Real estate can offer passive income and protection against market downturns over the long term. Turnkey rental offers an alternative to the traditional direct ownership model and can generate a profit.
“A turnkey property is one that has typically been recently remodeled or remodeled and already has a tenant in place,” says Kevin Ortner, president and CEO of Minneapolis-based Renters Warehouse. “This means that as an investor you should get an investment property that will require less maintenance in the first few years and you can generate a return from day one because a tenant is already paying rent. “
Turnkey homes may appeal to someone looking for streamlined real estate investments, income, and diversification for retirement.
“Turnkey properties can be purchased in a variety of regions, so if a market weakens there are still other properties in other regions that can remain strong,” said Daniel Hill, President and CEO of Hill Wealth Strategies, based in Virginia. “This allows for better opportunities for continued growth for a retirement strategy.”
- Consider the period of detention.
- Fully veterinary rental possibilities.
- Invest in quality management.
- Assess the long-term income potential.
- Watch out for taxes.
Take into account the holding period
Owning a turnkey rental property can simplify real estate investing, whether it’s renting a single-family or multi-family home. But it’s important to understand the time commitment involved.
“Your holding period is the most important factor because market dynamics change often,” says Kathryn Landow, real estate agent at Warburg Realty in New York. “Since investment property is not liquid like a real estate investment trust, you need to be able to withstand market corrections and downturns.”
With a REIT, the investment is in a business that owns the property, not the property itself. It is easier to sell a REIT than to sell a turnkey home or any other property owned directly when there are concerns about market volatility.
Landow says REITs may be better for short-term investments, while turnkey properties require investors to take a long-term view. The holding period is also important for the purchase of the property itself when investors are using loans rather than paying in cash.
“The way you finance the property will also put a strain on you when it comes to considering an assignment,” Landow said. “Make sure you finance the property for the same length of time that you are preparing to own the property. “
Fully veterinary rental opportunities
A turnkey property may seem beautiful at first glance, but don’t take the seller’s word for it.
“Something may seem turnkey, but the workmanship can be shoddy, which can lead to headaches and additional expense,” says Josh Rubin, Chartered Real Estate Broker at Douglas Elliman. He says this can be avoided by working with a professional home inspector who can spot potential issues before the purchase.
Besides the property itself, consider its surroundings and the seller’s overall reputation.
“Look at the upkeep of neighbors’ homes, not just the property you plan to buy,” says Rubin. “Check if the seller has a background in the community, whether good or bad, and see what their other properties have done.”
Assuming the property checks out, consider the reliability of tenants already in place.
“If the tenant placed in the property has not been properly vetted, you may find yourself having to replace it at an additional cost,” Ortner explains.
Not only that, but vacations can decrease yields and affect cash flow until the property is re-let.
Invest in professional property management
Turnkey investments have a non-intervention quality, in that there is much less to do in terms of renovations or finding tenants. But there is still turnkey property management going on that needs to be managed.
This can be done by a real estate investor, but it might make more sense to hire an expert who is familiar with turnkey real estate services.
“It is important to immediately put quality property management in place,” says Ortner, who adds that this makes the transition as smooth as possible.
He suggests speaking with other turnkey real estate investors with the seller to get recommendations for property management companies.
When choosing a property manager, consider the range of services they offer versus the fees they charge. The services should be comprehensive, but the associated cost should not significantly affect returns.
Assess long-term income potential
Turnkey investments can come in different nuances. Over time, for example, turnkey rental homes that stay occupied year round may generate more income than turnkey vacation rentals, which are occupied six months of the year.
It is important to consider how the projected rental income of a property aligns with retirement goals. If a property underperforms, it could lead to a shortfall when it’s time to start tapping into a portfolio to generate income.
Rubin says to examine the area’s historic rents to better understand whether the income expected from a turnkey home is sustainable. Examining general market conditions and local trends can provide additional perspective on the likely performance of an investment.
Turnkey investors should also be careful to keep overall asset allocation in mind to maintain balance.
“While physical real estate is an important part of any truly diverse portfolio, like any investment, it’s important not to over-leverage or invest more than you’re comfortable with,” Ortner said.
Watch out for taxes
Owning turnkey homes comes with certain tax advantages for investors.
“Expenses for mortgage interest, property management fees, operating expenses, property taxes and repairs or maintenance can be claimed as a deduction,” Hill said. He adds that investors can also deduct travel costs associated with the inspection or maintenance of a rental property.
But there are a few caveats.
“Investors don’t always know that rent collected is taxed in the year it’s earned and not when it’s due,” Hill says.
This can affect the tax return, for example, if a tenant makes advance rent payments several months or years in advance.
In addition, turnkey investors need to know what is and is not a deductible expense. This can help avoid surprises when it’s time to file income tax for the year.
Ultimately, consulting a tax professional can ensure that a turnkey rental property remains an asset, rather than becoming a tax liability.