Reasons to Never Buy Turn-Key Real Estate
Is it possible to invest in real estate without doing the work yourself? Definitely, it is. All you need to do is pay a turnkey real estate company to do the job for you.
With a turnkey property, you can start generating income within a short period of time. But, the easy process comes with its set of shortcomings.
As an investor turnkey property may not always be the best investment decision. Without due diligence, it is one risky venture. Let us learn more about turnkey properties and their potential drawbacks.
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What is a turnkey property?
Like the name suggests you only need to turn the key and open the door. A turnkey company looks for a property, renovates it, rents it.
Some turnkey companies will sell you the house. Then refer you to a different property manager. For others, they will manage the property for you.
Drawbacks of turnkey real estate properties
#1: The turnkey company does the work and takes the profits
Being handed a key that already has a property manager comes with a cost. As an ambitious real estate investor your routine should be to look for a property, renovate it and rent it out. When doing the job by yourself, you have a chance of keeping all the profits.
For a turnkey property, you are paying someone else to buy, revamp, rent, and help you to manage the property. The turnkey company will get returns when buying the property.
During repairs, the company will also pocket some money. You will still pay them to manage the property. You see, they take all the profits.
#2: High Possibility of buying a bad property in a horrible locality
Trusting a turnkey company to buy a house for you is one great risk. To begin with, the turnkey company selects the house for you. You don’t go out, do your research, and choose a property that meets your investment goals.
You may end up buying a low-quality house in a bad neighborhood. This is because the turnkey company will only aim at getting huge returns at your expense.
When renovating a house yourself, you will do it as per your preferences. But a turnkey property, the company wants to finish fixing the property and close the deal. They care less for you as the buyer. There is a high likelihood of poor quality finishing.
It is worse if the turnkey company does not provide in-house property management. They will sell you the property at the highest price possible and disappear. Without enough scrutiny, you will have a painted property. There will be no mechanical or electrical work done.
#3: Overpaying for a property
Turnkey companies have a marketing department. Their main responsibility is to convince you to pay more for a property.
Overestimating overheads is one way to explain their pricing. They will persuade you on how they have fixed the house. Funny enough, you will feel the house deserves the value or even more.
In real estate investments, you make returns when you buy not well you sell. With such a deal in place, you will have no exit strategy. Especially when the market is booming, you will likely pay more for a property.
In some cases, everything looks good as per your analysis, you smile that you have won a good deal. Ooops! A permit issue comes up or an outstanding claim on the property.
This will have a negative impact on your investment. If you decide to sell the house, you won’t even recoup what you spent in buying it; leave alone making a profit.
#4: Poor administration by the property manager
Turnkey companies can come in two categories. One that does the acquisition renovates and manages the property for you. This is the best to go for. They at least care about your investment. You are always in business together.
The other option is those that buy, revamp, sell the house to you and then let you hire a property manager. The new managing company will not have your interests at heart. They will ensure they gain from repairs and turning over of tenants.
#5: Limited investment options
Turnkey properties are very specific. You might not find them in your area or your local markets. This necessitates the need for long-distance investing. Such an investment attracts more challenges.
Conclusion on Turn Key Real Estate
There are several options for real estate investing. To get good returns you must get the right knowledge and do most of the work yourself. Investing in turnkey is risky and expensive.
But, it is still possible to invest in real estate without involving yourself. There are better options than turnkey properties but they will attract lower returns. Be cautious, do enough research to avoid losing your investment in turnkey properties.
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