Turnkey Rental Property | Investments That Pay Passive Income
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Owning rental properties of one kind or another has long been a favourite strategy for investors looking to build passive income. In this article we'll take a look at some of the advantages and benefits, as well as some popular investment strategies...
David Garner
Turnkey Rental Property in the USA: A Guide for Investors
Investing in turnkey rental property has gained immense popularity among individuals seeking to build wealth through real estate.
I myself own more than 60 rental properties across 2 States…
These investments offer the allure of passive income, potential for capital appreciation, and numerous tax advantages.
If you’re considering diving into the world of turnkey rentals, this article serves as an educational resource to help you decide if it’s the right avenue for you.
What Are Turnkey Rental Properties?
Turnkey rental properties are ready-made real estate investments.
They are often fully-renovated, leased to tenants, and managed by a professional property management company.
Investors purchase these properties, step into the role of the landlord, and start earning rental income immediately. This is what makes the whole investment process ‘turnkey’.
There are tons of turnkey rental property providers offering properties in various locations across the US, so finding a provider that has the kind of property that’s right for you can be a challenge.
Key Considerations When Investing in a Turnkey Rental Property
1. Property Location
Choose a location that aligns with your investment goals.
Research areas with strong rental demand, low vacancy rates, and potential for appreciation.
A safe and desirable neighbourhood can attract better tenants, so look for areas with positive jobs growth, good median household income, low crime rates, and positive population growth trends.
You can read more about analysing potential property markets for rental opportunities here.
2. Vendor Selection
Select a reputable turnkey provider or real estate company to ensure you receive a high-quality property.
Research the company’s track record, customer reviews, and ask for references. Unfortunately, there is no shortage of bad actors in the market.
There’s a good discussion on popular real estate investor forum Bigger Pockets about turnkey rental providers here.
3. Property Quality
Inspect the property thoroughly or hire a professional inspector to ensure it meets your standards.
In my opinion, paying $500 for a full property inspection can save you many thousands of dollars down the line.
Look for quality renovations, modern amenities, and compliance with local building codes.
You can check out a list of reviewed home inspector at Investopedia here.
4. Price
Consider your budget and the expected return on investment (ROI). Evaluate the purchase price, closing costs, and any additional expenses involved in acquiring the property.
As basic as it sounds, you want to check that you’re not overpaying for the house. Some turnkey rental property providers will price the property based on it’s rental income or yield. In reality, you want to make sure you are paying at or below the real market value, so getting an appraisal or Brokers Price Opinion (BPO) is always recommended.
You can learn more about BPO’s here.
5. Tenant Selection
Take it form me, if you have a problem with a rental property, it’s more than likely down to the tenant in one way or another.
With turnkey rentals, often the house will come with a tenant in place. This can be risky because vetting the tenant is incredibly important, and if the goal is to quickly sell the house to an investor it is not unheard of for turnkey sellers to stuff a house with poor quality tenants just to get it sold.
Remember, a well-vetted tenant can minimize potential issues and ensure a steady stream of income.
While you will want your property manager to do this for you, it’s still worth educating yourself. There’s a good guide to vetting potential tenants here.
6. Property Management
As a rental property owner, I can attest to the value of a good property manager.
These are the guys that will vet your tenant, collect rent, deal with delinquencies, deal with maintenance issue, sometimes also utilities, and manage the tenant-landlord relationship.
In my opinion, a good property manager is the difference between a turnkey rental property investment being ‘passive’, or a complete hands-on nightmare.
Some turnkey rental providers have in-house property management, and this could be a good thing or a bad thing. Often it is a good idea to review any third party options that might be available to you in the local market.
You should also assess the property management company’s fees, services, and track record.
I can’t state this enough… Effective management is crucial for a truly hands-off investment experience.#
Benefits of Investing in Turnkey Rentals
Now you’ve researched the local property market, vendor, and actual rental property, let’s talk about some of the benefits of investing in rental properties in general…
1. Passive Income
Passive income and compound interest, when combined, are two of the most powerful wealth creation tools in existence.
Turnkey rental properties offer consistent cash flow without the need for active involvement in property management.
That said, take note of my comments above. A good property manager is essential for a smooth investment experience.
2. Leverage
Real estate investors can use financing to magnify their returns, allowing them to control more properties with less capital.
This ‘profit amplifier’ is one of the main reasons people choose to invest in rental properties. You can control a much larger asset by borrowing some of the money, and thus enjoy greater potential capital growth and better cash on cash yield.
If you want to learn more about using leverage in real estate investing, there’s a great article from turnkey rental property provider, Roofstock, here.
