Investing in real estate has long been one of the most reliable ways to build wealth, and turnkey properties have emerged as a popular option, especially for those looking to enter the market with minimal hassle. As seasoned real estate investors ourselves, we’ve experienced firsthand the benefits and challenges of turnkey real estate investments. In this article, we hope to share insights on understanding the costs involved and how to evaluate the potential returns, helping you make informed decisions on your investment journey.
What is Turnkey Real Estate?
Before diving into the financial details, let’s clarify what turnkey real estate is. A turnkey property is a fully renovated home or apartment building that an investor can purchase and immediately rent out. These properties are often managed by professional property management companies, making them an attractive option for investors who want to generate passive income without the time and effort of managing a property themselves.
Turnkey investments are particularly appealing for those new to real estate or those looking to expand their portfolio without adding significant workload. However, like any investment, it’s crucial to understand the costs and returns before diving in.
Understanding the Costs
1. Purchase Price
The most obvious cost is the purchase price of the property. Turnkey properties are often priced slightly higher than similar properties that require renovation, as they are move-in ready and often come with the convenience of professional management or even a tenant already installed. It’s essential to compare the purchase price with the potential rental income and other costs to ensure the investment makes financial sense.
2. Downpayment and Financing
If you’re financing your purchase, it’s important to consider the down payment and mortgage terms. Typically, lenders require a downpayment of 20-25% for investment properties. The interest rate and loan term will also affect your monthly payments and overall return on investment (ROI).
Fortunately, Memphis Investment Properties maintains strong relationships with many lenders who specialize in real estate investing and turnkey properties. These lenders not only understand the business but are often investors themselves.
For a list of MIP’s preferred lenders, just click HERE. This can save you time and ensure you get the best mortgage rates and terms, significantly impacting your cash flow.
3. Closing Costs
Closing costs are another upfront expense that can add up quickly. These may include appraisal fees, loan origination fees, title insurance, and legal fees. Closing costs typically range from 2-5% of the purchase price, so it’s essential to factor these into your initial investment calculations.
4. Property Management Fees
One of the key benefits of turnkey properties is professional property management.
At Memphis Investment Properties, you’ll have the advantage of working with our sister company, Reedy & Company Property Management—the premier management company in Memphis, TN, with over 40 years of experience in matching tenants with properties and meeting investors’ needs. While property management fees typically range from 8-12% of the monthly rental income, the convenience and expertise provided by a top-tier management company like Reedy & Company can be well worth the cost, especially for out-of-state or hands-off investors.
5. Maintenance and Repairs
Even though turnkey properties are fully renovated, you should still budget for ongoing maintenance and repairs. While newer or recently renovated properties may have lower maintenance costs, no property is immune to wear and tear. Setting aside 4-10% of the rental income for maintenance and repairs is a good rule of thumb.
6. Vacancy Costs
Vacancies are an inevitable part of real estate investing. When your property is vacant, you’ll need to cover the mortgage, insurance, and other holding costs without rental income. However, owning more than one rental property can often help offset the cost of an occasional empty house, as the income from your other properties can help balance out the temporary shortfall. It’s still important to factor in an estimated vacancy rate—typically 4-10% of the year—when calculating your expected returns.
7. Insurance and Taxes
Property insurance and taxes are ongoing costs that can vary widely depending on the location of your investment. Be sure to research the property taxes in the area and get a quote for insurance before purchasing. These costs will impact your monthly cash flow and should be considered when evaluating the property’s potential returns.
Evaluating the Returns
Now that we’ve covered the costs, let’s talk about the exciting part—returns! The potential returns on a turnkey real estate investment can be evaluated in several ways:
1. Cash Flow
Cash flow is the amount of money left over after all expenses (mortgage, insurance, property management fees, maintenance, and taxes) have been paid. Positive cash flow means the property is generating income above the cost of ownership, which is the goal of most real estate investors. When evaluating a turnkey property, ensure the projected cash flow aligns with your investment goals.
2. Cash-on-Cash Return
Cash-on-cash return is a simple yet powerful way to evaluate your investment’s performance. It’s calculated by dividing the annual pre-tax cash flow by the total cash invested (down payment, closing costs, etc.). For example, if you invest $50,000 in a property and it generates $5,000 in annual cash flow, your cash-on-cash return would be 10%. This metric helps you compare the return on your real estate investment to other potential investments.
3. Appreciation
While cash flow is crucial for short-term returns, appreciation can significantly boost your long-term wealth. Appreciation is the increase in the property’s value over time. While it’s not guaranteed, investing in areas with strong economic growth and demand can increase the likelihood of property appreciation. When evaluating a turnkey property, consider the potential for appreciation alongside cash flow.
4. Tax Benefits
Real estate investments offer several tax benefits that can enhance your returns. Depreciation allows you to deduct a portion of the property’s value from your taxable income each year, even if the property is appreciating in value. Additionally, mortgage interest and property taxes are often tax-deductible. Be sure to consult with a tax professional to understand how these benefits apply to your specific situation.
5. Equity Buildup
As you pay down your mortgage, you build equity in the property. Over time, this equity can be a significant source of wealth. While equity buildup is slower with turnkey properties due to their higher purchase prices, it’s still an essential factor to consider when evaluating your investment’s long-term potential.
Turnkey real estate investments offer a convenient way to generate passive income and build wealth, but it’s crucial to understand the costs and returns before diving in. Look at the purchase price, financing options, ongoing costs, and possible returns. This will help you make smart choices that match your financial goals.
Remember, every investment comes with risks, but with the right knowledge and planning, turnkey properties can be a rewarding addition to your real estate portfolio. Happy investing!