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The Top 3 Pitfalls of Turnkey Real Estate Investing (And How to Avoid Them!)

Posted by Equity On Repeat on January 21, 2024

So you’ve decided to dip your toes into the world of turnkey real estate investing. Smart move! It can be a great way to build wealth over time without the hassle of traditional landlording. However, as with any investment, there are pitfalls to watch out for. Before you hand over your hard-earned cash, make sure you go in with your eyes open. Otherwise, you might end up making expensive mistakes and regretting your decision.

In this article, we’ll walk through the top three pitfalls new turnkey investors often stumble into, and how you can avoid becoming another statistic. Learn from the mistakes of others, do your due diligence, and choose a reputable company to work with. Follow this advice, and you’ll be well on your way to building a successful turnkey portfolio. So without further ado, let’s dive in and make sure your turnkey investing experience is as profitable and painless as possible!

Pitfall #1 – Not Understanding the Real Estate Market You’re Investing In

One of the biggest mistakes new investors make is not truly understanding the market they’re buying into. Just because a turnkey provider shows you glowing photos of a neighborhood doesn’t mean it’s the right fit for your investment goals.

Don’t rely solely on what the turnkey company tells you – do your own research! Search online for market reports, crime statistics, school ratings, and local events to determine if it’s an area on the rise or decline. Check sites like Zillow, Trulia, and Localdigs to analyze sales trends and see what types of properties are selling.

Speak to others with experience in that market. Connect with investors already owning rentals there to get their input on everything from tenant quality to maintenance costs to potential roadblocks. The more knowledge you have, the better equipped you’ll be to spot a good deal.Doing inadequate due diligence on the turnkey company you want to invest with is one of the biggest mistakes new investors make. Many get lured in by slick marketing and promises of high returns, failing to verify the details.

If possible, conduct site visits to see properties firsthand. Talk to property managers and tenants to get their honest feedback. Check that the properties are well-maintained and tenancy is stable. This helps ensure the investment is generating the income and returns advertised.

Don’t feel rushed into a decision. Take your time researching options and verifying facts. Your due diligence will pay off by helping avoid problematic turnkey companies, and instead finding stable, reputable partners for a successful investment experience. Do it right, and those rewards can be substantial over the long run.

Pitfall #2 – Failing to Account for Expenses Beyond the Mortgage

Research the costs of taxes, insurance, utilities, repairs, and property management fees which can vary significantly between markets. If a turnkey provider promises high returns in a market with unusually low costs, it may be too good to be true. Do the math to ensure the numbers actually pencil out.

Property Taxes and Insurance
In addition to your mortgage, you’ll have to pay annual property taxes and insurance premiums for your rental property. Property taxes can vary but typically range from 1-3% of the property’s assessed value per year. Homeowner’s insurance also needs to be paid to protect your investment in the event of damage. Make sure you understand the tax rates and insurance costs for your specific area and property type.

Repairs and Maintenance
Things break and need fixing in any home, and as the landlord, the responsibility falls on you. Budget at least 10% of the monthly rent to cover any necessary repairs, maintenance, and replacements that come up. Small issues like leaky faucets or HVAC tune-ups are annoying but unavoidable. More significant problems like roof or plumbing repairs can cost thousands if you’re not prepared.

Vacancy and Non-Payments
Even the best landlords experience vacancies and non-paying tenants at some point. Make sure you have enough cash reserves, ideally 6-12 months of expenses, to cover periods when you’re not receiving rent. You should also budget at least 5% of annual rent to account for tenants who default on payments or skip out before paying.

By understanding all the costs that come with turnkey real estate investing and budgeting for them upfront, you can avoid unwanted surprises and keep your cash flow in the black. Do your due diligence to determine realistic expense estimates for your market and property type. With prudent financial planning, you’ll set yourself up for success as a turnkey real estate investor.

Pitfall #3 – Not Having a Proper Exit Strategy

A common mistake new turnkey real estate investors make is failing to plan how they’ll eventually sell the property. Without an exit strategy, you could end up stuck with an investment property for far longer than anticipated.

To avoid this pitfall, determine your exit strategy upfront before purchasing a turnkey rental property. The most common strategies include:

  • Selling the property: This is ideal if you’ve owned the property for several years and home values have appreciated substantially. You can sell to another investor or owner-occupant.
  • Refinancing and pulling your cash out: If interest rates have dropped or your property value has increased, you may be able to do a cash-out refinance. This allows you to pull some of your equity out while still keeping the property.
  • Doing a 1031 exchange: A 1031 exchange allows you to sell your current investment property and roll the proceeds into a new property while deferring capital gains taxes. This allows your money to stay working for you.
  • Passing it on to your heirs: Some investors take a very long-term buy and hold approach, holding properties for decades. Upon your passing, the properties can be transferred to your heirs, who may decide to sell or keep renting them.

The key is going in with a plan for how and when you want to exit. Meet with your lender, real estate agent, tax professional, and financial advisor to determine the best path based on your unique financial situation and investment goals. With the right team and strategy in place, you can feel confident investing in turnkey rentals knowing exactly how you’ll eventually exit.

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