The idea behind "turn-key" real estate investing is that an investor can purchase a property from a company that will then manage that property for them. It's basically portrayed as "hands-off" investing for busy professionals or investors that, for whatever reason, do not want to get their hands dirty managing their own rental properties.
But turn-key investing is no excuse for not knowing what you are doing. Here are some very important questions investors need to be aware of before seriously considering plunking money down with an investment company that will handle all of the details for you. Below are tips based on actual cases I've dealt with that involved turn-key investing.
1. Ask to see all documentation related to the property
The biggest mistake I've seen turn-key investors make is simply believing everything they are told without verifying any of the information that is provided. I've consulted with dozens of investors who bought into turn-key investments sight-unseen and ended up with major problems. I strongly recommend a detailed review of the property appraisal, and a title search to verify ownership.
*And here is a tip:
Check the addresses of the comparable properties in the appraisal to see whether they actually exist, and whether they are actually located less than 1 mile from your subject property. It's easy to provide bogus or poorly done appraisals to investors who don't check up on them. No matter who is providing the information, even if it's an attorney, check it out and verify those details. It's a nightmare to end up owning a property that you thought was worth $150,000, only to discover later that it's a shack worth $25,000 and is not even livable.
2. Who is going to manage the property on a month to month basis?
Is it a real property management company with licensed professional managers, or will the turn-key company owner be sending out his brother-in-law to check on it from time to time?
3. How much net positive cash flow can you really expect to receive on a monthly basis?
What is your likely return on investment going to be? These numbers almost always look better on paper than they do in real life. It's easy to make any property look good in a brochure or email. But can the company verify the rental cash flow?
4. What guarantees does the company offer in the event that the property remains vacant for an extended period of time?
5. Who is responsible for insurance and property tax payments?
Are these payments held in an escrow account by the turn-key company? Where is the escrow account held and how will you know if the balance needed in escrow falls behind?
6. Tenant Screenings - Does the company screen potential tenants carefully?
What happens of a tenant trashes your property? Do you pay or does the company have any responsibility? Normally you would pay; if you are not choosing or screening your own tenants, it could increase your risks for unexpected repair expenses.
7. Turn-key investment property is usually sold at a substantial mark-up
When the turn-key company sells a property to another investor, there is usually a substantial price increase. That increase may or may not be acceptable to you as the buyer. You must make sure that the cash flow promised is more than enough to cover all of the ownership expenses. Turn-key sellers often make their profit on the sale of the property and may not care whether it cash flows or not, once you own it.
8. Do you live in the general area where the property is located?
Out of state investing can be very risky. If things go wrong you'll be stuck with travel expenses on top of repair costs. Only invest out-of-state if you have someone locally who can look out for your interests. I've seen people in Alabama buy a rental property in Utah. Guess who got stuck with the bills when the tenants trashed the house and the turn-key company stopped returning phone calls?
9. Turn-key investing may mean you are "hands off" but when something goes wrong you'll still be responsible for the costs.
Don't be fooled into thinking that this is the "lazy man's way to riches".
10. I'm not impressed with turn-key investment returns in the vast majority of cases
Because the turn-key company is generally making their money by marking up the selling price, the net return on investment may be as low as 5% BEFORE maintenance or vacancy expenses are taken into account.
Turn-key investing can be a good opportunity for investors who are willing to put effort into proper due diligence before they sign anything. If you need help analyzing a property for it's true investment potential, contact a professional investor or real estate agent who has experience with rental property ownership. Make sure you know exactly what you are getting before you invest.
About the author: Donna S. Robinson is a 18 year veteran of the real estate industry, with experience as a rehabber, wholesaler, investment analyst, rental property manager, owner, licensed agent and residential real estate market expert. She coaches real estate investors to improve cash flows while reducing risk. She has authored numerous books and CE courses on real estate market fundamentals and investing strategies. Follow her on twitter @donnaconsults Watch her videos here, and read more articles and contact her about coaching or business consulting services on her website.