When deciding to invest in real estate, one of the first steps is determining our Investment Strategy. That is, a plan that directs what we invest in and how we manage the investment. There are three primary Investment Strategies to pursue, based on the type of asset in focus:
- Distressed Assets
- Value-Add Assets
- Turnkey Assets
This article discusses the Investment Strategy commonly known as Turnkey.
As the name implies, a Turnkey Asset is ready to go from the start. Meaning, the property requires very little or no work to be done once purchased. It already has nicely finished exteriors and interiors, amenities based on the market standards, and quality management in place. Therefore, these factors make it a desirable place to live. The economic occupancy rate is 95% or higher, making it a highly stabilized asset.
One thing to note, however, is just because an asset is Turnkey does not necessarily mean it’s Class A. Turnkey properties can be Class A, Class B, or even Class C properties. For example, its not uncommon to see Class C properties rehabbed, brought up-to-date and then sold as Turnkey. However, due to the age and typically the neighborhood, they are still considered Class C.
The primary benefit of the Turnkey Asset Investment Strategy is the ability to achieve Cash Flow from day one, without requiring any work in terms of renovations, operational improvements, replacing management, or the like. It is essentially acquiring a business that is already established, running smoothly, and profitable.
The new Investor/Owner now just continues to make the Cash Flow, generally holding it for a period of years until such time as they decide to sell the property and move on. Turnkey Assets generally carry very low risk since there are no issues to be addressed, its highly stabilized, and provides immediate Cash Flow.
Sounds nice, right? Well, it can be.
However, there are downside risks to the Turnkey Investment Strategy, which really comes down to the higher purchase price for these assets. Since essentially all the work has already been done to make this property successful, then it will most likely come with a premium price tag. And we know the more we have to pay to enter an investment, the more limited our earnings potential will be.
The annual Cash-on-Cash return from a Turnkey property can be literally half or less of what a successful Value-Add property can yield. Second, unlike the other strategies, Turnkey assets generally lack the ability to force any meaningful appreciation.
That is, since there are essentially no improvements to be made to the asset, it is fully stabilized, and the rents are already at market rates, then there is very little room, if any, to force appreciation and purposefully increase the Asset’s valuation. In this case, the Asset’s only increase in value is through market appreciation. That is, waiting on the overall market to move in our favor, which can be dangerous.
What if the market slows, or worse, drops? In this regard, great caution should be taken before deploying this strategy for overall appreciation growth.
Conclusion: The Turnkey Investment Strategy typically carries the lowest risk of all the Investment Strategies. But it can also come with a considerably lower overall return. Turnkey properties can come with good cash flow, and in certain markets may gain in appreciation due to market conditions. However, since there is generally no additional value to be added, appreciation cannot be considered a sure thing.
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