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Turnkey Investing 101: Breaking Down the Numbers for Smart Real Estate Plays

Posted by Equity On Repeat on October 16, 2023
Real Estate Numbers

So you’ve decided to dip your toes into the world of turnkey real estate investing, huh? Smart move. Turnkey rentals can be a great way to build wealth over time without the hassle of being a landlord. But before you take the plunge, you need to understand the numbers. What kind of cash flow can you expect? What’s a good return on investment? How much will you need to put down, and what financing options are out there? This article will break down the essential financial metrics you need to evaluate any turnkey deal. By the end, you’ll feel confident crunching the numbers on properties and knowing when an opportunity is too good to pass up or when it’s better to walk away. Knowledge is power, and in the world of turnkey real estate, it can mean the difference between a stellar investment and a money pit. So grab your calculator and let’s dive in!

As Always, Number Are KING

Turnkey real estate investing means purchasing rental property that is ready to rent out upon acquisition. The term “turnkey” means you can purchase the property and immediately begin earning income with little hassle. The seller has already found the property, negotiated the deal, and prepared the property so you can start making money right away.

As an investor, the numbers are key. You’ll want to analyze the projected cash flow, return on investment (ROI), and financing options to determine if the investment makes sense. For cash flow, look at the rental income minus expenses like taxes, insurance, maintenance, and property management fees. For ROI, calculate the annual rental income plus any appreciation in the property value minus your initial down payment and closing costs.

Financing options for turnkey properties include traditional mortgages, private money loans, commercial loans, and seller financing. Buyers typically put at least 20-25% down. Some turnkey companies offer financing assistance to help investors get into deals.

The main benefits of turnkey real estate are simplicity and speed. You avoid the hassles of finding and renovating a property. Turnkey companies have already vetted the deals, put in the work to rehab the properties, and have a property manager in place. All you have to do is buy, sit back, and collect rent checks. The trade-off, however, is potentially lower returns since you’re paying a premium for the convenience.

For many investors, the ease of turnkey real estate is appealing. While the numbers may be slightly lower, you can build wealth through rental income and benefit from long-term appreciation — all without the usual headaches of being a landlord. For a hands-off way to invest in real estate, turnkey properties are an attractive option.

Analyzing Cash Flow for Turnkey Investments

Analyzing the cash flow for a turnkey investment property is key to determining if it will be a good investment. The cash flow a property will generate should be enough to cover your financing payments with some left over. Most lenders want to see that a property will generate at least 125% of the monthly mortgage payment in rent. As with any real estate investment, you want to make sure the numbers work in your favor. Some things to consider:

Monthly Rent
The amount of rent the property can generate each month is the basis for your cash flow analysis. Do some research on comparable properties in the area to determine an average and realistic monthly rent. You want to be sure that after expenses, the rent will provide positive cash flow and a good return on your investment.

Consider both fixed expenses like the mortgage payment, insurance, and property taxes as well as variable expenses such as maintenance, vacancies, and property management fees. Make conservative estimates for expenses to avoid underestimating costs. It’s best to overestimate expenses and be pleasantly surprised.

Cash Flow
Subtract the total estimated expenses from the potential rental income. The result is your monthly cash flow. As a general rule of thumb, aim for at least $200 to $500 per month in cash flow for a single-family home. The higher the cash flow, the better.

Calculating ROI for Turnkey Rental Properties

To determine if a turnkey rental property will be a good investment, you need to calculate the potential return on investment or ROI. ROI measures how much money you make on a property versus how much you put into it. The higher the ROI, the better.

To calculate ROI, you’ll need to know:

  • The purchase price of the property
  • Closing costs like appraisal fees, inspection fees and title insurance
  • Annual operating expenses like property taxes, insurance, maintenance and repairs
  • Expected annual rent

Once you have all these numbers, here’s the formula:

ROI = (Annual Rent – Operating Expenses) / (Purchase Price + Closing Costs)

For example, if you pay $200,000 for a house with $5,000 in closing costs, annual rent of $15,000 and $4,000 in expenses, your ROI would be:

($15,000 – $4,000) / ($200,000 + $5,000) = 11%

An ROI of 8-12% is typically considered good for turnkey rentals. The higher the better, but don’t get lured in by deals that seem too good to be true. They probably are!

By analyzing the numbers and ensuring the cash flow and returns meet your investment goals, you can feel confident that a turnkey rental property will be a smart investment. Be conservative in your estimates, understand your financing options, and make sure the cash flow and ROI justify the investment. Finding the right balance will set you up for success as a turnkey real estate investor.

Financing Options When Evaluating Turnkey Property Deals

When it comes to financing turnkey real estate, you have several options to consider. Each has its pros and cons, so evaluate them based on your investment goals and risk tolerance.

Paying in cash means no debt and full ownership of the property. You avoid interest charges and payments, keeping more money in your pocket each month. However, using only your own money exposes you to more risk if the market changes. It also ties up your capital, limiting funds for other investments.

Conventional Mortgage
A standard mortgage from a bank or lender is a popular choice for turnkey investors. You can put down as little as 20% of the purchase price while the lender funds the rest. Interest rates are usually reasonable, and payments remain fixed for the life of the loan. The downside is that you’re on the hook for those payments each month, even if the rental income changes. You also face penalties for early payoff.

Hard Money
For a quick close, hard money lenders provide short-term loans at higher interest rates, often with more flexible terms. You can get 65-75% of the purchase price, but must pay off the loan within 6-24 months. Hard money allows you to act fast on a deal, but the high rates reduce your cash flow. It’s best only for experienced investors who can rehab and flip the property quickly.

Newer options like real estate crowdfunding websites let you raise money from multiple private investors instead of a bank. You give up some ownership and control in exchange for equity to fund your deal. Crowdfunding opens you up to more people but also more opinions on how you should operate. There is also a chance investors may want to exit early, forcing you to buy them out or sell the property sooner than planned.

Evaluate the pros and cons of each choice based on your own financial situation and investment goals. The right financing option for your turnkey deal can make or break your success and returns. Do your homework to pick the one that gives you the most advantages with the least amount of risk.

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