Turnkey properties and fixer-uppers involve two different approaches to real estate investing.
Your investment portfolio may eventually involve a mix of both types of properties. But what should you start with when you don’t yet have as much investment experience?
In this article, we will explore the pros and cons of turnkey properties and fixer-uppers to help you determine which type better suits your current investment goals. We’ll also explore which loan options are best for each property.
What is considered a turnkey property in real estate?
A turnkey property is ready for you to “turn the key” over to the tenants immediately after purchase.
Turnkey properties are in good condition and often do not require any updates or renovations—and if they do, they are minimal.
They typically are well-maintained and up-to-date on safety and legal standards.
Turnkey properties are attractive to investors who prefer a more passive approach to real estate, or those who want to start generating rental income quickly without the time and effort required for extensive renovations.Get started with Park Place Finance
What is a fixer-upper?
A fixer-upper, on the other hand, is a term used to describe a property in need of significant repairs or renovations.
These properties often have not been well-maintained, and they may require significant repairs to the roof, plumbing, electrical systems, or foundation.
Fixer-uppers may also have outdated features, including old appliances, inefficient heating and cooling systems, or obsolete design elements.
Investors who are interested in fixer-uppers are willing to take on the challenges of renovation projects to add value to the property.
Turnkey properties vs. fixer-uppers: Pros and cons
Since these properties are at opposite ends of the investment spectrum, they suit different investor goals, needs, and interests.
To help you decide which property type better suits your current needs, let’s take a look at the pros and cons of each.
Turnkey property pros and cons
- Turnkey properties are move-in ready, which allows investors to start generating rental income immediately.
- Investors won’t need to invest significant time, money, or effort in renovations or repairs because the property is already in good condition.
- Investors can more accurately predict their rental income and potential appreciation.
- There is less of a risk of unexpected costs or complications that are commonly associated with renovation projects.
- Turnkey properties come with higher upfront costs due to their condition, which can potentially lead to lower profit margins compared to buying a distressed property.
- The property may have already reached its peak value, meaning it may have limited potential for significant future appreciation.
Fixer-upper pros and cons
- Fixer-uppers are often much more affordable than turnkey properties.
- Buying a property below market value and adding value via renovations can lead to higher potential profits.
- Investors can customize the property according to market demands and preferences.
- Savvy investors who fix up a property in an up-and-coming neighborhood could potentially benefit from higher appreciation over time.
- Renovation projects come with higher risks, such as unexpected costs, delays, or the potential to exceed your budget.
- Fixer-upper projects could take a long time, and during this period the property will not be generating rental income.
- Renovation projects require the investor to be well-versed in construction, local building codes, market trends, etc.
- Fixer-upper projects can be challenging if you’re not prepared for the work that’s to come—or financially unprepared for the period when you’re not generating income.
How to determine which property type is best for you
Ultimately, the decision between a fixer-upper vs. a turnkey property is based on the investor’s strategy, risk tolerance, financial situation, skills, and interests.
Some investors genuinely enjoy the fixer-upper process, while others simply want to add another property to their portfolio and start generating income immediately so they can move on to the next.
Some investors prefer the stability of turnkey properties, while others seek the potential for higher returns through fixer-uppers.
Both are valid investment options that align with specific goals.
Which investment loan should you use for each type of property?
Turnkey and fixer-upper properties require different loan types to finance the unique purposes of each.
A turnkey property requires a loan to purchase and hold the property long-term, while a fixer-upper property requires a loan that covers the costs of purchasing a property and renovating it.
Park Place Finance offers hard money lending solutions that fit various investor needs, including rental properties and fixer-upper projects.
DSCR loans for turnkey properties
A debt service coverage ratio (DSCR) loan is perfect for purchasing a turnkey rental property for long-term use.
DSCR loans provide 30-year fixed-rate loans without using a borrower’s tax returns or personal income to qualify.
Instead, DSCR loans are focused on the property’s cash flow rather than the investor’s finances.
To qualify, investors should have a DSCR of at least 1.00, but a ratio of at least 1.25 is ideal.
You can calculate your property’s DSCR using the following formula:
DSCR = Net operating income / Total debt service
A ratio of 1.25 means that your property brings in 25% more per month than the principal, interest, taxes, and insurance (PITI) payment.
Turnkey properties have the potential for a strong DSCR because they are move-in ready, and investors can adjust their rental rates as necessary to achieve the best DSCR.
Fix-and-flip or fix-and-hold loans for fixer-uppers
Depending on your long-term goals for your fixer-upper project, you may need either a fix-and-flip loan or a fix-and-hold loan.
Fix-and-flip and fix-and-hold loans are short-term loans that cover the costs of purchasing a fixer-upper property and “flipping” or renovating it for sale or rental purposes.
Fix-and-flip/hold loans are based on the after-repair value (ARV) of a property, rather than the borrower’s income and employment history.
Both DSCR and fix-and-flip loans are hard money loans, which are secured by tangible assets. They also both require detailed project information and an exit strategy.
The loan experts at Park Place Finance can walk you through your full range of options and the requirements for each type of loan.
Discuss your options with Park Place Finance
Ready to move forward with a turnkey or fixer-upper property?
Park Place Finance loves helping investors with these types of projects.