We’ve all seen certain assets and investments go in and out of fashion.
However, real estate has long been a cornerstone of the economy at-large, mostly because land is a finite resource and shelter is an essential human need. There will always, then, be a demand for real estate in some form or fashion. For an investor, this lends certain reliability and stability that you would not find in other asset classes.
If you want to get the best out of real estate investment—and especially if you're looking to be a passive investor—the solution is an age-old method that has grown more efficient, profitable, and accessible over the past few decades: turnkey rental investment.
What Is "Turnkey" Real Estate?
Though variations of this investment model exist, turnkey real estate investing is, in essence, a method of real estate investment in which the investor (the owner) buys a single-family rental property that is renovated and managed by a team or teams of professionals, usually from a turnkey company.
It is considered “hands-off,” and is a way to invest passively, generating both streams of income and building equity in the property over time. It is often used as long-term strategy for buy-and-hold investors who prefer to centralize their operations and streamline the entire process from acquisition and renovations to management and exit strategies.
The process, generally speaking, is as follows:
- The turnkey company actively purchases and renovates single-family properties.
- These properties are sold to real estate investors.
- The turnkey company may (either in-house or through a trusted vendor) provide property management services. This includes vetting and placing residents, property management, upkeep, and repair, customer service, and handling turnover. In some cases, the investor will hire a company to do managerial tasks outside of the turnkey company.
- The investor receives passive income from monthly rental payments. The management team receives a predetermined percentage of property income.
- Over time, the investor uses rental payments to pay off their mortgage balance. Afterward, their passive income increases along with equity in the investment.
- As investors are able, they acquire more turnkey properties and increase their streams of income.
- If at any point the investor wants to sell their property, their turnkey partner may buy the property back from them.
Nationwide, the cost of renting greatly outpaces the cost of monthly mortgage payments. What many turnkey investors will do is identify companies that invest in more affordable real estate markets. This makes it easier to acquire multiple properties. In turn, passive income flows from rental payments.
The Advantages of Investing in Turnkey Single-Family Rentals
Market Access
Turnkey real estate investing has an edge over other varieties of real estate investment: limitless market access. More hands-on strategies demand that investors be somewhat close to their investment properties. When you’re turnkey, you rely on a reputable company to identify key properties in markets that they know very well and to manage those properties.
For an investor – particularly one inexperienced in real estate – choosing a market you’re not familiar with, let alone a worthwhile investment property within it, is challenging. Therefore, you’ll see many people recommend investing in your local market. And while this can work for some individuals, it’s very limiting.
For one, your client’s local market may not be in the position to deliver a good ROI. Certain markets are overheated, meaning it’s hard to achieve satisfactory profit margins. Additionally, investing only in your local market isn’t making the most of your diversification potential. By investing in markets that are relatively affordable for your client, they will be able to better scale and diversify their assets.
passive income & equity
Passive income is one of the big (and obvious) benefits of investing in rental properties. Your client sees immediate results in the form of rental income while also building long-term wealth through equity in the property. Between paying off the mortgage via rent payments and reaping the benefits of both forced and natural appreciation, the advantages are huge.
That’s not even mentioning the vast tax benefits and strategies available to buy-and-hold real estate investors.
strong Rental rates
Single-family properties go for a premium rate compared to multifamily housing. As the COVID housing market put a squeeze on already lagging inventory while also raising prices, the demand for rentals only grew. This is particularly true as we saw priorities shifting in favor of SFRs in the suburbs and in the South. As of August 2022, when the housing market has arguably begun to cool, the average monthly rent for an SFR was up to $2,495, a 13.4% year-over-year increase.
That’s even considering a significant increase in SFR listings overall and properties on the market in general. Demand for rental properties – particularly ones that people can afford – is greater than ever.
quality resident retention
The secret to success in SFR investing is resident retention. For the investor, turnover is an expensive season – between renting households, an unoccupied property doesn’t make money and continues to incur costs, including those associated with cleaning, maintenance, marketing, and new resident preparations.
Today, SFR occupancy rates are higher than ever, even despite SFR supply growing to include 14.8 million homes nationally. That’s 10.4% of all housing units. In general, SFR households are expected to stick around for longer due to rising mortgage rates.
Of course, resident retention is never a given! Part of what makes turnkey real estate investing effective is the tight management structure. Investors leverage the experience and skill of their partner companies. In turn, they’re able to raise the standard and motivate residents to renew their leases time and time again simply through excellence.
utilizing leverage
Speaking of leverage, turnkey real estate investors take advantage of leverage on more fronts than the average investor. Leverage allows investors to use less of their own money to invest. For example, they leverage bank lending with a down payment versus paying all cash for an asset. They also turn around and leverage their rental income, paying down the mortgage balance with little, if any, of their own money.
This leverage in turn allows investors to scale their portfolios more quickly and efficiently. Over time, their full equity will grow.
Leverage isn’t just about money, though. They leverage experience from their turnkey providers. Ideally, the partners that they work with are those who have been in this industry for some time. They’ll be well-established in their markets with a thorough understanding of what makes a good investment property and how best to acquire, renovate, and manage those properties.
For an inexperienced investor, access to this kind of expertise is priceless.
hedging against inflation
There’s no doubt that we’ve been in some trying economic times. Inflation has been increasingly burdensome on American households, an issue exacerbated by the Russian invasion of Ukraine on top of existing COVID-era supply chain issues. Inflation, as any financial advisor knows, eats at the worth of your money.
Perhaps the biggest advantage of real estate is that it is a hedge against inflation. Properties tend to grow in value over time, increasing alongside side inflation. This isn’t the case for all assets, and it certainly isn’t the case for cash and savings.