3. Amortization
This is something that isn’t talked about enough. It is one of the biggest benefits of owning real estate as an investment.
Imagine someone else paying for your shares in Microsoft. no way, right? Well, that’s what amortization is…
Rent payments made by tenants pay for your mortgage payments. This essentially means that the tenant is buying the property for you.
Over time, you build equity by natural attrition, increasing your net worth and opening up avenues to release equity to expand your portfolio.
There’s a good article on how amortization works here.
4. Capital Appreciation
Over the long term, well-located and well-maintained real estate tends to appreciate in value, potentially leading to significant financial gains.
The key here however is ‘well-located and well-maintained’. Property in a bad or deteriorating neighbourhood, or property that is not properly maintained may actually lose value.
Remember, real estate is a physical asset and as such requires physical maintenance and upgrades over time to maintain its value.
5. Forced Appreciation
Investors can increase a property’s value by making strategic improvements, further boosting ROI.
In the case of turnkey rental property, the vendor is usually making their profit margin from forced equity.
They will purchase a property that is in need of renovation and complete a rehab to update the property and bring it up to standard.
This might include things like a new roof, furnace and/or HVAC, new electrics and new plumbing, as well as cosmetic upgrades.
All of these things add value which the turnkey provider realises as a profit when they sell the property as a turnkey rental to an investor.
Rent collection company Azibo has a good article on forced appreciation is you want to understand more.
6. Tax Advantages
While everyone’s tax situation is different, real estate investors can take advantage of tax deductions when buying turnkey rentals. These can include; mortgage interest, property taxes, and depreciation. All of these can be used to reduce your taxable income.
You can also write off some of the operational and ownership costs, including some repairs and capex.
While the entire scope of the tax advantages of investing in real estate is way beyond the scope of this article, you can read more about that subject here.
Turnkey Rental Property Investment Strategies
There are lots of ways to approach investing in turnkey rental property. Investors often use various strategies, including:
1. BRRRR Method (Or BWRR)
This is an an acronym for: Buy, Rehab, Rent, Refinance, Repeat.
This investing strategy involves purchasing a property, renovating it to increase its value, renting it out, refinancing to extract equity, and then repeating the process with the proceeds.
When talking specifically about turnkey rentals, it’s more likely to look like; BWRR; Buy, Wait Refinance, Repeat. This is because the turnkey provider is doing the rehabbing and renting, while the turnkey buyer is paying more for the property.
The turnkey buyer likely has to wait for the property to appreciate as a result of general market appreciation in order refinance and pull out the cash to buy the next property.
2. Long-Term Buy and Hold
Many investors prefer the stability of long-term buy and hold strategies, where they accumulate a portfolio of turnkey properties and benefit from rental income and appreciation over time.
When combined with the benefits of amortization noted above, buy and hold can be an excellent way to build generational wealth for your and your family.
3. Short-Term Rentals
Some investors focus on short-term rentals, such as vacation homes or Airbnb properties, which can yield higher rental income but may require more active management.
Personally, I have not done any short term rentals, but there are plenty of folk out there who have. As with all forms of real estate investing, results have been mixed and will depend on the specific of each investment.
Risks of Investing in Turnkey Rental Properties
As with any investment, investing in turnkey rentals carries risks. here are some of things you should consider ahead of time…
1. Tenant Problems
Despite careful tenant screening, issues like non-payment of rent, abandonment, squatting, or physical damage to the property can (and does) happen.
Again, buying property is areas with a decent tenant base, and properly screening tenants with a good property manager is the key to success in rental property investing.
2. Vacancies
Vacancies – where a house sits empty) can result in lost rental income. This obviously affects your cash flow, so you should have some cash reserves to cover holding costs such as insurance, mortgage interest, property taxes and repairs.
3. Rising Ownership Costs
Property taxes, insurance, and maintenance costs may increase over time. Some of these costs can increase quicker than rent rates, so make sure to plan ahead.
4. Capital Expenditures (CapEx)
Major repairs or renovations can be expensive and impact profitability.
The cost of a new roof or furnace can kill years of positive cashflow on a mortgaged rental property, so make sure these large items are in good shape with plenty of life left in them when you buy the property.
Also make sure to put aside some cash every month to build up a fund to pay for big capex items when they inevitably come up.
Conclusion
Investing in turnkey rental properties can be a lucrative way to build wealth through real estate, offering passive income, tax benefits, and the potential for appreciation.
However, it’s crucial to conduct thorough research, select the right location and vendor, and be aware of the associated risks.
Whether you’re pursuing the BRRRR method or a long-term buy and hold strategy, carefully consider your goals and risk tolerance before embarking on your turnkey rental property investment journey.
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