Turnkey rentals have become an interest of those who invest in real estate. But what are they and how do they benefit the investor? Enter Roofstock.
Roofstock, an online marketplace for buying and selling tenant-occupied rental properties across the country, shares how remote investing in turnkey rentals creates an experience that we all should know about.
Enjoy this Q&A with the experts who answer our questions about this type of real estate investing.
Before we get into the user-submitted questions, we wanted to outline some basic concepts.
What is single-family rental property investing?
Single-family rental property investing refers to the purchase of a self-standing, single-family home that is leased to a long-term tenant (typically lasting at least one year), producing monthly rental income for the owner.
This is distinct from investing in apartments or condos, referred to as multi-family investing, where an investor may purchase multiple units in a single complex or own it in its entirety. Duplexes, triplexes, and quadplexes are referred to as small multi-family. Another strategy some investors pursue are short-term rentals, which is purchasing property designed to be listed on a platform like Airbnb or VRBO for recurring, short-term stays.
What is “turnkey?” What does it mean in the context of rental property investing?
Turnkey properties are homes that are move-in ready, meaning all the appliances are in working condition and no major structural, electrical, or plumbing repairs are required.
Some turnkey providers will also manage the property on your behalf once the transaction is complete. This helps the investor be much more hands-off and avoid having to deal directly with the tenants on a regular basis, but also comes with an added cost.
What is the role of a turnkey company? Are they the broker and the property manager rolled into one?
The role of a turnkey rental property provider is to:
- Find an investment property for you to purchase and perform repairs if needed
- Lease it to a qualified tenant
- Handle property management
Ideally, all the investor has to do is purchase the property and begin earning rental income.
A turnkey provider will work with you to find a home for sale and convert it into a rental property, often acting as the broker if they are licensed. In some cases, they may currently be the owner of the property and sell to the investor directly.
What are the Pros & Cons of buying turnkey properties?
The pros of buying turnkey properties are:
- The property is in rent-ready condition, so you’ll be able to place a tenant (if the property is vacant) quickly.
- You will typically see a minimal amount of repairs during the first few years of ownership.
The cons of buying turnkey:
- You’ll usually have to pay a little more a premium to buy turnkey properties, mainly driven by the costs that the previous owner put into rehab and repair.
- The higher price point means it’s unlikely you’ll have much, if any, additional equity in the home beyond the down payment.
What is Roofstock?
Roofstock is an online marketplace for real estate investors to buy and sell tenant-occupied rental properties across the country. It was designed to enable remote investing by taking the experience of buying and selling rental properties and putting the entire process online.
Is Roofstock a “turnkey” provider?
Roofstock is not exclusively a turnkey company, but our online marketplace does include a section of turnkey properties.
Rather than charging investors to manage the property for them, Roofstock provides investors with a list of vetted third-party property managers (PM’s) to choose from. They can, of course, choose another PM not recommended by Roofstock or opt to manage the property themselves.
Our benefit to investors comes in providing a curated marketplace of leased rental properties across 20+ states, with due diligence and financial projections provided up front, We also coordinate the entire transaction process for you from offer to closing and connect you with vetted local property managers to oversee your investment.
At the bottom of this article, you can learn more about how Roofstock works and some of our unique features.
Is turnkey investing worth it? Is it better to just buy yourself?
The value of working with a provider that offers turnkey rental properties is really dependent on your preferences as an investor. It generally comes down to answering these two questions:
- Beyond the required capital, how much personal time and effort am I able to invest in searching for properties, identifying the best investment opportunity, and executing on the transaction?
- Does the provider make the process of investing in real estate meaningfully easier for me while helping me achieve my desired return on investment?
You need to address the personal trade-offs between the time and effort required to start building a residential real estate portfolio against the desired outcome. A turnkey rental property provider will ideally make it easier for you to:
- Identify attractive investment opportunities
- Support you in overseeing the process of acquiring the property
- Be “hands-off” in owning the investment by handling the management of the property (if the turnkey provider offers built-in property management)
Choosing to manage the process yourself from start to finish can be much more daunting, requiring a much greater investment of time and effort to do the legwork. For some investors, the value of “making it easy” to invest in residential real estate can’t be overstated, while others will prefer to be more hands-on so they can get the absolute best deal possible. Additionally, if you live in a high-priced real estate market and need to invest out-of-state to see better returns, local market knowledge can be helpful in the decision making process.
