The goal of a commercial real estate investment is for investors to earn a return on their capital. With this goal in mind, there are many strategies to achieve this end. One of them is known as “turnkey investing.”
In this article, we will define what turnkey investing is, the pros and cons of pursuing this strategy, and how it compares to private equity investments. By the end, real estate investors should have the information needed to determine if this strategy is a good fit for their own investment objectives.
At First National Realty Partners, we prefer a value-add approach to investment. However, because we do much of the work on behalf of our investors, it could be considered turnkey for them. To learn more about our current investment opportunities, click here.
Turnkey Commercial Real Estate Explained
Depending on the context, turnkey real estate may have a different definition. But, for the purposes of this article, it is defined as a strategy in which an investor purchases a property where all they have to do is to “turn” the “key” to begin earning a return on their capital. Each deal is unique, but turnkey commercial properties typically have the following attributes:
- Low to no vacancy
- Tenants on medium to long term leases with plenty of term left
- Positive operating cash flow
- Little to no deferred maintenance
There are a variety of reasons why an investor may want to pursue a turnkey investment, but the most common is time and effort. Typical turnkey investors do not have the time to manage a commercial property, nor do they want to exert the effort to do so. So, they purchase a turnkey property in which they can start earning a return on day 1.
Turnkey Investment Process
The process used to find a turnkey real estate investment is the same as the one used to find other types of properties in the sense that these deals are found through existing relationships, brokers, turnkey providers, and/or internet searches.
The only major difference is that investors just use different criteria to conduct their property search. For example, they may tell their broker to only bring them turnkey deals. This way, they can focus their effort on just those properties that meet their investment criteria.
Pros and Cons of Investing In Turnkey Properties
Like any investment strategy, there are both pros and cons for real estate investors who pursue a turnkey approach.
Pros of Turnkey Investment
The primary benefit of investing in a turnkey property is that there is little to no work that must go into upgrading the property. It is cash flow positive on day 1. Other benefits include:
- Passive income stream, since there is little to no work to be done at purchase
- Property management is outsourced to a third party, which reduces the amount of day to day involvement and increases the marketing reach for the property
- Data, local knowledge, and expertise that the management company brings to the deal
- High quality tenants, which reduces credit risk
- Turnkey investments are available in all property types (multifamily, office, etc.), but tend to be most prevalent with residential properties like single family rentals.
For real estate investors who want to be able to walk into a property or investment portfolio and have everything ready to go, a turnkey property has a lot of positives. But, they must be weighed against the downsides.
Cons of Turnkey Investment
The primary downside to a turnkey real estate investment is the cost. Because these properties are ready to go on day 1, they are more expensive than properties that aren’t. As a result, the returns could be lower. Other downsides include:
- Operating expenses may be slightly higher due to the cost of the third party property management company.
- The property may start as a turnkey property, but it still requires maintenance and upkeep to ensure it stays in good working order.
- Turnkey properties are often sold by “turnkey providers” who specialize in this specific property type. In addition, these properties are often sold to out of towners who may live a long distance from where it is located. As such, the property manager and turnkey providers must be trustworthy and reputable. Otherwise, investors could be left with a sub-optimal asset.
As with any real estate investment, each deal is unique and it is important that investors identify the risks in each deal and actively work to minimize them.
Who is Turnkey Real Estate Investing Good For?
Turnkey investments are designed for two types of investors:
- Individuals who want the benefits of real estate ownership, but not the hassle of managing it. Often, this category includes high net worth investors who don’t have the operational expertise needed to manage an investment property on their own.
- Turnkey investments also tend to be a good fit for first time or inexperienced investors because the barriers to entry are relatively low and all of the property management work is done by a third party.
But, this doesn’t mean these are the only two groups who can invest in turnkey real estate. The key is for each individual to perform their own due diligence on the turnkey provider, the property, the real estate market, and the tenants to ensure that the deal is a good fit for their own investment objectives.
Summary & Conclusion
Turnkey real estate investing is a strategy whereby investors purchase a property that is stabilized and cash flowing on day 1. All they need to do is “turn” the “key” to the property to start earning a return on their capital.
The primary benefit of a turnkey investment is their simplicity. There is no major work or renovations that need to be done. Other benefits include passive rental income and third party property management who has marketing, leasing, and local market expertise.
The primary downside to a turnkey property investment is their cost. They tend to be more expensive than non-turn key properties, which means that their returns can also be lower. Other downsides include higher operating costs and the complexities of owning an out of town property.
Turnkey properties tend to be a good fit for passive and first time investors who can benefit from the value that the turnkey provider brings.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.