Investing in a turnkey rental property will give you another stream of income. Many investors are now looking to get out of a shaky stock market and into rental properties to diversify their investment portfolios.
How do you invest in turnkey rental properties? There are many tips and tricks out there to help with investing in rental properties. A few tips include understanding:
- The One Percent Rule
- The Cap Rate
- Your Potential Property
When most people hear the term “turnkey” they believe that the entire process will be easy from start to finish. Researching what to expect when investing in turnkey rental properties can set you off to a great start.
Investing in Turnkey Rental Properties
Even if you are playing with the notion of purchasing a rental property, there are formulas and guides to follow. These guides will ensure that you can see and project what a turnkey rental property’s return investment will be for you.
Understand the two formulas you need for investing in a turnkey rental property:
- The One Percent Rule
- The Cap Rate
The One Percent Rule
The One Percent Rule is based on the monthly rent. So, the monthly rent should be 1% or higher for the entire amount of the rental property. Be careful with this number as it does not include any fees or maintenance repairs done to the property.
Here is the formula for the One Percent Rule:
- The cost of rent that you would like to charge ÷ The entire cost of property x 100
- $1,500 for rent ÷ $150,000 x 100 = 1%
If your monthly rent goes below 1%, you may not see that great of a return on your investment property. However, this is just a guideline to follow when you need to estimate the amount of money needed to keep the property’s income stream above the property maintenance costs.
The Cap Rate
Your capitalization rate is simply the profit you will make on your turnkey rental property annually. There are times when many do not understand this formula or use it the wrong way.
The cap rate is the Net Operating Income (NOI) to the entire value of the property, combined. The NOI is the amount of money it takes to keep the property functioning annually. This includes any:
- Maintenance Fees
- Insurance Fees
- Repair Costs
- Other Annual Fees
So, here is an example of how to use the cap rate formula:
- The amount of money it takes to maintain the property ÷ The entire value of the property = The Cap Rate.
- $15,000 NOI ÷ $300,000 Property Value = 5% Cap Rate
When you are seeking to invest in a turnkey rental property, you want the cap rate to be at a high percentage. This means that your purchasing price will have to be low for you to see a good return on investment.
So, now that you know the formulas for success, it is time that you understand what to expect from the turnkey real estate market.
Understanding the Turnkey Real Estate Market
Investing in the turnkey real estate market is for those who wish to purchase a rental property with the least amount of damages so that it is move-in ready.
Some investors will purchase these cheap rental properties and hire a property manager to in part take care of the property. This leaves the investor to just sign off on repair and maintenance costs.
There are turnkey companies that investors can enlist for help. You should look towards a turnkey company if you wish to have them do most of the work in finding your property should you not have time to do so yourself.
You need to understand a few ideas about the turnkey rental market:
- Returns in different areas: The turnkey rental market is just like any other market; it is about location. The rental property will thrive in different areas, so it is up to you to pay attention to the markets where you wish to invest in.
- The property you are seeking: Always visit and inspect the property that you are looking to invest in. Just because it is a turnkey property, does not mean that you should walk in blindly.
- Property managers experience: Your property managers are there to help you. When seeking property managers make sure they have enough experience in rental properties and how to handle tenants the correct way.
- Turnkey rental financing: The lower your rate is the better it will be for you in the long run. Up your credit score when possible. Do some research about the mortgage rates.
- Look at the downsides: Investing in a property is a risk just like any investment. There are times when you may not have any tenants and other times when the repairs start to become too much. However, you have to stay vigilante and a step ahead of the problems at all costs.
With the basic knowledge of the turnkey real estate market, you have tough questions to ask yourself. These questions are to help you determine if investing in a rental property is truly what you seek and why.
Questions to Ask About Turnkey Rental Properties
While the idea of investing in turnkey rental properties sounds good, there are other questions that one needs to ask themselves during this venture. This exercise is to help you understand what is needed of you and when you need to seek the help of others.
- Are you available at all times: If you do not have a property management company or a crew of your own to take care of things regarding your property, you will have to be in contact with everyone. This could lead you to resent the property if you are unable to handle everything.
- Can you handle a problem quickly? Whichever way you would like to put it, you are running a business and time is money. If the roof begins to leak, then you need to fix it immediately.
- Are your finances in order? Most investors who look into turnkey properties are purchasing them with cash. This way you are not tied down to a mortgage and all you have to do is collect the profits. If you are seeking a mortgage, check your credit score and debt-to-income ratio.
- Can you handle people? Again, if you do not have a property manager who sits as a buffer between you and your tenants, you will be the point of contact. This requires you to be there for your tenants any time they reach out to you.
- Will you be able to see a profit with the amount of rent you are charging? You may be tempted to keep the monthly rent down to attract tenants but will this sustain you in the months to come. Adjust your monthly rent rates accordingly.
- Is there more work to the property that needs to be done? This can hurt you if you have taken a mortgage out on your turnkey property. The added expense of taking care of an unexpected leak can make you lose profits.
- Is this a scam property?: There are scamming “businesses” out there that will post beautiful pictures to get investors to bring in the money. Always visit the property before you sign any papers and use an inspector when you can.
The more you research and ask others who have invested in a turnkey rental property, the more you will be ready to take this on. If your first investment does not work out take it from others who have gone through the same process. It may take until your second investment before things pan out.
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