Should You Take a Closer Look at Turnkey Rental Properties?
Properties converted to rental units have been a major force in real estate market improvement the last few years. Cash investor buyers, including institutional and major investors like Blackstone Group, have been buying properties in bulk for rental investing. A lot of this activity has been focused on “fix-and-flip” investing. The property is purchased in poor condition, fixed up and then sold as “rent-ready” to another investor.
This strategy has worked well for many, with a steady supply of tenants and rising rents making it lucrative. Passive investors who want to become landlords find the availability of a “turnkey” rental unit very appealing. However, let’s take a look at how one “turnkey” or “rent-ready” unit can be a better investment than another.
Minimal Rehab – Deferred Maintenance Issues
When a fix-and-flip investor comes to a tenant-ready point in their rehab, profits rise with fewer cosmetic and deferred maintenance repairs. If a buyer is out there willing to pay say $89,000 for a single family home, why add another five figures and more time to the rehab cost? The final owner takes over the deferred maintenance items, many cosmetic in nature, and they are still happy with their cash flow position and easy tenant placement.
Suppose another $12,000 would have put the property into better condition, leaving few or no deferred maintenance issues? Would the end buyer have paid $101,000 for the property? Perhaps, but it would be a tougher sale, considering their cash flow would drop if they couldn’t raise the rent to compensate. For this reason, many of these transactions result in passing along deferred maintenance to the landlord owner.
Sale Without Deferred Maintenance Issues
Suppose the fix-and-flip investor markets to their landlord buyers with a study of the ongoing future costs of a rental unit if it’s purchased with those deferred maintenance issues repaired instead of passed along. That study would likely show higher maintenance and repair costs, greater tenant turnover, and higher costs of move-out repairs.
Or, perhaps if you’re that turnkey property buyer, you’ll want to make a more careful inspection of the property and negotiate those cosmetic and deferred maintenance repairs into the deal. Run the numbers, check the prevailing rents, and you just may find that long term this is a better and more profitable approach.
Properties converted to rental units have been a major force in real estate market improvement the last few years. Cash investor buyers, including institutional and major investors like Blackstone Group, have been buying properties in bulk for rental investing. A lot of this activity has been focused on “fix-and-flip” investing. The property is purchased in poor condition, fixed up and then sold as “rent-ready” to another investor.
This strategy has worked well for many, with a steady supply of tenants and rising rents making it lucrative. Passive investors who want to become landlords find the availability of a “turnkey” rental unit very appealing. However, let’s take a look at how one “turnkey” or “rent-ready” unit can be a better investment than another.
Minimal Rehab – Deferred Maintenance Issues
When a fix-and-flip investor comes to a tenant-ready point in their rehab, profits rise with fewer cosmetic and deferred maintenance repairs. If a buyer is out there willing to pay say $89,000 for a single family home, why add another five figures and more time to the rehab cost? The final owner takes over the deferred maintenance items, many cosmetic in nature, and they are still happy with their cash flow position and easy tenant placement.
Suppose another $12,000 would have put the property into better condition, leaving few or no deferred maintenance issues? Would the end buyer have paid $101,000 for the property? Perhaps, but it would be a tougher sale, considering their cash flow would drop if they couldn’t raise the rent to compensate. For this reason, many of these transactions result in passing along deferred maintenance to the landlord owner.
Sale Without Deferred Maintenance Issues
Suppose the fix-and-flip investor markets to their landlord buyers with a study of the ongoing future costs of a rental unit if it’s purchased with those deferred maintenance issues repaired instead of passed along. That study would likely show higher maintenance and repair costs, greater tenant turnover, and higher costs of move-out repairs.
Or, perhaps if you’re that turnkey property buyer, you’ll want to make a more careful inspection of the property and negotiate those cosmetic and deferred maintenance repairs into the deal. Run the numbers, check the prevailing rents, and you just may find that long term this is a better and more profitable approach.