The Truth About Turnkey Real Estate

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Due to the combination of the insane stock market volatility over the last decade and mutual funds fees hitting all time highs, more and more investors are looking to alternative investments to build their retirement. One of the most common alternative investments that is becoming popular again is cash flow focused real estate, particularly turnkey real estate. Turnkey real estate investing is a great way for investors to benefit from passive income, appreciation and tax deductions without all of the inconveniences of hands-on real estate investing.

First of all, it is important to understand that “turnkey real estate”  may have several definitions. Some consider it to be a property that has already been remodeled and needs no repairs. Others define it as a property that has been remodeled and has a tenant and property manager in place. In some cases, the property is in need of repairs before it can be rented. It’s important to understand what the seller considers to be a turnkey property. Just like any other investment, turnkey real estate investing is not without risks, and requires the same due diligence as other type of investment.

Sellers often package turnkey investment properties into an attractive presentation with a recently updated home, a tenant, long term passive income and property management. While it may seem that all aspects of the investment have been managed, the details of any defects or potential problems may be omitted. Verify that the information you have been given on a property is accurate. Request to see documentation concerning the work performed during the renovation and contact information for the contractor who performed the work. If the property is empty, ask for photographs. Inquire about the age and condition of costly items that can quickly deplete the return on your investment such as the roof, electrical system and HVAC system.

Sellers Will Mislead You 

Some sellers offer distressed properties and guarantee renovation and management after the sale. Investors can often find exceptional deals under these circumstances, but it is highly recommended that you hire an inspector to give you a detailed report and a written estimate of repairs. This can often help you negotiate a better price. Once the repairs have been made, ask for photos or a video. This also applies whenever a tenant vacates a property and repairs are needed.

The type of neighborhood the property is in is one of the major factors that determine cash flow. There are generally two types of neighborhoods where you should avoid purchasing investment properties. On one end of the scale, you have what many investors refer to as a “war zone”. These properties are generally in high crime areas and have a high vacancy rate. They are difficult to rent and are often susceptible to property damage. On the other end of the scale, you have luxury home neighborhoods. Luxury homes typically come with numerous high maintenance items, higher insurance and higher taxes that can quickly turn into negative cash flow. When searching for investment properties, you should look for the optimal purchase price and market rental rate to achieve the highest cash flow. This point is usually in the middle of the two extremes.

In Order To Be Knowledgable, You Must Do Your Own Research 

When purchasing real estate in a location you’re not familiar with, it’s critical to do research. You will want to know what other types of properties are nearby, crime statistics, public roads access and any projects underway that might affect the community. Access to schools, hospitals and shopping can affect the vacancy rate on a property. Google Earth allows you to view a property, the street it’s on and neighboring structures. It’s an excellent tool for taking a virtual look around in the neighborhood where you intend to invest. Crime statistics can be obtained from sites such as crimemapping.com and neighborhoodscout.com. You can also find crime statistics as well as a great deal more demographic information at city-data.com.

Property Management Plays A Crucial Role In Your Investments Success 

Inquire about the property management company that will be handling the property. The property management company is at least as important as the property. Tenants play a vital role in real estate investing. The property management company must ensure minimal vacancies and that the rent is paid or the investment will not perform. The turnkey real estate 3 company should have its own in-house property management. When the seller manages your property, they have a vested interest in the performance. Long term performance increases the chance that you’ll purchase additional properties and send referrals. Another advantage is that repairs are often made by the same contractors that completed the renovation, and they are already familiar with the property.

Clarify the level of support that is to be expected from the property management company. Determine what their responsibilities are in regards to limiting liabilities and ensuring the tenant’s safety. Ask for a copy of the lease to determine if it minimizes your liabilities with restrictions such as prohibiting aggressive breeds of dogs or installing a pool. Ask if the rents are above, below or at market rates. Ideally, they should be a little below to make it easier to rent the property. If the property is occupied and the tenant is paying above market rates for rent, try to find out why. Typically the only time tenants will pay above average rents is if they have poor credit. It may signify a problem tenant.

Sellers Will Underestimate Expenses and Vacancies 

It’s not unusual for a seller to use inflated numbers when stating returns on your investment. Perform your own calculations for a more realistic figure. Remember that there is an expected 45% expense ratio. Always verify the property value. You can have a realtor perform a comparative market analysis. The vacancy rate can provide an indication of the quality of service. The industry standard is 8%. Ask the property manager what is the longest vacancy on their books. If it’s longer than 45 days, try to find out why so you can avoid purchasing similar properties. There are several reasons why a property may be difficult to rent. It may be in an undesirable area, or it may be a two bedroom in a market where three bedrooms are in demand.

You Will Regret It If You Are Not Careful Who You Do Business With 

An essential part of your research should include the turnkey real estate seller. Check with the Better Business Bureau for information on the company. Request that they provide references and records of other investor’s acquisitions including maintenance costs and management expenses. Ask for verification of any figures the seller presents to you. Don’t forget, running background checks on anyone that is playing a managing role in your money should always be considered.

Are you ready to turn your portfolio of uncertainty into a reliable cash flow machine?

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