Passive income is the name of the game. If you’re here, you know real estate is one of the best ways you can do that. The problem with investing in real estate is that low entry properties often need work before you can start generating cash flow. To avoid the hassle of locating contractors or doing the work themselves, the solution for many investors is turnkey properties. 

But are turnkey properties worth it?

In this article we discuss the different types of turnkey properties, what fees property management companies charge, how to buy turnkey rental properties, and their overall pros and cons. Yes, dangers do exist with turnkeys but they’re easily avoided if you know what you’re looking for. 

What is a turnkey property?

What are turnkey properties? A turnkey property is a type of real estate that has already been renovated, so no major issues need to be addressed before someone can move in. It is ‘turn-key ready,’ so all you need to do is unlock the door and walk in. 

However, for real estate investors, turnkeys are usually accompanied by a property management company that takes care of things like maintenance, rent collection, and tenant communication. All in all, they take care of the big stuff, so all you have to do is deposit the cash they collect for you.

As you’ve probably already determined, there’s a catch: those services cost money. Sometimes too much.     

Types of Turnkey Properties

As an investor, you can purchase the following types of turnkey properties:

• Single family homes

• Multi-family Properties

• Condos

• Townhouses

• Student housing

• Commercial properties

• Warehouses

• Office buildings

• Retail spaces

• Senior care/ assisted living properties

• Vacation rentals

As can be seen, any type of real estate can be a turnkey property. Because of this, it’s often just a marketing ploy to convey that nothing needs to be done to the property right away. The plumbing, electrical, roof, bathrooms, and kitchen should all be fine and ready to go. 

It’s common for turnkey properties to come with property management companies attached to them—meaning they are updated and renovated by the very same companies that will manage them on the investor’s behalf. Having a company to manage your investment comes with monthly costs, which we’ll get into shortly. 

What do property management companies do?

Property management companies do a fair bit of work for investors— especially if you find a good one. In a perfect world, a property management company should do all of the following:

• Tenant Acquisition and Screening

• Market the property to attract tenants

• Vet tenant applications by doing background checks, credit checks, and rental history verifications 

• Lease Agreement and Documentation

• Draft lease agreements that comply with local laws and protect your interests

• Handle lease renewals and terminations

• Rent Collection

• Collect rent from tenants on investor’s behalf

• Enforce late payment policies 

• Take appropriate action against non-paying tenants

• Property Maintenance

• Arrange for routine maintenance and repairs of the property

• Respond to maintenance requests 

• Inspections

• Conduct property inspections to identify the property’s needs

• Tenant Communication

• Serve as the main point of contact for tenants

• Financial Reporting

• Provide detailed financial reports to investors, which should include rental income, expenses, and any necessary accounting information

• Legal Compliance

• Ensure that the property complies with local, state, and federal laws and regulations 

• Eviction Handling

• When necessary, manage the eviction process to ensure that it is done legally

• Vacancy Management

• Minimize vacancy periods by quickly finding new tenants when a property becomes vacant

• Market Analysis and Rent Setting

• Conducting market research to determine competitive rental rates for the property

• Adjust rental rates as needed to maximize rental income

• Insurance and Legal Services

• Assist with insurance matters related to the property

• Coordinate legal services when needed, such as tenant disputes or claims

• Emergency Response

• Provide 24/7 emergency response services to address urgent property-related issues

• Property Upkeep and Improvement

• Offer advice and coordinate property improvements to maintain and enhance the property's value

However, whether a property management company actually does do all of the above depends on the company in question. It’s unfortunately a space filled with some bad actors, so research is key. For this, Reddit and Bigger Pockets are good places to meet fellow investors and ask questions. Testimonials are also great, but get contact information. 

How much do property management companies charge?

Property management companies typically charge a 10% monthly management fee, which is in addition to any other fees they may charge. This amount is determined by the amount of rent that is collected from tenants. Therefore, if you charge $2,000 a month in rent, then the property management company will take $200 of that amount.

