Debunking the 7 Myths and Misconceptions About Turnkey 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. In fact, many businesses use “turnkey” in their marketing materials just to capture a large audience.
There are many unique forms of turnkey investing at your disposal. Within the broad spectrum, numerous types of businesses operate in a variety of ways. When you’re researching this specific investing niche, it’s essential 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.
There are also 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. Here’s a look at them.
Myth Number 1: Turnkey Investing Is Fully Passive
Turnkey investing is often 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 as they should.
If you’re working with a great turnkey team, all the necessary systems should already be set up for you. That said, 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. However, in the world of real estate ownership, turnkey investing can be more passive than other forms of active investments.
Myth Number 2: Turnkey Offers Lower Returns Than Investing on Your Own
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 versus 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 than trying to rehab a property in a market that has low returns in an attempt to force equity. I’ve been able to create way more equity and cash flow in properties I didn’t rehab in good markets than 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 Number 3: There Is No Equity in Turnkey, and They’re Overpriced
This myth is certainly not true with many of the markets that turnkey investors focus on, especially with new construction. In this case, many properties have immediate equity that can be as high as 10% to 20%.
There have definitely 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 there’s volume. By partnering with a real estate investment company, individual investors are able to benefit from wholesale pricing in certain new construction locations. This option exists because the real estate investment company is able to commit to many transactions.
The company can then use this position to negotiate discounted prices that the individual investor otherwise wouldn’t have access to. 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 many 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.
In short, there are turnkey solutions that can be purchased below market value and may come with added benefits.
Myth Number 4: Investing in Turnkey Removes All Risks
If you own rental real estate, you’ll invariably be subjected to the same risks as everyone else, including market changes, costly maintenance items, property management issues, and unfavorable tenants. 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, they 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, effective way for investors to get started, diversify their portfolios, and scale their holdings. Whether you’re a new or seasoned real estate enthusiast, the turnkey strategy can be advantageous to your position.
Myth Number 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. Look for great growth markets that have low maintenance, strong cash flow, some amount of immediate equity, and the ability to attract quality tenants.
Myth Number 6: You Need a Significant Down Payment to Buy Turnkey Properties and Have Limited Financing Options
Among the most common misconceptions about 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 to you based on your goals. However, they’ll leave the final decision up to you.
You can get some great terms when it comes to seller financing or investor loans. For example, some investor loans are available with a down payment of just 5% to 10% and no private mortgage insurance. These are true portfolio loans that don’t require the same underwriting as a conventional loan. If you want to use conventional financing, however, you certainly could.
It’s ultimately up to the investor as to what type of loan options they’d like to use that makes the most sense to them. There are numerous loan options you can select from when investing in turnkey properties, which include low down payments, DSCR loans, and seller financing. Having multiple financing options at your disposal is a tremendous benefit at times when interest rates are highly dynamic.
Myth Number 7: Turnkey Properties Are Only Single-Family Homes
As mentioned, turnkey investing is a very diverse space with a myriad of business models. Turnkey operators can specialize in alternative investment options, multifamily properties, commercial investments, etc.
You can invest in single-family, multifamily, commercial, new construction, and development projects, all of which are classified as turnkey properties. It’s also possible to put your money into syndication funds. There are plenty of opportunities to engage in turnkey investing without limiting yourself to single-family homes.
Don’t Walk Away From Turnkeys: Here’s Why They’re Still Valuable in this Market
Turnkey investing is still a highly valuable investment strategy that offers many clear advantages that would otherwise be difficult to come by. The most obvious reason to use this strategy is that the properties are already livable. You won’t spend nearly as much time on renovations and repairs.
I’ve found that these properties are also more affordable in comparison to building from scratch. Good prices are necessary at a time when property values are increasing rapidly. You won’t need to consider material costs or try to find affordable contractors, which will make it easier for you to maximize your returns.
Turnkey investing allows you to add real estate to your portfolio quickly while benefiting from good loan terms and low down payments. In fact, this might be the simplest way to get into real estate investing if you don’t have much experience. Keep in mind that international real estate investing is also more feasible with turnkey properties.
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.
When properly utilized, turnkey investing is among the best strategies you can implement when you’re trying to grow your investment portfolio. As with any investment, regardless of whether it’s classified as turnkey, 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.
At Rent to Retirement, we can help you find the right turnkey properties for your portfolio. Call us today to schedule your first appointment.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.