TURN-KEY INVESTMENT PROPERTIES 101
Turn-key real estate investing has in recent years become a significantly more prominent avenue for investors seeking the returns and inflationary hedge available through real estate without the headaches of property management. To take on the full scale of work needed to acquire, rehab, lease, maintain and own a successful and healthy cash-flowing rental property by one’s self can take years of experience, and most often becomes anything but the ‘passive investment’ it is touted to be. For this reason, the market for rental properties which require little more than monthly oversight and which are professionally managed has exploded.
Investors who try and take on the entire rental property investment process themselves often point towards greater ROI and cashflow by cutting out extra fees associated with professional acquisition, rehab and management as their justification for doing all the work. So the question becomes, are turn-key properties worth the fees? For an investor who does not fully understand the risks associated with real estate, or at least does not have the experience to properly mitigate them, the short answer is absolutely! Just like any investment, there are risks aligned with the returns, and in real estate these risks range from acquiring a money-pit to leasing the property to a deadbeat tenant who will destroy the property and can drain a years’ worth of cashflow to evict. The experience required to be able to assess and mitigate these risks comes only from having already made all the mistakes there are to make, and putting processes in place to ensure they are not repeated. A professional real estate group who specialize in turn-key properties will have all the mistakes and their associated solutions under their belt, so the investor can rest easy knowing their investment is safe. The key to a passive real estate investment is finding a company who are fully integrated and handle the entire range of duties including cost efficient rehabbing, leasing units to fully screened tenants, handling day-to-day maintenance and management, and even the sale of the property when the time is right. For the cost of 8-10% of gross rent, a buyer of turn-key rentals can leave the major risk mitigation to professionals, and still see returns higher than your typical paper asset or fund.
People interested in rental property investing will often hear the words ‘passive investment’ associated with this asset. As mentioned in the previous paragraph, someone trying to take on the entire process by one’s self will quickly realize how involved they will have to be day-to-day to maintain a healthy investment property. An investor simply looking for the returns real estate can bring do not want to deal with the midnight overflowing toilet call, nor do they want to screen tenants when a vacancy occurs. Poor maintenance of a property can turn even a fantastic opportunity into a liability, and in contrast, we have found that an average property with excellent management can be an excellent investment. So are turn-key properties truly passive assets? Speaking from experience, clients of GC Realty & Development can choose to be as involved as they would like, but those who choose to let us fully take the reins do little more than monitor monthly reports on their properties and make decisions regarding them. In this sense, buying turn-key properties from a company who will also manage and lease the units makes the investment a very passive one.
Taking the next step, how might an investor go about purchasing a turn-key property? Real estate is known to be one of the most highly levered investments due to the ease and availability of financing, where an investor can lever their purchasing power by up to 96% in certain cases. Beginners just entering the world of rental property investing often think financing a purchase is their only option, or at least think it’s their best option. It is important however to know all purchasing options available, and take into consideration some lesser known methods, such as cash purchases.
There are a few key advantages to all-cash purchases which are often overlooked. First and foremost, as real estate investing becomes increasingly popular to everyone from large institutional funds to your neighbor down the street, quality cash-flowing properties become scarcer and the acquisition processes more competitive. Investors need every advantage they can get when approaching a seller with an offer, and a cash purchase can mean the difference between an offer being accepted, sometimes at a lesser price, and missing a fantastic opportunity. Obtaining financing can be a long and arduous process which will lengthen the closing processes by weeks or even months, and can turn a seller away from the offer. In addition, not being tied to the banking system and having mortgage payments to worry about provides an investor with an even greater peace of mind. Cash flow will be higher without a loan obligation, and having no interest to pay off can increase a properties ROI. While this article is not meant to discourage the option of financing, as that can help a less cash-strapped investor get into real estate, it is important to understand other purchasing options such as all-cash, and the advantages they can bring.
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