Other Fees

Property management companies also charge for other services, too. For example, you may also be charged for:

• Tenant placement/ Lease renewal

• Advertising and marketing

• Maintenance/ Repairs

• Tenant eviction

• Financial reporting

How much for each? It depends on the company and where you live. 

Investors who have been burned by property management companies cite vacancy fees as the fees that broke them. Not only were they charged for vacancy related costs, but they were still charged the 10% monthly fee on top of it all. On paper, charging a vacancy fee makes sense because it does take work and manpower to list properties and show them to prospective tenants. However, charging 10% or more on top of that, when it happens, is excessive because it creates a conflict of interest. Companies that do this obviously make more money from properties that don’t have tenants than ones that do.

Which fees are standard?

In a perfect scenario, investors should only pay three on a monthly bases fees once the management company has secured a tenant. Those fees are: 

1) Standard monthly fee (approximately 10%)

2) Maintenance and repair fee 

3. Financial reporting fee 

All other fees should only happen once in a while. 

How to Buy Turnkey Properties

Purchasing a turnkey isn’t complicated. It’s the same as purchasing any other type of real estate. If you’re working with a realtor, you can simply tell your realtor what you’re looking for. Plus, if they’re a part of a nationwide organization, they can put out feelers to realtors in other locations. You may even find unlisted properties.

The most important thing when buying a turnkey property is to have an unbiased third party come in and assess the building. Have them take a look at the property as a whole as well as any work the management company claims to have done. For any type of real estate you buy, you want future liabilities to be as far downstream as possible. If the work was shoddy, you’ll be spending money sooner than necessary, which can quickly eat away your profits and incentive to continue investing. 

Pros and Cons of Turnkey Properties

Advantages of Turnkey Properties:

• Faster cash flow

• Property should not need immediate work

• Hands-off approach to investing

• Property management company vets tenants

• Investment properties can be bought anywhere if investor works through a property management company

• Good way to get initial investing experience 

Drawbacks of Turnkey Properties:

• Property management fees can eat away an investor’s profits

• Property may only be superficially updated and repaired

• There are many bad property management companies out there, so vetting is key

• Investors have limited control over the property

• Liability ultimately falls to the investor

• Downstream liabilities are always on the horizon no matter how good the property is—e.g., roof, appliances, hvac, etc. 

Conclusion

Turnkey properties can be a good way to get into real estate investing if you don’t want to devote any time to management and repairs. The most important thing is to do your due diligence by researching the property management company. Read through testimonials, speak with fellow investors who also use them, and understand the company’s fee structure. When speaking with other investors, be sure to ask them about their personal vacancy rates. While the property management company may charge a lot to procure reliable tenants, if you only pay the fee once in a while, it’s probably worth the additional expense. 

One last thing: Because turnkey properties are ultimately about procuring passive income, you want your ROI to be as high as possible, but you don’t want to exchange a lower monthly fee for numerous downstream nickel-and-dime fees. Companies that charge less ultimately make up for lost income in other ways— and for property management companies, a common way to do that is through vacancy fees.       

Keep in mind that there are MANY happy turnkey real estate investors, but you have to do your research if you want to be one of them. The purpose of this article wasn’t meant to dissuade anyone from purchasing turnkeys! But it is always important to understand the ways in which you might lose money. 

Happy investing, Hipsters!

FAQ

Are turnkey properties a good investment?

They can be, but there’s no guarantee. If you decide to work with a property management company, it’s important to understand their fee structure. Also take the time to speak with other investors who work with them as well. They may charge a low monthly fee, but will nickel and dime for other services, which will eat into your ROI. 

Do some property management companies charge less than 10%?

Sure, and some charge more. However, if you find a company that charges less than the industry standard in your area, take a long look at its fee structure and speak with other investors who work with them. Ask if the company drags its feet on securing new tenants, how good they are at communicating, would that investor recommend them, etc.   

How to find turnkey rental properties?

It depends on where you want to buy. You can speak with an agent to put out feelers, but you can also look on sites like Bigger Pockets, which has a pretty comprehensive list of turnkey agencies in the country.