Investors interested in breaking into the real estate market but do not wish to deal with renovation or maintenance may want to consider turnkey properties, which can create steady income streams and diversify investment portfolios. But what is a turnkey property? Here is a guide for investors.
Turnkey properties became popular more than 15 years ago, following the housing market’s decline and when it generally became more expensive nationwide to rent than to buy. In expensive markets such as San Francisco, investors often purchase rental properties in areas where they are cheaper and hire property managers to take care of them.
Basically, turnkey properties are completely repaired or renovated houses, duplexes, or apartment buildings that investors can buy and rent out as soon as possible. Sometimes, the property will already have a tenant.
In addition to investors, everyday homebuyers also frequently buy such properties because they require no work. Real estate agencies sometimes use the term “turnkey” to describe any residence up for sale that is move-in ready.
Oftentimes, these fully functioning properties are bought from a company that restores older properties in need of extensive repair or renovation. Such companies also frequently offer management services that many turnkey investors need to invest remotely.
For most investors, the overall idea behind acquiring a turnkey property is to be able to make it available for rent right away. Afterall, work completed on such properties can involve plumbing and electrical repairs, flooring fixes, interior or exterior painting, and perhaps roof replacement or more. This is work the new buyer would otherwise have to first do themselves.
Many investors lack either the time or the inclination to renovate and furnish properties. Unlike labor-intensive and time-consuming projects such as fixer-uppers or houses that have been “flipped,” turnkey properties can also offer immediate passive income opportunities in the form of rent.
Also, if a property manager is involved, the benefits of real estate investing can be enjoyed without having to worry about property management. Investors are also free to buy properties in multiple cities, which can diversify portfolios and protect against volatility.
Another key benefit of turnkeys is that there is usually a demand for already-furnished housing, which means the property will likely be rented out quickly.
As with any investment, there are drawbacks to turnkey properties as well. For example, such properties offer no opportunities for personalization. For those for whom using their creativity in this way is important, turnkey properties may not be for them.
Also, the new buyer has no control over where the investment property is located, since the turnkey company decides on what properties they plan to tackle as projects.
While there are no perfect investments, turnkey success stories do abound. For example, a turnkey company bought a fixer-upper at a below-market price and rehabbed the property, replacing the roof, HVAC system, and flooring, and did work on electrical and plumbing systems. It also upgraded kitchen appliances.
An investor bought the three-bedroom 1,500-square-foot Memphis home for $125,000 and has had no problem renting it for $1,250 monthly. A bonus is that the turnkey company not only manages the property but vets prospective tenants.
In another example, an investor bought a three-bedroom, one bathroom, 1,300-square-foot turnkey property with an existing tenant for $125,000. With a monthly rental income of $1,090, the investor’s gross rental yield is 10.46%, a figure calculated by dividing the annual rental income by the property’s price and multiplying by 100.
On a larger scale, turnkeys are commonly used with government-funded large-scale infrastructure projects globally, including Jewar International Airport in India on which the Swiss firm Zurich Airport International is working. Once the airport has been completely constructed, it will be up to the local government to operate and lease.
Note that while these properties are turnkey ready, the dollar amount that went into repairs and renovation will be reflected in the investment, in addition to any management services.
Also, income generation opportunities notwithstanding, turnkey investors must contend with a number of considerations including fluctuating property values, should the new buyer wish to ultimately sell. Further, there are rental rates to consider, as well as area occupancy rates.
Taking positions in turnkey properties can be a good way to begin investing in real estate, an ever-popular asset class with low correlation to public markets, and thus low volatility. Take the alternative investment platform Yieldstreet, on which more than $3.2 billion has been invested thus far. Its highly vetted private-market offerings include a growth and income real estate investment trust, which provides exposure to multiple commercial real estate properties in a single investment of a little as $10,000.
Investing in real estate also serves to diversify holdings, which is essential to mitigating overall portfolio risk. Alternative investments such as real estate can be a good way to help accomplish this.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
While every investment carries risk, experienced investors generally consider turnkeys as being relatively secure investments, particularly over the long term. Such properties can also serve as an entry point for investing in real estate and other alternative assets, which also diversifies portfolios to lessen overall risk.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.