The world of real estate investing is a highly diverse and dynamic industry that provides investors with endless opportunities to participate. One technique available to investors involves turnkey rental property investing. When it comes to the rabbit hole of real estate investing options, the word “turnkey” is among the most commonly used but poorly applied terms around. For example, many businesses use “turnkey” in their marketing materials to capture a large audience.
There are many unique forms of turnkey investing at your disposal. Within the broad turnkey spectrum, numerous types of businesses operate in a variety of ways. When you’re researching this specific investing niche, it’s essential that you understand what these differences are. Like any industry, there are some businesses that do an excellent job for their clients and others that don’t. Properly researching and vetting all potential investments is essential for success.
Lastly, there are many preconceived notions about what exactly turnkey investing is, why someone should or shouldn’t invest in these properties, and what the pros and cons are. These ideas come from the assumption that “turnkey” can be placed under a single category, which is impossible. Over the past decade that I’ve been in the industry and part of the leading turnkey investment company, I’ve observed how the industry has evolved over time and why it’s necessary to address the most common misconceptions about turnkey investing.
As CEO of Rent To Retirement, my goal is to educate the real estate investor community on the many investment options available and how to best research any investment opportunity you’re thinking of pursuing.
Myth #1: Turnkey Investing Is Fully Passive
Turnkey investing is oftentimes more passive than other types of investing when you’re self-managing, attempting to rehab/BRRRR properties, or investing on your own. However, this approach isn’t entirely hands-off. You’ll need to manage the property manager you hire and make sure that everyone on your team is operating like they should.
If you’re working with a great turnkey team, all the necessary systems should already be set up for you. You’ll still be tasked with spending some time on this investment strategy. In fact, I would argue that there’s no such thing as fully passive income. You always need to manage your money, which requires at least a small level of involvement. In the world of real estate ownership, turnkey investing can be more passive than other forms of active investments.
Myth #2: You Need a Significant Down Payment to Buy Turnkey Properties and Have Limited Financing Options
Among the most common myths with turnkey investing is that you need to make a sizable down payment to purchase turnkey properties since the financing options are limited. This is simply not the case at all. In my opinion, a turnkey operator should never dictate what financing you need to use or require things like all-cash purchases. These are red flags that you should be on the lookout for during your research. If a team wants to set you up for success, they’ll present multiple financing options and help you understand what they mean for you based on your goals. However, they’ll leave the final decision up to you.
For example, here at Rent To Retirement, we have seller financing options that come with rates as low as 2.99%. We also have investor loans where you can purchase multiple investment properties with just 5% down and no PMI (private mortgage insurance). These are true portfolio loans that don’t require the same underwriting that would accompany a conventional loan. If you want to use conventional financing, however, you certainly could.
It’s ultimately up to the investor what type of loan options they’d like to use that make the most sense to them. There are numerous loan options you can select from, which include low down payments, DSCR loans, seller financing, etc. Having multiple financing options at your disposal is a tremendous benefit at times when interest rates are volatile.
Myth #3: There Is No Equity Investing in Turnkey, or Turnkey Properties Are Overpriced
In regard to this myth, it’s certainly not true with many of the markets we operate in, especially with new construction. In this case, many properties have immediate equity that can be as high as 10-20%. There have been some bad actors in the past that have overpriced inexpensive homes in poor locations while also requiring all-cash sales where you can’t obtain an inspection or appraisal. However, this isn’t true of the turnkey industry as a whole. I believe that a few of the businesses that have attempted this strategy didn’t survive for very long. This is likely where the misconception came from.
All sellers want to offload their homes at the highest market value possible, especially if the home was newly built or recently renovated. In the turnkey industry, however, there are times when the buyer has more negotiating power and incentives that the average seller wouldn’t provide.
When looking at it from a volume perspective, it’s possible to achieve below-market pricing in situations where volume is being done. Here at Rent To Retirement, we’re able to negotiate wholesale pricing for individual investors in certain new construction locations. We’re able to negotiate prices based on economies of scale and the volume of transactions that we conduct on a monthly and yearly basis.