Also consider that many turnkey providers are offering rental properties they have purchased themselves and done some repair or maintenance work. This means you’re typically paying a bit of a mark-up on the property.
Your options for sourcing investment properties:
- Find property yourself
- Work with a local agent or realtor
- Use a traditional turnkey provider
- Use a marketplace like Roofstock (which also has turnkey properties available)
Is it a good option for physicians just starting out in real estate investments?
Deciding whether investing in rental property is the best place for you as an investor to begin adding real estate into your investment portfolio will depend on a number of factors. Most critically, you should consider the amount of available capital you’re looking to invest, your goals as an investor, and your risk tolerance.
The key benefits of investing in rental property are the opportunity for generating passive income and the potential for long-term appreciation gains. By buying turnkey properties, a lot of the heavy lifting is done for you. Also consider that you will typically need at least $20K for a down payment and that this is a higher risk investment than a REIT, for example.
Is investing in turnkey rentals a scam? I’ve heard of people getting ripped off by turnkey companies.
In the world of rental property investing, as in any investment, there are bad actors that do not have an investor’s best interests at heart. Selecting a reputable provider is a critical part of the process, whether that means reading customer reviews or asking your network. That being said, investing using a turnkey company is not inherently a scam.
Review sites including Google Reviews, Trust Pilot, and the Better Business Bureau are all great resources. There are also numerous reputable personal finance and investing sites (such as Passive Income MD) that may provide recommendations, either in the form of review articles or community-sourced forums.
How do you even get started with real estate investing? A Realtor? A financial advisor?
Real estate investing offers a variety of investment vehicles to choose from – residential rental property (which includes turnkey), commercial real estate deals, REITs, etc. As forward-thinking technology companies have moved into the space to offer innovative ways to invest in the sector, we’ve seen the evolution of crowdfunded real estate platforms and marketplaces, such as Roofstock.
All of these platforms provide investors access to different parts of the real estate sector that were previously the domain of large financial institutions or investors with large amounts of capital.
With all of them being internet-based offerings, it’s now very easy to get started with initial investments ranging from as little as $500 all the way up to $25,000 and beyond. By doing your homework and understanding the pros and cons of the various platforms, it’s now incredibly easy to get started in real estate investing.
Is it safe to use rental property investments as a part of your retirement plan?
Rental property is one of the best strategies for generating passive income, which can provide a significant advantage over other investments, especially once you have more limited recurring income streams. A properly selected and maintained rental property can also see significant appreciation over time, allowing you to benefit from that accumulated value alongside the ongoing rental income.
Whether it is a “safe” investment to consider as part of your retirement plan depends entirely on what percentage of your retirement nest egg is constituted by your rental property investments, how well diversified you are, and whether the illiquid nature of the asset suits your plan. However, over the last 25 years, annual returns in the single-family rental market (8.00% annual average) have been about the same as the stock market, and outperformed the bond market.
One thing to note when considering investing in rental property as part of your retirement plan is that you can use self-directed IRA funds as a way to fund your investment. We advise speaking with your financial advisor to evaluate whether this option is right for you.
What are the advantages and disadvantages of turnkey compared to a syndication or Real Estate Investment Trust (REIT)?
The core benefits of investing in rental property over a REIT or syndication are that you have full control over how your funds are being allocated. Purchasing rental property through a turnkey provider puts you in the driver’s seat to select the specific assets that meet your investment criteria – everything from the market and neighborhood down to specific square footage and vintage of the home.
If you decide that you would like to invest in renovations that may allow you to increase the rent or results in-home price appreciation, the choice is entirely yours. It can be very hands-on if that’s your preferred approach. Of course, you can also opt to let your trusted property manager handle those decisions as well.
Direct ownership also gives you the ability to use financing to “buy” a bigger investment, helps you build equity as your tenant pays off your mortgage, and provides more favorable tax advantages like depreciation and operating expense deductions.
The key disadvantage of investing in rental property over a REIT or syndication is that you have far more responsibility over the individual properties you’ve chosen to invest in and may have to deal with some of the hassles inherent in being a landlord.
