There has long been a debate in the real estate investing industry about the benefits and drawbacks of turnkey properties, with people on either side of the argument very passionate about their stance. Now, a new way to invest and operate rental properties has emerged in Roofstock, an online platform that allows you to invest in single-family rentals (SFRs) with more transparency and flexibility.
What is Turnkey Real Estate?
Traditionally, a turnkey rental company is a company that purchases distressed properties, rehabs them, and sells them with property management in place. The goal of turnkey rental companies is to offer investors immediate cash flow and take the workload out of vetting, updating, and managing properties. Essentially, investors “turn the key” on these properties in terms of ownership. While the workload is significantly less, sometimes turnkey investments offer lower returns in poor markets.
What is Roofstock?
Recognizing the investment opportunities as well as the setbacks that turnkeys offer, Roofstock created an innovative platform to connect investors to cash flowing properties and local property management services. Unlike traditional turnkey companies, Roofstock does not own or operate their rentals. Let’s see how this difference plays out for investors in terms of price point, location, and property management.
Turnkey companies have a reputation for overpricing their properties sometimes by 30% or more. The truth of the matter is some turnkey companies do overprice their properties, yet you can and should do your own due diligence by getting an independent appraisal. If the appraisal comes back with the property priced over market value, you can either negotiate or walk away.
Here, however, is where turnkey price point has an impact on your investment strategy: the higher initial investment will take longer for you to see an increase in market value. It's only advisable to consider purchasing a traditional turnkey if you plan on holding onto the property long-term.
Through Roofstock, the seller determines the price of the property with the help of an Account Executive and a full valuation report, which includes home condition, historical sales, and market comparables. Since Roofstock vets properties, not renovates them, many invest-ability factors are taken into consideration prior to listing on the site.
In fact, Roofstock only accepts 15% of all submitted listings due to their stringent guidelines. Roofstock's business model relies on their ability to build a reputation based on their valuations and assessments of their properties being as accurate and fair as possible. Because of their proprietary certification process, Roofstock is able to offer you only the best rental properties in the low effort category that fit your investment strategy and needs.
Many turnkey companies sell you the property under their management or chosen management. This means it is a requirement that you use their services. The service fees vary, but Fit Small Business, a digital resource for small businesses, found a range from 8%-20% in property management fees across 12 traditional turnkey companies. Eight percent is considered high, but it comes down to the amount of ongoing effort you plan on putting into each property and the economics going forward.
Often, you might like the company, their pricing, and would be happy to work with them. However, if you have another company you want to work with or manage yourself with property management software, that probably won’t be an option for you.
With Roofstock, you get to select your own property management method, whether it is a company, a software, or you entirely manage the property yourself. If you are interested in finding a new property management company, Roofstock vets property managers in all their areas and only works with ones who have:
- Necessary licensing in good standing
- Responsiveness and transparency
- Historical portfolio performance
- Reporting and data capabilities
- High-quality referrals
They further work to get you preferred pricing as a Roofstock customer and build a relationship.
One of the benefits of investing in turnkey rental properties is the ability to invest all over the country and diversify your portfolio. However, we recommend investing in areas you know intimately well, or at least that you perform your own research on a location when purchasing a turnkey rental. Often, turnkey companies buy multiple distressed properties in one area, which by default will be in distressed neighborhoods where people cannot afford higher rents.
Every Roofstock listing comes with a Roofstock Neighborhood Rating, which measures key attributes including the school district, home value, employment rates, crime, and more. Roofstock Neighborhood ratings are 1-5 stars, with a 3-star neighborhood having decent schools, above-average income levels, and a blend of newer and older homes.
As always, your own examination and expertise are key, but the Roofstock Neighborhood Rating is helpful and offers guidance based on your investment strategy. For instance, Roofstock’s 1-star neighborhood ratings are the greatest risk but might come with the highest reward.
A New Way to Invest
More or less, Roofstock is similar to turnkey companies in the investment style and process. However, as a third-party platform, Roofstock has another level of transparency and data that can make you feel secure in your investments. Roofstock is a fantastic way to find new properties and grow your rental portfolio.
If you’re interested, you can sign up on Roofstock for free here. For more investor tools and resources, visit our blog. Don't forget to partner with us for your next investment property loan.