In many markets, real estate values have climbed to record highs, leaving some investors priced out of the market. Some don’t want to give up on real estate investment altogether, so they’ve turned to an alternative strategy: buying “turnkey” rental properties in undervalued markets.

Several third-party “turnkey” providers have sprung up recently to meet increased demand. However, is this a wise investment strategy, or is it all just a cleverly marketed gimmick? Let’s take a look.

What are “Turnkey” Properties?

When we use the term “turnkey property,” we are referring to the loosely defined investment strategy in which the investor buys, rehabs, and manages a property through a third-party. The process of working with a third-party typically looks something like this:

1. Finding a property. The company will help you identify and build a portfolio of properties that meet your personal investment goals. Some offer a pre-vetted database of properties for your consideration.

2. Funding the investment. Turnkey providers will help you evaluate a range of financing alternatives depending on your circumstances and goals.

3. Acquiring the property. Once you’ve identified the property you’d like to purchase, the turnkey provider will assist with all paperwork, home inspections, appraisals, loan documents, etc. They act like real estate agents but specialize in working with long-distance buyers who want to take a hands-off approach.

4. Renovating the property. If a property needs renovations or maintenance of any kind, the turnkey provider will typically manage this process for you.

5. Property management. Turnkey providers help stabilize a property by finding tenants, etc. and then handle the day-to-day operations for owners.

Generally speaking, most turnkey firms will charge around a 3% fee for property acquisition, and then anywhere from 7% to 10% for ongoing property management.

There are hundreds of turnkey firms across the U.S., and no two are exactly alike. Some will buy, rehab, rent and THEN sell a property to you (an investor). Others specialize in helping you find cheap properties (as low as $20,000) that need renovation and then will help manage those renovations for you. The range of services can vary greatly, so always be sure to research turnkey providers thoroughly before you commit to anything.

Buyers Beware

There has been an explosion of turnkey providers over the past decade, and not all are legitimate. Some target uneducated buyers and sell the promise of a stress-free, cash flow generating investment opportunity.

As it turns out, many of these turnkey providers are expert internet marketers—not expert real estate professionals. Many don’t even know how to manage the properties professionally that they’re selling you.

Here are a few warning signs that a company may not be legitimate:

· Inexperienced operators. Find out how long the company has been in business, where they’ve invested in real estate, how many buyers they’ve worked with, etc.

· Lack of direct investments. Has the company invested in its own portfolio of rental properties? If so, what types of returns are they getting? If the company doesn’t own and manage its own rental properties, how will they know how to look after yours properly?

· Weak support structure. Is the person who’s selling you on the investment the same person responsible for property acquisition, rehab, tenanting and maintenance? If so, that’s an indication that there’s a weak support structure in place. Legitimate turnkey firms typically have a deep bench with professionals of varying expertise.

· Shoddy renovations. Before going into business with a turnkey company, take the time to tour a few of the other properties they manage. What condition is the property in, and have renovations been done correctly?

· Rental guarantees. Experienced real estate investors know there is no such thing as a “rental guarantee” – a property may be more or less likely to rent quickly, but there’s no guarantee that it will be rented at the price the turnkey operator has stated. Spend some time doing your own market research.

· Overpriced properties. Similarly, spend some time researching the local market. Turnkey providers are notorious for selling overpriced homes to out-of-state investors who are used to expensive real estate markets. A house that sells for $200,000 might seem like a bargain compared to your pricier market area—but if local comps are selling for half that, then there’s a good chance the turnkey company is duping you.

To Buy or Not to Buy

Ultimately, the decision as to whether or not you should invest in turnkey rental properties is a personal one. Your experience in the real estate industry, knowledge of local markets, and investment objectives should all influence your decision.

Turnkey rentals can be a great way to diversify your portfolio, especially if you’ve been priced out of the local market. However, be cautious about whom you invest your money with – always, always do your due diligence before committing to a specific turnkey provider.

No investment is foolproof. However, keep in mind that rental property is highly illiquid. Turnkey properties are often easier to buy than they are to sell, so be sure to prepare your exit strategy in the event things don’t work out as initially planned.