Many perceptive investors know that turn key rentals can bring in a reliable, low-risk, and highly rewarding passive income. What you want from a professionally managed rental property is strong passive income from reliable tenants who maintain the house and the landscaping. Tenants that stay put even when you raise the rent. Dependable monthly rent checks that show up on time every month.
However, every investment comes with some risk. A turnkey rental doesn’t become passive until you’ve done the original due diligence to put all of the right pieces in place. Before you leap, be sure you consider and resolve any potential mistakes that might be made.
1. Choosing the wrong turn key property provider. Anyone can post an online advertisement claiming to have turn key rentals for sale. Always do your due diligence on both the house and the business you are purchasing from. Create a list of qualifications they have to meet. Generally, these people have bought and rehabbed damaged or outdated houses. You want to know that the rehab was done correctly, with the required permits, and by quality contractors. You want this information specific to the property that you are investing in as well as past houses they have rehabbed and sold to other investors. Check out their reputation and how long they have been in business.
2. After you select a turn key seller, ask detailed questions. Know all of the terms that you will be agreeing to. Know the exact people you’ll buy the property from. Verify the rental income on previous houses they have sold. Verify the quality of the tenants. Ask questions until you don’t have any unanswered questions.
3. Research the property management side of the business. Understand the policy for dealing with problem tenants and evictions. The same applies to their policies for repairs and maintenance including hvac services. You will be the legal owner of the property. Everything the management company does is being done in your name.
4. Have the property professionally inspected. You would do this with your own home or any other investment property. Once you get to know the business you are dealing with – trust but verify.
5. Know the neighborhood. Again, turn key rentals aren’t a passive income until everything is in place. Listen to why they bought and rehabbed in this neighborhood and then check it out for yourself. Know what other houses rent for. Know the school district. Know the transportation system, grocery stores, entertainment, etc.
6. Don’t buy a white elephant. If the deal is too good to believe, it probably is. The turn key business may have made a mistake and is trying to recoup a loss. Look out for abandoned houses in the neighborhood, industrial areas, ganglands, a bad house layout, busy streets, etc. Quality renters want to live in a quality house and in a quality neighborhood.
7. Understand municipal and other codes. Have the zoning codes been changed to allow industry? Is a freeway overpass going to be built over the backyard? Is it in a homeowners association community? This is all part of getting into the house with your eyes wide open.
8. Know when to switch from being passive to proactive. Hopefully, your turn key rental will provide years and years of passive income. But you are still the owner. If you or your tenants are not satisfied with how it is being managed, you are still the responsible person. Ultimately, you’re responsible if repairs aren’t done or if a tenant stops paying. At the least, you should always know what’s going on with the property even when everything is going well. You should be consulted before substantial changes or repairs are made. You never want a tenant or the city contacting you with a problem that you aren’t even aware exists. You have the authority to hire or fire your property management company.
9. Have a reserve fund. Successful landlords have a contingency fund to cover the unexpected. Stuff happens that neither you nor the management company could have foreseen. The entire HVAC system could go out without warning. A once trusted tenant could completely trash the place and move out during the night. Stuff happens, be prepared.
10. Buy eviction insurance. Maybe you want to cover this with your reserve fund or maybe you want insurance. If you want to keep your turn key rental as passive as possible, low-cost eviction insurance is worth considering. This can be purchased through insurance companies and some property management companies.
By taking the right precautions, a good passive turn key property becomes a great turn key investment. It can also be more profitable. The wrong house, in the wrong neighborhood, might cost you money or earn as little as 5% after all the vacant time and repair costs are accounted for. With the right house in the right neighborhood, you can expect to earn 15% or more annually on your highly secured turn key rentals. All without the headaches of major repairs, tenant calls in the middle of the night, and a constant turn-over of tenants.
Without a doubt, I’ve missed some important information about mistakes that can be made with turn key properties. Please share your insights and experiences by leaving a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].