The word “turnkey” implies that an investor can buy a rental property and generate income with little effort. But, as the saying goes, there’s no such thing as a free lunch. This article will discuss whether there really is such a thing as turnkey rental property and explain how Roofstock is different from turnkey real estate companies.
Key takeaways
- The word “turnkey” suggests all an investor has to do is turn the key to start generating income, but owning rental property always requires some time and effort.
- Some turnkey real estate companies overpromise and underdeliver by buying homes and flipping them to their customers or locking investors into a property management contract.
- Roofstock provides investors with freedom of choice.
What does “turnkey real estate” mean?
The word “turnkey” in real estate means that the property is ready to move into, with appliances in working condition and no obvious structural or electrical issues. Sometimes, turnkey can mean that the house is already occupied by a qualified tenant paying their monthly rent.
However, although turnkey homes are not fixer-uppers, they may nonetheless require some cosmetic upgrades or refreshing.
Rent-ready homes may already have a qualified tenant in place, like many of the homes listed for sale on the Roofstock Marketplace, and buyers can request referrals to local property managers as an alternative to self-managing the property.
Managing a rental property is a vital part of investing in real estate. Repairs will need to be made to maintain the property’s value, provide a safe and habitable home for a tenant, and to generate a fair market rent to help maximize return on investment.
Red flags to watch for with turnkey real estate
Some turnkey real estate companies promise the moon but, in reality, deliver far less. One of the risks of investing in turnkey real estate is that you may be buying someone else’s problem, such as a home needing major structural repairs or property taxes that skyrocket when a primary residence is turned into a rental.
Here are some red flags to consider before buying turnkey real estate:
- Cosmetic renovations. Some inexperienced or dishonest turnkey real estate companies are masters at making cosmetics updates that make a home look good without addressing issues that really need fixing.
- Homes located in undesirable areas. Some turnkey properties photograph well but may be located in high-crime areas where vandalism is common and qualified tenants are nearly impossible to find. That’s why it’s important to understand the risks and rewards of investing in different neighborhoods.
- Premium pricing for minimal work. Because the word “turnkey” implies owning a rental property will be effortless, a real estate company may describe a home as turnkey simply to justify a higher sales price.
- Flippers in disguise. Some real estate companies buy undervalued homes, fix them up, then resell them to their customers as turnkey rental property. Before buying, it’s essential to order an inspection, ask for receipts for all repairs made, and run sales comparables to verify that the purchase price is fair.
- In-house leasing and property management. Turnkey companies may use the strategy of “pay me now or pay me later” by selling a home at what appears to be a fair price but then requiring an investor to use the company’s in-house leasing and property management team for the first year. While there’s nothing wrong with a full-service real estate company, forcing an investor to sign a contract may be cause for concern.
How Roofstock is different from turnkey real estate companies
Roofstock has been ranked by Fit Small Business as the #1 real estate company that isn’t a turnkey company. Criteria used in making the selection include areas where homes are located, average property prices, and fees.
Here are some of the main ways Roofstock differs from turnkey real estate companies.
Freedom of choice
There are hundreds of SFR homes, multifamily properties with 2 to 4 units, short-term vacation rentals, and portfolios of rental properties listed for sale on the Roofstock Marketplace at any given time in over 70 real estate markets across the U.S.
Investors can search for rental property to purchase using key metrics, including:
- List price
- Monthly rent
- Location
- Neighborhood rating
- Best schools
- Minimal repairs
- High appreciation
- Price reduced
- Higher yield
- Gross yield
- Cap rate
- 2 to 4 unit multifamily
- 1% rule
Having freedom of choice when investing in real estate is important because investors use different strategies. For example, a buy-and-hold investor may look for SFR homes with a good balance of rental income and cash flow. In contrast, another investor may search for a property in a specific real estate market where a relative or family member lives.
Research tools
Roofstock provides a variety of tools investors can use to research potential investments and conduct due diligence. Homes listed for sale on the Roofstock platform include:
- Pictures and floor plans
- Property inspection (when applicable) and valuation reports
- Interactive tools for visualizing return and cost estimates
- Neighborhood rating and school scores
- Current lease and tenant payment history if the home is already rented
Low transaction fees
The fee structure on Roofstock is completely transparent and similar to buying or selling property through a real estate agent, although at a much lower cost:
- Sellers pay a 3% fee of the sale price or $2,500 (whichever is greater).
- Buyers pay a fee equal to 0.5% of the purchase price or $500 (whichever is greater).
- No recurring fees are paid to Roofstock after the initial sales transaction.
Fees collected by Roofstock help to cover the cost of certification, underwriting, and full-service transaction management services.
Professional assistance
A buyer who is financing a purchase can ask to be referred to a third-party lender for preapproval, which can strengthen an offer. Roofstock’s service and transaction teams guide buyers and sellers through the entire transaction process until escrow closes and the property changes hands.
Rental income begins the day of closing if a tenant already occupies the home. After the sale closes, a buyer can ask to be referred to property managers vetted by Roofstock to handle the day-to-day operations.
Track and optimize
Roofstock customers can sign up for a free account with Stessa, a Roofstock company, to monitor their rental property investments from a single, comprehensive online dashboard. After entering the property address and linking bank and mortgage accounts, income and expenses are updated in real time to help investors optimize performance and returns.
Closing thoughts
Purchasing a rent-ready home that has been fully inspected with all needed repairs made can be a good way to generate recurring rental income and profit from an increase in equity if property values increase over the long term. As with any other real estate investment, it’s essential to perform research and due diligence, budget for operating expenses, plan for the unexpected, and set aside enough time each month to review property performance.