From 2010 to the present (2022), the cumulative rate of inflation in the U.S. was 35.9%. You would need $135,871.52 today to make a purchase that would have cost $100,000 in 2010. Owning real estate preserves buying power through growing home equity and appreciation.
An Honest Appraisal of Turnkey SFR Risks
Of course, we can’t talk about the benefits of turnkey real estate investing without mentioning some of the risk involved. Your financial advisor's job is to paint a fair and realistic view of any product you recommend, so they may have the following to say as you consider this strategy.
premium cost
We’re not going to beat around the bush – turnkey real estate doesn’t come cheap. It’s not that it’s overpriced or unjustified. But some investors used to scoring great deals may be disappointed at the cost associated with the model. Now, investors do greatly benefit from market access, provider expertise, and excellent property management – value that isn’t easily quantifiable but certainly makes a difference in the success (and profitability) of SFRs.
lower liquidity
Real estate isn’t as liquid as other assets your clients may be investing in. Even in a hot seller’s market like this one, it can take time for a real estate transaction to turn into cold hard cash. Assess your client’s needs: are they going to want to tap into their equity frequently, or are they satisfied with a long-term, buy-and-hold approach?
other general risks
All the risks that apply to real estate apply to turnkey SFRs. There are outside forces that you cannot control and that may impact these properties or their ability to generate income. Natural disasters, poor local weather events, unfortunate turns in nearby land development…
Going in, stress the importance of appropriate insurance coverage for any client wanting to buy real estate, regardless of context!
And honestly, not every turnkey company out there is concerned about your bottom line. They don’t all offer comprehensive services, aren’t all backed by experience, or necessarily have the investor’s best interests in mind. Sorting through the sea of providers can be challenging – but we’ll talk about vetting a bit further down! Just remember due diligence is the name of the game when it comes to investing in real estate.
The Best Candidates for Turnkey Real Estate Investing
Just because you're following a well-trodden path by investing via turnkey, you have your own unique goals, needs, and levels of risk tolerance. Not everyone is cut out for turnkey real estate investing—and that's better to know now than later! These are a few of the factors that may make turnkey SFRs a good option!
Investors Who Want to Be Hands-Off
While calling turnkey real estate “hands-off” is a bit misleading, it demands a lot less active engagement from investors than other real estate investment strategies. If you wantsall the benefits of owning rental properties without the landlord-ing headaches, turnkey is the happy medium they need. This is an especially great option for investors who have a career alongside their other wealth-building efforts.
Turnkey real estate demands much less of the investor in terms of time and energy – meaning you can continue to invest well past retirement while also retaining full ownership of your properties. (That’s not always the case with REIT investments!)
New Real Estate Investors
Regardless of how experienced an investor you may be, real estate is a whole other beast compared to the rest of the financial and investing world. A few serious missteps can make or break your career in this business before it even gets off the ground. That’s why leveraging that experience from a turnkey partner is so valuable. They allow you to get started ASAP and learn on your feet while still avoiding costly mistakes.
Both inexperienced and experienced real estate investors will benefit, but those new to the game get the biggest advantage!
Comfortable with Long Distance Investing
If you clients want to maximize their effectiveness in investing in real estate, you’re going to have to look beyond their local markets. Long-distance (or out-of-market, out-of-area) investing is key because it allows investors to take advantage of different market climates. For instance, properties in the South and Midwest tend to be far more affordable than those on either coast. Properties in the South also don’t have to deal with the threat of regular or heavy snowfall in the winter.
In real estate, location is everything. An investor willing to go the distance will get the most bang for their buck.
Young Investors
Any investing takes time to really pay off. While investing in rentals does generate passive income, you won’t truly get the full benefit until years down the line when you’ve really built up your portfolio and increased overall equity in your properties. Young investors are in a marvelous position here, as they have the time to make it happen. Some are even choosing to buy investment properties before they even buy their own personal residence!
Young investors should know about the wealth-building potential of buy-and-hold real estate. Though investors at every age and stage can benefit from turnkey real estate, young investors have the most potential to earn big!
How to Work with Your Financial Advisor to Start on the Right Track
So, say you’re in a position where you feel comfortable and willing to go with turnkey real estate investing. There are areas of due diligence your advisor can support you with to ensure you flourish in this new venture.
Emphasize Scaling
Scaling in turnkey real estate doesn’t just increase portfolio diversity. It also increases the diversity of your income streams. This alone is one of the big advantages of the turnkey SFR model! However, investors will only build significant wealth with real estate if they work intentionally and consistently to scale up.
Your financial advisor knows the value of portfolio diversification. It’s even more important where real estate investment is concerned. Work with your advisor to develop a plan for regular property acquisitions as your finances and goals allow.
Vet Turnkey Companies
Thankfully, a financial advisor isn’t throwing their client into an investor’s Wild West when it comes to turnkey real estate. Remember, you’ll be partnering with a turnkey provider to identify, purchase, and manage their investment properties.
Of course, not all turnkey companies are created equal. Some are more reputable than others. So these are a few factors to question, investigate, and find out about any turnkey company you want to recommend:
- How long have they been in this business?
- Are the turnkey providers investing in their own model?
- What’s their history of profit, acquisition, and investor growth?
- What are their resident retention rates?
- Who are their vendors, particularly for property renovations?
- What are their systems and how do they replicate and scale success?
- What markets are they in and where do they plan to expand?
If you intend to pursue turnkey real estate investment, your advisor can help you vet reliable providers that you yourself have spoken to, investigated, and deemed trustworthy. This is a space many companies are trying to get into, but few have the experience, staying power, and integrity to get the job done at the standards of excellence required.
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