A turnkey rental property is one that you immediately can begin renting out and increase your revenue stream. Yet, many entrepreneurs are wary of the higher cost the comes with buying a turnkey property when compared to the lower cost of buying a property that you need to rehabilitate to make it livable. It’s much more enticing to buy a relatively cheap property, fix it up, and start renting to generate a seemingly higher profit. But, unfortunately, that isn’t always the case.
Problems With Rehabilitating Properties
When you undertake a property rehabilitation, you need to factor in the repair costs when determining your potential profit. Any errors or unforeseen issues will place a significant dent in your potential profit and possibly create a loss. You also likely will need to obtain permits, pass inspections, and then find tenants to move in before you can collect a dime in revenue. All of that takes time, effort, and money, which can turn a potentially profitable venture into a money pit.
Advantages of Turnkey Properties
While the initial buying price will be higher than similar properties that need work done before you can start renting them out, turnkey properties can be more attractive for investors. When you buy a turnkey rental property, you don’t have to factor in repair and rehabilitation costs to make it rentable. That means you won’t have to obtain permits, you won’t need several building inspections, and you might even have renters already occupying the rental property. You also have a much better grasp of the cost it will take to have the property ready for renting, which makes it much easier to accurately project your potential revenues. The biggest advantage, though, is it won’t take as long to rent out the property and boost your rental income.
Another advantage you will find in buying turnkey properties is that you generally will be able to rent it to a better quality tenant. Many properties that need rehabilitation are located in areas where the neighborhoods aren’t as nice, many local properties are worth less, and the people living in them in many cases aren’t as considerate toward the property itself or its owner. A $20,000 home that you fixed up enough likely won’t attract a renter who has a high level of education, stable income, and will be a responsible long-term renter. Instead, you stand a much greater likelihood of having renters who bounce from one place to another, are younger and less responsible, and who might wind up costing you a great deal in repairs, vacancies, and potential eviction proceedings.
Careful Selection Improves Profitability
As many successful investors in turnkey rental properties can attest, you need to do your homework before buying one to ensure you are in a good location and can turn a profit over a matter of years. The most important thing you need to look at is the ratio of the price to rent in a particular market. Some places, like Los Angeles, have high tax rates, lots of fees, and high property values but also have rent control laws. That makes it very hard to turn a profit on a property subject to rent control. Jacksonville, on the other hand, has one of the best markets based on price-to-rent ratio and is much easier to buy a turnkey property and find good tenants to rent it from you. It also helps to find a market that is landlord-friendly and won’t drag out an eviction process over months if you get a bad tenant who you need to evict.
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