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Mistakes New Investors Should Avoid with a Turnkey Rental Property

By Brian Kline | August 13, 2021

Turnkey rentals are one of the easiest ways to get into real estate investing. Turnkey rentals have high appeal to investors because of the passive income with a decent return on the investment. These are typically single-family houses or duplexes that are rented to long-term tenants. The investor purchases the rental, but it is operated by a professional property management company. Many times, the investor purchases the property directly from the management company with a long-term tenant already in place. It’s a no hassles investment model.

Turnkey rentals can bring in a reliable, low-risk, and high-reward passive income. What you want from a professionally managed turnkey rental is strong passive income from reliable tenants but without the hassles of maintaining the house and the landscaping. You want tenants that stay put even when you raise the rent. And you want 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 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 turnkey property provider. Anyone can post an online advertisement claiming to have turnkey 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 must meet. Generally, a turnkey seller has bought and already completed rehabbing damaged or outdated houses. You want to know that the rehab was done correctly with the required permits and quality contractors. You want this information specifically for 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 turnkey seller ask detailed questions. Know all the terms 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 remaining.

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. 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, turnkey rentals aren’t a passive income until everything is in place. Listen to why they bought and rehabbed in this particular neighborhood. Then check it out for yourself. Know the resale value of comparable houses in the neighborhood and how much they 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 turnkey seller 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 street, etc. Quality renters want to live in a quality house in a quality neighborhood.

7. Understand municipal and other codes. Have the zoning codes changed to allow industry? Is a freeway overpass going to be built on the other side of the backyard fence? Is it in a homeowner’s 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 turnkey rental will provide many 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 major 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 prefer insurance. If you want to keep your turnkey 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 turnkey property becomes a great turnkey investment. It can be very profitable. On the other hand, the wrong house, in the wrong neighborhood might lose money for you, barely break even, or earn as little as 5% after all the vacant time and repairs are accounted for. With the right house in the right neighborhood, you can expect to earn 15% or more annually on your highly secured turnkey rentals. All without the headaches of major repairs, tenant calls in the middle of the night, and repeat vacancies.

Without a doubt, I’ve missed some important information about mistakes that can be made with turnkey 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].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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