If you’re working with a qualified property manager and given them approval for a repair and maintenance budget, they should be in a good position to handle most issues that arise, including finding a new tenant when the time comes.
Compare that to investing in a REIT, where you’re trusting a third-party with your capital to invest it into markets and properties that they believe will deliver an expected ROI. Beyond selecting an individual REIT or syndication that aligns with your investment criteria, you have little control in how the investment is allocated or managed. This appeals to investors who prefer the “set it and forget it” approach to real estate investing, but this won’t be the best option for everyone.
How significant are the financial disadvantages of investing in a turnkey property, instead of doing a little extra work to buy your own property and using a property management (PM) company?
It’s hard to put an exact number on the cost savings of finding and buying your own properties as it varies wildly. Again, assume that you’ll never get the best deals buying turnkey, but you also don’t have to put in much work in either. So if you’re willing to put in the work, you’ll always find better properties by sourcing your own deals. But if you want your investment to be passive, turnkey might be your best option.
For many investors, using a property manager is preferable because they are responsible for dealing with the tenant and any repair or maintenance issues that arise. Some investors prefer to self-manage and deal with this themselves in order to reduce their expenses.
How do you vet a real estate investing company?
As mentioned in the answer to a previous question, the current wave of innovation transforming the real estate investing segment means investors have more options to choose from now than ever before. Selecting the real estate investing company that best suits your needs as an investor means selecting the right investment asset as well as the right provider. Broadly speaking, this can range from a Real Estate Investment Trust (REIT) or commercial real estate crowdfunding platform, to a rental property company (whether a traditional turnkey provider or a marketplace like Roofstock).
The advice here would be two-fold. First, understand the pros and cons of the real estate investment assets available to you. Rental property may be right for some investors, while completely passive investments like REITs or crowdfunded real estate may appeal to others. Second, use the same diligence you would apply to any firm you’re considering investing your money with. That boils down to assessing their reputation, track record, and what investors are saying about them.
Some suggested avenues for vetting a real estate investing company:
- Company Information: see how the company positions itself and whether they publish any historical earnings or reports on investor returns
- Press Coverage: search reputable press coverage from publications you trust
- Investor Feedback and Review Sites: Google Reviews, Better Business Bureau listing
- Community Forums: Passive Income MD group on Facebook, BiggerPockets, etc.
How do you verify the numbers/calculations that a company gives you about a certain property?
Different companies will calculate key financial metrics in various ways, typically leaning in favor of making the numbers look more attractive. It’s always helpful to run the numbers yourself when investing in real estate for the first time:
- Pricing – Check Zillow or House Canary to see if the list price for the home is in line with what other similar homes in the area have sold for recently
- Monthly Rent – Rentometer is a rental comparison tool that will help you assess what similar homes in the area are renting for.
- Financial Projections – You can use this tool we created to help you get an overall picture of a home’s potential performance, taking a number of factors into account. Each property listed on Roofstock’s marketplace comes with a complete set of underwriting assumptions that form the basis of the financial projections. Roofstock, in general, uses conservative estimates as the default view, but investors can customize all-expense estimates which then updates financials in real-time.
- Property Conditions and Repair Costs – You should always include an inspection contingency as part of the deal. This will allow you to conduct an independent inspection once you’re in-contract to buy a property, giving you the benefit of not losing out to another buyer while retaining the option to terminate or negotiate the deal if the inspection finds issues with the home that you were not previously aware of.
Roofstock is not a turnkey firm in the traditional sense. Our goal is to provide the benefits of turnkey investing – mainly to let you purchase a cash flowing asset that doesn’t require you to rehab the home yourself – while addressing common complaints around property management fees and less competitive pricing.
Since we do not offer property management services ourselves, our goal is to help you select from the most qualified providers in each market we service by doing our own market research to offer vetted options to choose from. We will provide 2-4 recommended property managers in each region that we’ve personally-screened and display their fee structure to help investors make an informed decision. We have no financial relationship to the property managers we recommend.
The only fees associated with investing on Roofstock is a 0.5% or $500 transaction fee (whichever is greater) that is charged when you go into contract on a property. The majority of properties listed on the Roofstock marketplace are sourced from third-party sellers, meaning that we only make money for facilitating transactions between buyers and sellers.
Visit Roofstock to learn more.