There’s no getting around it — every investment involves risk. Wiring your deposit money can be nerve-wracking, especially for first-timers. It can be hard to shake the feeling that you’re making a big mistake with a large amount of money. This is especially true when buying turnkey real estate you have never seen, several states away. In this article we will show you how to reduce your risks when buying a turnkey rental property.
But unlike the stock market, which is completely unpredictable, real estate — especially turnkey real estate — offers you several avenues to reduce or control your risk, without reducing your exposure to profit or even costing you any extra money (insurance, emergency funds, option fees, etc.)
Here are five ways to reduce your risk when buying a turnkey rental that don’t cost you any extra money …
1. Research the Market
Real estate is a highly localized industry. Even a weak property will do well if it’s in a good area. If you’re thinking of investing in a particular market, learn everything about that market you can.
Information breeds confidence. Find out if people are moving there, if companies and jobs are moving there. Look for news articles about the local economy.
Consider setting up interviews with local professionals. Be wary of realtors — they will definitely want to talk to you, but they tend to be cheerleaders for the market because they only get commissions if you do deals there. Property managers or contractors are a better source, because they actually have to run the deals you do there.
If you have a particular neighborhood in your sights, check the area amenities on Walkscore.com, the average market rent on Rentometer.com, the crime heat map on Trulia.com.
2. Partner with a Reputable Turnkey Rental Provider
On easy and free way to reduce the risk of your turnkey rental property purchase is to partner with a reputable turnkey provider. If only we had one to recommend you …
But seriously, folks, MartelTurnkey has been in business for over six years. We have testimonials and reviews online attesting to the quality of our work. We’re in this for the long haul and have no interest in jeopardizing our reputation by selling you a lemon. This isn’t rocket science.
Just as you can reduce the risk of further damage to your car by choosing a reputable mechanic, partnering with a reputable turnkey provider is the best investment in peace of mind you can make. The first few deals may be nerve-wracking, but once you get comfortable with the provider (and hooked on the cash flow and increasing property values), you’ll get to the point where you’re buying deals as quickly as you can raise the money.
3. Check the Property’s Condition
One of the biggest risks of purchasing real estate is the secrets that might be hiding in the bones of the property. Every buyer fears a major system failure — a collapsed roof, a flooded basement, etc. — rearing its ugly head while the ink is still drying on the mortgage contract.
The remedy is to verify the property’s condition before you buy. How can you do this with a turnkey rental property you don’t plan to visit? Several steps:
The Property Inspection. This is a standard part of any property purchase, and it doesn’t require you to be there. The inspector will furnish you with a detailed report, accompanied by photo evidence.
The Renovation Contracts. Most turnkey rentals have been extensively renovated, and the provider will provide you a list of all the work that was completed. Photos provide good evidence of the work and city inspection certificates (when required) help clarify things
Boots On The Ground. This is supposed to be about how to reduce risk with no extra cost so I don’t want this to be about hiring help, but if you happen to have friends or family in the area — or someone you can barter services with — have them visit the property for you to verify its condition. Just remember to pick someone who isn’t affiliated with the seller or turnkey rental provider so they have nothing to gain by misleading you.
That being said, eventually something always breaks in every property. It is inevitable. Whether it happens in Year 1 or Year 10 is only a question of how long you have to save up a contingency fund to cover it. At MartelTurnkey we always recommend you have a cushion for unforeseen situations.
So although this article is about not spending extra money, it bears repeating — have a contingency fund from the get-go. We discuss how to do that here. A property can suffer tens of thousands of damages and still be wildly profitable over a 5-10 year time horizon. If you have the cash cushion to get you through it, you’re still in great shape.
4. Check the Financial Documentation
The physical condition of the property isn’t the only thing to verify — you should also consider the financial condition.
Check documentation for every bill you will be responsible for. Look up property tax records. Ask to see every service contract. Call insurance agents and find out what it will cost to insure this property so there are no surprises. If there is a tenant in place, examine the lease. If anything is a mismatch, ask questions until you are satisfied with the answers.
5. Target Positive Cash Flow on Day One
Positive cash flow is about more than just financial freedom. Cash flow is liquidity. Cash flow gives you options. Positive cash flow reduces risk.
So if you’re buying a turnkey rental property, you can de-risk your investment by targeting a property that has positive cash flow on Day One — no deferred maintenance, a tenant in place, enough rent coming in to cover all the projected expenses, including the mortgage payment.
What if you don’t intend to have a mortgage? What if you’re buying all cash? With no mortgage payment it’s certainly a lot easier to achieve positive cash flow and reduce your risk.
But if you want to still adhere to the principle of de-risking your investment, follow the “75% Rule” — do the math as if you were borrowing 75% of the purchase price. If the math returns positive cash flow, you’re taking a pretty minimal risk, even with a mortgage … which means you have very little risk as an all-cash buyer.
Ready to invest? MartelTurnkey has a sterling reputation in the Turnkey Rental industry, with the results and testimonials to back it up. We are always replenishing its inventory of fully-renovated, tenant-in-place rental properties in strong markets ready to produce cash flow on Day One. The next one could be yours! See what properties we have available right now.