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March 11th, 2018 by Marco Santarelli
What Are The Risks In Turnkey Real Estate Investment
Even with turnkey real estate investment, there might be some risks along the road, but this article will give the you an idea of how to deal with these bumps without losing too much. No investment is risk free and so is true for turnkey real estate investments. There is so much more that goes into turnkey real estate investment than simply buying a cash flow property and enjoying a passive income, and all new investors need to know about these risks in turnkey real estate investment. Even more seasoned real estate investors are now being more cautious than ever before when it comes to choosing a turnkey real estate company.
Whether you are a seasoned or new investor, you can use this article on risks in turnkey real estate investment and refresh your memory and possibly even add new techniques to your knowledge base.
12 Big Risks in Turnkey Real Estate Investment
Is turnkey real estate investing really a risky business? Well, here are some big risks in turnkey real estate investment which may not easy to decipher for first time investors.
Risk# 1: Bad Turnkey Real Estate Investment Company
One of the risks in turnkey real estate investment is encounter with a bad turnkey provider. In order to eliminate this risk, you must find out to what extent the turnkey company has been in the business, where they’ve put resources into real estate investing, and what number of buyers they’ve worked with in the past. Make sure you call their clientele and get the first hand feedback of their turnkey properties and services. You have the privilege to do your due diligence before making the further step of signing an agreement with them.
Risk# 2: Turnkey Real Estate Investment Company Does Not Own Any Rental Properties
It is important to note whether the turnkey company has put resources into its own portfolio of rental properties? What sorts of returns would they say they are getting from their properties? It is noteworthy if the company doesn’t own and manage any turnkey rental properties. It is an absolute sign to move away from them and find another turnkey real estate company which owns a portfolio of rental properties. By taking this step you would eliminate one of the risks in turnkey real estate investment.
Risk# 3: Turnkey Real Estate Company Claiming They Do Everything
A turnkey real estate provider can acquire a renovated rented or non-rented properties from sellers and builders in the form of an agreement that they shall flip it to the buy and hold type investors. In the other case they can just act as brokers to connect turnkey property owners with the buyers and earn their commission. They are not usually responsible for property acquisition, renovation, tenanting, and after sales support. If the company does all of that, that is an indication that there could be feeble support structure set up for buyers.
The turnkey real estate companies usually have people of different expertise who help them in finding good properties for their clients. The companies do their due diligence and prepare a report to show how profitable their properties are. On their website you will find property addresses, pictures and calculations of cash flow income. If you concerned about after sales support, do not go with a company claiming to do everything. By taking this step you would eliminate one of risks in turnkey real estate investment.
Risk# 4: Less or Risky Profits From Turnkey Property
Тhе turnkеу real estate соmpany nееds tо mаkе mоnеу. Тhіs mеаns buуіng рrореrtу аt а dіsсоunt аnd thеn sеllіng іt tо уоu аt а hіghеr аmоunt, or “flірріng” thе рrореrtу, оftеn fоr а hеftу рrоfіt mаrgіn. Some part of your rental income from the property will also goes into the pockets of a turnkey property management company. For hassle free and passive management of your property, you need to hire such companies. Managing properties and tenants can be a daunting task for you, especially you own multiple turnkey properties in different locations.
Risk# 5: Bad Renovation is Another Drawback of Turnkey Real Estate Investment
A bad renovation of the property is one of the most common risks in turnkey real estate investment. Before acquiring a property from a turnkey company, you must visit a couple of their properties that they own and manage. Find out exterior and interior conditions of the properties, and what is the workmanship of the renovations done. If the company asserts that renovations have been done perfectly, you must insist on having an inspection done from a third party contractor. Else, you might have to deal with costly repairs not far off.
Risk# 6: Rental Income Assurance is Risky in Turnkey Real Estate Investing
Experienced rental property investors realize that there is no such thing as a “rental guarantee.” If the property is fully renovated to perfection but not yet rented out, there is no guarantee that it will be rented at the exact price the turnkey real estate company has stated as “potential monthly rent” on their website. For that you need to invest some energy and time in doing your own market research to comprehend what are the rent prices of comparable properties in the area where your property is located.
You need to find rental properties which are similar to yours in terms of exterior and interior features like sq ft, beds, baths, garage, etc. You can take help of a local real estate agent and pay them some amount to send you details of similar rental properties or use sites like Zillow and Trulia to find them yourself. By successfully doing so you can eliminate another risk in turnkey real estate investment.
Risk# 7: Buying Overpriced Turnkey Properties Is a Big Risk
You make most of your money on an investment property when you buy. The price for which you buy a property will greatly determine what level of profit you can expect to see from your property, from both a cash flow and an appreciation perspective. Again, you can ask a local agent to pull some data from the MLS and send you details of recently sold similar rental properties. See what is the average sold price and compare it with the asking price of the turnkey real estate investment company. Turnkey providers are notorious for selling overpriced homes, especially to out-of-state investors who are used to costly real estate markets, and they even do it to the extent that you may find them selling for double the price than local comps.
Risk# 8: Bad Turnkey Property Management
A bad property management company will not take good care of your property as you would. Since you do not know the person who has been appointed to take care of the company, you cannot be sure that they will provide you with the kind of care that the house requires. This is another risk in turnkey real estate investment.
Risk# 9: High Property Vacancy Rates
While doing your research for property management or turnkey providers, make sure that you inquire them about their rental protection and tenant screening process. High vacancy rates can lead to negative cash flow, especially if you have bought the rental property through mortgage. The turnkey property management must ensure tenants will live in the property for the entire lease period or else they will quickly find new tenants.
Risk# 10: No Exit Strategy Planned
No investment is risk free. Turnkey rental properties are easy to buy than they are to sell, so make sure to have an exit strategy in mind if things don’t work out for you. If you have to sell for lower than you bought it, for example in a declining market, you are losing money. So think about who would want to buy your property in that declining market in the long-run.
Risk# 11: Damage To Property By Tenants
A damage by tenants can be accidental, deliberate or malicious. It’s every landlord’s worst nightmare — a tenant who destroys the property because he or she is disgruntled for some reason. A disgruntled tenant can cause havoc on your turnkey rental property. Some of the damages to expect from them are graffiti on the walls, torn or stained rugs, broken windows and doors, scratches on the hardwood floors, a hole punched in the wall and any other damaging mischief your disgruntled tenant can think of.
Risk# 12: Delayed or Non-Payment of Rent
Another risk in turnkey real estate investment is delayed or non-payment of rent by tenants. If you are managing your rental property all by yourself, it is going to be a big challenge to collect rent on time. You’ll have the tenants that don’t pay and don’t call in case of delayed payment. As a landlord, you’re going to have to face this problem from time to time. Ask yourself if you’re comfortable confronting your tenants before you start renting. In these circumstances you’ll need to settle on a decision to either let the tenant slide or to begin the eviction process.
Turnkey Real Estate Investment: To Do or Not to Do
Eventually, the decision concerning regardless of whether you should put your money into a turnkey real estate investment is a personal one. Your involvement in the real estate industry, learning of neighborhood markets, and investment targets should all impact your decision. Turnkey real estate investing can be an incredible way to expand your portfolio, particularly if you’ve been priced out of your neighborhood market. Notwithstanding, it’s imperative to be cautious when choosing a particular turnkey property provider.
Less Risky And Stable Markets For Turnkey Real Estate Investing In 2018
References: https://www.buildium.com/blog/turnkey-rental-properties/ http://hipsterinvestments.com/5-risks-of-buying-rental-properties-in-declining-markets/
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