 1% sounds good– nice quality area, and likely positive cash flow.
What a great comment j. Thanks for sharing that. I think that is very valuable information for anyone reading this article. That is part of the reason why I make sure all my turnkeys have new everything as well to delay the capex as long as possible. Its a good strategy for sure. Im happy to hear you were able to improve your situation no your negative cash flow rental. Im sure that can be tough holding on to that one.