If an individual investor is purchasing one or two properties, they’ll likely pay at or above the market price. This is yet another example of how buying properties via a turnkey group allows for discounted pricing that you wouldn’t be able to access on your own.
There are also numerous additional benefits that occur when you buy with a reputable turnkey provider that will stay on even after the transaction. The turnkey provider you partner with can assist with things like management and potential maintenance or tenant issues. This benefit isn’t available when you buy from a random seller on the MLS. What this shows is that there are turnkey solutions that can be purchased below market value and may come with added benefits.
Myth #4: Turnkey Removes All Risks
If you own rental real estate, you’ll invariably be subjected to the same risks of market changes, costly maintenance items, property management issues, and unfavorable tenants. Every investment has risks. While many of these risks can be mitigated by investing in real estate with a well-established team that has the right systems in place, the risks will never be fully removed. Make sure you keep adequate reserves for any investment property you buy and know that ultimately you are the owner of the property.
Turnkey can be an easy and effective way for investors to get started, diversify their portfolio, and scale their holdings. Whether you’re a new or seasoned real estate enthusiast, the turnkey strategy can be advantageous to your position.
Myth #5: Turnkey Operators Won’t Rehab Older Homes in Cheap Markets that Won’t Appreciate
This is partially true because some rehabbers give turnkey a bad name. However, it’s certainly not true of everyone in the turnkey space. There are turnkey providers across the country that operate in almost every market throughout the U.S. Remember, turnkey investing is a diverse industry that has many different business models.
There are some turnkey operators that specialize in new construction in growth areas, while other investors focus on more affordable markets like the Midwest. It’s important to match your goals with the team and market that makes the most sense for you. Garnering long-term success with this strategy is only possible with the right approach. About half of what we do at Rent To Retirement is build-to-rent (BTR) in the SE markets like AL, FL, SC, and TX. These are strong growth markets that have low maintenance, strong cash flow, some amount of immediate equity, and the ability to attract quality tenants.
Another turnkey investing myth is that it offers lower returns than investing on your own. This can be true if you’re an experienced investor with a proven business model where you add value to rental real estate. I do think, however, that the risk is higher if you’re a new investor.
It’s fine to do things on your own, but you should expect to make more mistakes in the beginning as you learn. Some of those mistakes can wipe out decades’ worth of returns, which is just part of the game. Having a consistent experience with a long-term tenant in a strong market is far more important for long-term returns vs. trying to force equity through rehab or buying a below-market property in a location that might not provide consistent long-term returns.
Over the years, I’ve learned that choosing the right market location is much more important for long-term equity growth as opposed to trying to rehab a property in a market that has low returns to force equity. I’ve been able to create way more equity and cash flow in properties I didn’t rehab in good markets as compared to properties I rehabbed in markets that weren’t as attractive. We’ve all heard the saying “location, location, location”…so I guess there’s some truth to that.
Myth #7: Turnkey Properties Are Only Single-family Homes
As mentioned before, turnkey investing is a very diverse space with myriad business models. Turnkey operators can specialize in alternative investment options, multifamily properties, commercial investments, etc.
At Rent To Retirement, we operate in single-family, multifamily, commercial, new construction, and development projects that are all turnkey properties. We also have turnkey solutions for investors who want to put their money in syndication funds. A few additional options include turnkey business models if you’d like to do your own investing, coaching & educational programs, and private money lending opportunities. Our goal is to offer the most comprehensive turnkey approach in the industry to meet the needs of as many investors as possible. If you’re searching for a one-stop shop for all your turnkey investing needs, we’re here to help.
Turnkey can mean different things to different people, since it’s among the most common buzzwords used in real estate today. There are many varieties of turnkey investing and an array of different business models. I hope my detailed explanation about turnkey investing debunks the most common myths associated with turnkey investing.
As with any investment, regardless if it’s classified as turnkey or not, you must develop a clear idea of your investment goals before making sure to properly vet any investment opportunity you find. I hope this has helped you understand how to further research and consider turnkey investing to determine if it’s a strategy that will assist you in accomplishing your investment goals.