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Turnkey properties: The new millennial investment

Turnkey Investment

The American dream

Millennials and younger members of Gen X appear to be delaying the financial responsibility of homeownership. But it’s hard to blame a group who watched the housing market skyrocket and plummet just as they were entering college or becoming young professionals gearing up to buy a starter home.

As the economy improved, and financial arrested development started to end, some 20- to 30-somethings have started to invest in St. Louis real estate, but not in the traditional sense.

Many have turned to turnkey properties, which offer the opportunity to become a homeowner while adding another revenue stream to an investment portfolio.

Jay Dao, a 30-year-old engineer who lives in Santa Clara, California, felt priced out of the market in the Bay Area, so he turned to investing in more affordable regions and now owns properties in Chicago and Indianapolis.

“Turnkey investing is a much more passive form of real estate investing for busy professionals or investors who simply don’t want to put in that much work themselves, but still would like to own rental property,” says Dao, who chronicles his adventures in real estate on the blog FIFighter.com.

Buying for Short-Term Housing, Long-Term Investment

Unlike house-flipping that might require significant repairs to make a home livable, a turnkey investment is typically ready to rent the day it’s purchased.

Mario Bonifacio, 34, used a turnkey investment initially as a place to live when he arrived in Fort Hood, Texas, as a young soldier, but he bought with the forethought of renting it out in the future.

“I figured out that the best way to take advantage of high rent and low real estate prices wasn’t just to own a home to live in; it was to own a building with enough units to rent out to others,” Bonifacio says.

Today, Bonifacio owns turnkey properties in Foot Hood and Killeen, Texas, as well as Des Moines, Iowa, while he lives in New York City.

How to Buy a Turnkey Property

Buyers can go through a St. Louis real estate agent or a turnkey company. Just note that the process is research heavy and requires a lot of time upfront.

Investors identify where they plan to purchase property and then contact a company to get a properties packet listing the available homes in an area. An investor should do due diligence and actually visit the area, properties and the turnkey company itself.

Once an investor finds and vets a property, he or she can either enter into negotiations with the turnkey company or move straight into the closing process.

“With turnkeys, a standard condition to closing is to have the property leased up with a paying tenant in place before the buyer closing escrow,” Dao says. “In other words, the property should be ready to generate cash flow for the owner as soon as day one.”

Making a Property Turnkey On Your Own

Going directly through a turnkey company may be the simplest way to invest in real estate, but it isn’t the only option for owning a turnkey property.

“I actually purchased each home on my own and then went about the process of making them as turnkey as possible,” says Sandy Smith, 37, who lives in Queens, New York.

Smith purchased two properties in Wilkes-Barre, Pennsylvania, and then went through a number of management companies in order to find one that suited her needs. Her current management company handles almost every aspect from cutting the grass to ensuring mortgage payments are made.

“I am only ever involved if a repair will cost more than $500,” says Smith, whose rentals make up about 30 percent of her total investment portfolio.

Any Investment Comes with an Element of Risk

Turnkeys sound like a dream investment with a guaranteed return, but no investment is foolproof.

Smith is experiencing taxes rising at a rate faster than she can increase rental rates to offset the cost.

Dao has experienced the typical loss of money that’s part of owning any rental property: vacancies, maintenance and tenant turnovers.

Bonifacio dealt with being underwater on one property for a few years after 2008, but he held on to the place and it continued to bring in rent while the property lost value.

Any turnkey investor should have an emergency fund buffer to handle the potential financial strain of owning multiple properties.

And keep in mind there are no magical investments. Buying a turnkey property requires a lot of research, a significant chunk of money and a most valuable commodity — time. Anyone interested in investing in a turnkey property needs to be on the lookout for scam artists and perform their due diligence before taking the keys.

“Rental property is highly illiquid, and it can be much easier to buy than it is to sell,” Dao says. “The only way to really minimize risks is to invest in quality.”

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4 ways to maximize your property investments

Here is some great information for investors from the St. Louis Business Journal.

