Are Turnkey Rental Properties a Good Investment?

Turnkey rental properties have become a go-to option for those seeking a more passive approach to real estate investing. However, the question remains: are turnkey rental properties indeed a good investment?
In this article we will answer the question of if they are a good investment or not while offering you the pros, cons, and important considerations investors should weigh before diving into turnkey rentals.
Learn More About Turnkey Rentals
Turnkey rental properties are homes or apartments that are fully renovated, already rented out, and ready for immediate purchase. The term “turnkey” refers to the fact that the property is prepared for an investor to “turn the key” and start collecting rent without worrying about renovations or tenant acquisition. These properties are often sold by companies specializing in buying distressed properties, rehabbing them, and providing ongoing property management.
For many investors, particularly those living out of state or who want to avoid the complexities of managing a rental property, turnkey rentals are appealing. However, while these properties offer convenience, they have inevitable trade-offs, such as potentially higher prices and reliance on third-party management.
What Are The Pros?
- Minimal Time Commitment: One of the major selling points of turnkey properties is their low time commitment. The property is already renovated and leased, so investors can avoid the hassles of finding tenants or overseeing construction projects. This is ideal for investors with other obligations, such as full-time jobs or family responsibilities.
- Immediate Cash Flow: Since turnkey properties usually come with tenants in place; investors can begin earning rental income right after purchasing the property. This eliminates the delay associated with finding tenants, reducing the risk of initial vacancy periods. For investors looking for immediate returns, this can be an attractive feature.
- Professional Property Management: Many turnkey companies offer property management services, ensuring that investors don’t have to deal with tenant issues, maintenance, or rent collection. The management company handles everything from repairs to lease enforcement, allowing investors to focus on other priorities while earning passive income.
- Geographic Diversification: Turnkey properties enable investors to diversify their portfolios by investing in different markets. This is particularly advantageous for those living in expensive real estate markets with low rental yields. Investors can spread their risk by purchasing turnkey rentals in more affordable areas with more robust rental demand and earn better returns.
- Predictable Income: Since turnkey properties typically come with an existing lease; investors have a clear idea of what their income will look like from the start. This predictability reduces uncertainty and makes it easier to forecast cash flow, making turnkey properties attractive for those looking to stabilize their finances quickly.
Cons of Turnkey Rental Properties
- Higher Purchase Prices: Turnkey properties tend to be more expensive because the renovation work has already been completed, and tenants are in place. The premium price reflects the convenience and reduced hassle. However, this higher upfront cost means that investors might get less equity than they would from purchasing and renovating a distressed property. This can limit long-term profit potential.
- No Control Over Renovations: Investors who purchase turnkey properties do not have any say in how the renovations are conducted. Investors could face high maintenance costs if the rehab were rushed or done with low-quality materials to maximize the seller’s profit. With firsthand knowledge of the renovation process, ensuring the property is in top condition is more accessible.
- Dependence on Property Management: While professional management is a plus for many, it can also be a risk. If the property management company is efficient and needs to maintain the property correctly, it can lead to high tenant turnover, vacancies, or costly repairs. Additionally, investors may need help monitoring or intervening in the property’s day-to-day management, especially if they live far away.
- Lower Return on Investment (ROI): Because turnkey properties are priced higher than distressed properties, the return on investment might be lower. The premium paid for convenience reduces the opportunity to generate value through forced appreciation, achieved when investors buy under-market properties, renovate them, and increase their worth. Investors seeking significant appreciation may find that turnkey rentals must meet their expectations.
- Market Vulnerability: Turnkey providers often operate in markets with lower real estate costs and relatively strong rental demand. However, this dependence on specific markets can backfire if the local economy weakens. A downturn could lead to vacancies and falling rents. Investors should know that some turnkey properties are in less established or volatile markets, which might offer short-term appreciation like more stable urban areas.
Key Considerations for Investors
- Research the Market: Whether you’re buying locally or out of state, it’s essential to understand the market where your turnkey property is located. Job growth, population trends, and housing demand are crucial for long-term success. A weak local economy can lead to high vacancy rates and lower rental income over time, even if a property looks attractive at face value.
- Vet the Turnkey Provider: All turnkey companies are equal. Some have a long history of providing well-renovated properties and excellent property management services, while others may be more concerned with selling as many properties as possible. Research the provider’s reputation, read reviews, and ask for references before purchasing.
- Understand the Property Management Contract: If you plan to use the turnkey company’s property management services, review the contract thoroughly. Understand all fees, services offered, and the company’s process for handling repairs, vacancies, or disputes. If the property management doesn’t meet your standards, you might prefer to hire your third-party manager for more control.
- Run a Financial Analysis: Although turnkey properties are convenient, investors should still conduct a thorough financial analysis. Factor in expenses such as property taxes, insurance, maintenance, and management fees to ensure the property will be profitable. Be realistic in your projections, especially regarding vacancy rates and ongoing maintenance costs.
- Think Long Term: While turnkey properties provide immediate cash flow, they may only sometimes offer the highest returns in the long run. Purchasing and rehabbing a distressed property may provide better opportunities if your investment strategy focuses on forced appreciation or high capital gains. However, if you’re focused on cash flow and want to minimize your involvement, a turnkey property could better fit your goals.
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Turnkey rental properties can be an excellent option for confident investors. They offer convenience, immediate rental income, and a way to diversify across markets without getting bogged down in the day-to-day hassles of property management. However, these benefits have potential downsides, including higher purchase prices, reliance on third-party management, and lower ROI than active investment strategies.
Whether turnkey properties are a good investment depends on your individual goals and risk tolerance. If you value convenience and passive income over high returns and are willing to pay a premium for a hands-off approach, turnkey rentals can be a sound investment. However, other real estate strategies offer more opportunities if you seek greater control and higher long-term gains. As with any investment, thorough research and due diligence are essential to make an informed decision.
To learn more about our property management services, contact us today by calling us at (503) 646-9664 or click here to connect with us online.