Should You Buy Turnkey?

[Eric Fernwood]

If you're considering purchasing turnkey properties, this post is for you.

Turnkey is only a purchase method. Using Turnkey does not reduce the time or effort required for due diligence. Turnkey is simply an alternative purchase method to direct purchase.

Where Does Turnkey Fit in the Passive Income Process?

After:

• Location selection
• Tenant selection
• Property profile defined

Location Selection

The first step is to select an investment location. Investment location is your most important decision, not the property.

Select a location based on

• Metro area population size greater than 1M
• Both state and metro populations are increasing
• Low crime
• Low operating cost
• Rents consistently kept pace with inflation

Tenant Segment Selection

Before selecting a property, you need to decide which tenant segment you want to occupy it.

A rental property is only as good as the tenant who occupies it. You need your property to be continuously occupied by a "good" tenant. A good tenant is someone who stays for many years, always pays rent on time, and takes care of the property.

Good tenants are the exception, not the norm.

Target a tenant segment with a high concentration of good renters to increase the likelihood of consistently getting good tenants. Locate this segment through property manager interviews.

Once you have identified this segment, determine what and where they are currently renting. Based on these properties, create a property profile, like the one below.

• Rent range: $1,500 - $1,900
• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garage
• Stories: One or two.
• Location: North of the river, east of Vine Rd.
• Size: 1,200 to 2,100 SF

To translate the rate range into a property price range, find conforming properties on a real estate website and their sale price.

With a property profile, you know exactly what to buy.

Determine the Best Purchase Method

The next step is to determine the purchase method. The chart below outlines the process for selecting between turkey or direct purchase.

Turnkey Due Diligence

Below are some essential due diligence questions to consider when purchasing a turnkey property. These questions are necessary because some turnkey purchase contracts limit your options, and it's important to verify critical information.

• You must be allowed to have an independent property inspection.
• If you are not satisfied with the turnkey’s property management, you must be allowed to move your property to another property manager.
• You must be allowed to get multiple bids on expensive repairs. You choose the vendor.
• No percentage markup on repairs.
• Determine the fair market rent for the property. Does it match what the turnkey is stating?
• They must provide all disclosures from the prior owner of the property.
• They must provide the results of any code inspections.

If the turnkey does not provide/allow for all of the above, either find a different turnkey vendor that does or make a direct purchase instead.

Turnkey Purchase Convenience Cost

Turnkey properties are almost always more expensive than direct purchases. See the diagram below why a turnkey purchase will always cost more.

If you choose to purchase a turnkey property, you will pay more and receive a lower return on investment. However, you will save time compared to a direct purchase.

Summary

• Turnkey is only a purchase method.
• Due diligence remains the same.
• Turnkey properties cost more than direct purchases.
• The higher turnkey price reduces your returns.