Today, you’re either a renter or a buyer — and if you’re the latter, you buy big. The average property owner owns between one and 10 units, proving that in a post-recession era defined by a generation of renters, it truly is a landlord’s market.

For most landlords, investing in and renting out property is the most significant financial decision and commitment they can make, and their property management costs are often the biggest part of their budget.

We live in a fast-paced, ever-evolving world where knowledge is power and good management matters. It’s more important than ever to stay up-to-date on industrial trends, local regulations and legal record-keeping.

The following four tips will help landlords think like a business owner to maximize property investments and legally protect their assets:

1. Know the law and marketplace

Every state has different rules about property ownership, rentals and subleasing. Before taking on property management as a full-time job or pursuing some side profits as a “small landlord” through sites like Airbnb, make sure that the local law and lease allows subleasing and doesn’t have any loopholes.

For example, eviction procedures in states like California are lengthy (three to six months), complicated and entirely preventable through a quick search of state law and a friendly chat with an attorney.

Just as laws vary state by state, a fair asking price for rent in one city is not necessarily fair in another. Landlords must be familiar with the local cost of living and avoid under- or over-valuing their property.

Of course, the acceptable amount of rent a landlord can charge depends heavily upon local rental demand, the economy and the health of the local housing market, in addition to the location and condition of the property.

Before settling upon on a rate, landlords should scour the market for comparable rental properties in the newspaper, local rental guides and online listings to see what other landlords are asking.

2. Know your paperwork

In today’s litigious society, always follow the golden rule: Get it in writing. A lease agreement helps landlords understand and protect their rights and obligations.

Once signed by both parties, landlords can begin the landlord-tenant relationship on the right foot and have a written record to fall back upon should any future questions arise. It’s also a smart best practice to use other agreements like move-in and move-out documents and official request forms to manage tenant relationships. In addition, encourage tenants to use sublease agreements in the event that they share or sublet their space.

It’s also recommended that landlords consider tech-savvy tools like online leases that can be signed and stored in the cloud to prevent loss, damage and legal troubles spurred by confusion.

See Also

?Five legal do’s and don’ts for your office rental
6 tips to develop your company’s legal game plan for success
5 reasons to protect your intellectual property — no matter the size of your company
3. Know your tenant

Move-in day marks the beginning of an important relationship between a tenant and a landlord. It is ultimately the landlord’s responsibility to know who will be residing in their building.

Tenants who have well-documented rental histories and past long-term living situations, including positive reviews from past Airbnb hosts and landlords, are great candidates, especially those who are willing to verify their identities with private background checks or offline character references.

Landlords must also be mindful of whom they turn away. The Fair Housing Act of 1968 is a federal law that prohibits unjustly denying housing to a person based on their race, color, religion, sex, marital status, nationality, sexual orientation or disability.

In some states, a landlord also cannot unjustly deny someone housing solely based on the fact that they receive public assistance. However, a landlord can turn away a potential tenant if their income is below a certain threshold. Always double-check the law: Civil penalties for violating federal and state housing discrimination laws are costly!

4. Know your responsibilities

Under state laws, the landlord and tenant will each have pre-designated responsibilities, no matter what’s outlined in the lease. Landlords, for example, will usually have to handle repairs to ensure a property is habitable, while the tenant will be required to pay rent and handle some (if not all) of the utilities.

Beyond budgeting to cover costs of insurance coverage, repairs, property taxes, debt service and association dues, there are increasingly popular ways to fulfill duties as a modern landlord while potentially saving money in the long-term.

One great way to save money, boost efficiency, trim waste and sustain value is to go green. For instance, by educating tenants on how to use water more efficiently or joining a program like IREM® Sustainability, both landlords and tenants can save money via reduced utility costs while helping to preserve water supplies.

Rebates or other incentives for purchasing high efficiency products, such as toilets, faucets and site irrigation systems, can help sweeten the investment too.

Following these tips will help landlords navigate the sometimes murky rental waters, keep them in good standing with the law, improve relations with tenants and (hopefully) make the most of their investments.

By Lisa Honey, BizJournals.com

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