When exploring investing in real estate, people starting out can sometimes get sidetracked with all of the terminology. Real Estate acronyms and terms can be intimidating, however once you learn the lingo, entering the world of rental property investing can be a tremendous way to build wealth and financial freedom.
One such word that many aspiring investors may not know is “turnkey” and might even be too scared to say something when hearing advice to invest, let alone find a loan, agent, et cetera, in “turnkey rental properties.” However, the term isn’t complicated. It simply means “rent-ready” or in livable, good condition from day one! The term comes from the idea that all the investor needs to do is “turn the key in the door” to get started, with no renovations, dirty work or inspection or certificate hassles to worry about.
In some cases, a turnkey rental property may even be a property that is for sale that is not only in great condition day one, but already leased with a tenant in place paying rent from the start as well! As such, these truly turnkey rental properties are very popular for real estate investors that are just starting out and want as many things taken care of as possible for their first investment (no need to worry about learning everything involved with real estate investing on deal number one). In addition, many real estate investors that aim to build wealth through real estate more passively, like in addition to a full-time career, may prefer to save the time and energy required to find, screen and negotiate with tenants or pursue more time-intensive strategies such as the BRRRR Method or fix and flips.
Turnkey rental property investing can be a great strategy for newbie and large portfolio mogul alike. However, when it comes to finding rental property loans to finance these purchases, its important to understand the nuances and differences between the loan options for turnkey rentals and other types of investment properties, such as distressed properties for the BRRRR strategy or flips, or conventional mortgages you may be used to for buying your primary residence.
Are Turnkey Rental Properties Worth It? Key Metrics to Evaluate when Buying Turnkey Rentals!
Evaluating turnkey rental properties comes with a different set of key metrics and data points than other types of investing. When buying non-turnkey properties, such as distressed homes for flips, key metrics include things such as After-Repair Value (ARV), with the biggest focus on unlocking value in the property through renovations.
While investing in turnkey rentals can also provide returns through value appreciation (Per CNBC, average home prices in the United States have increased 48.55% in the past 10 years!), many investors that pursue this strategy are focused on cash flow. Especially for rental properties that come leased to tenants paying rent when the sale closes!
Net Operating Income (or Net Cash Flow)
Net Operating Income (NOI) or Net Cash Flow (NCF) can be defined differently among real estate investment classes, but generally means the monthly amount of dollars of profit received on a rental property – the revenue (from rents) less all of the expenses associated with the property that’s not paid by the tenants, such as property taxes, insurance, repairs and any financing costs (mortgage payments).
This is the most basic metric of evaluating returns on turnkey rentals, and can often be the first thing investors use as a filter to begin searching for rental properties.
Rent-To-Income Ratio
Rent-to-Income Ratio is an important metric when evaluating rental properties particularly when your top focus is cash flow. Cash flow comes from tenants paying rent and thus relies on properties being leased as much as possible and at highest rents as possible. However, smart real estate investors look beyond immediate rental rates and leases, which typically run for no more than 12 months in most markets.
Rent-to-Income ratio compares market rents to the median income of a market. It is essentially a measure of how affordable the market rents are for potential tenants. Cash flow can disappear quickly if its tough to find a tenant. But even with tenants in place, cash flow only occurs when the tenants pay their rent. Which as most real estate investors know, is never truly guaranteed. One of the ways investors evaluate the likelihood of leasing their rentals and getting paid is looking at the job market of their property’s location. When incomes are strong and well above market rents, then it is likelihood of safe cash flows are increased.
Rent-to-Income ratio thus is a powerful tool for turnkey rental investors as it shows how “safe’ the cash flows are when looking at the average tenants ability to pay market. Generally, real estate investors consider whats called the “30% Rule,” when looking for properties to invest in. This means that the best turnkey rental properties will be in markets with Rent-to-Income Ratios of 30% or less.
Cash-On-Cash (CoC) Return
Cash on Cash Return is a top concept and metric for real estate investors to truly understand the profitability and returns on their investments. It also showcases the power of leverage in real estate.
What is Cash-On-Cash Return? Its simply the Annual Cash Flow earned from a property divided by the Total Cash invested in said property.
Cash Flow / Cash Invested
Basically, real estate investors, especially when evaluating how to best buy turnkey rentals, want to maximize the cash flow they earn from their rental properties, while minimizing the cash (capital) they invest in purchasing/owning the property.
Two Examples:
Example 1:
Investor purchases $500,000 property all in cash, and earns $50,000 in rental income with $5,000 in expenses (taxes, ins. et cetera).
His cash flow is $45,000.
His C-o-C return is 9% ($50,000 – $5,000)/$500,000.
Not Bad.
Example 2:
Investor purchases $500,000 property with a $400,000 loan (and $100,000 of his own cash). He earns $50,000 in rental income with $5,000 in expenses and $30,000 in debt service
His cash flow is $15,000
His C-o-C return is $15% ($50,000-$5,000-$30,000)/$100,000
Better.
So Example 1 = $50,000 Cash Flow, 9% Cash on Cash Example 2 = $15,000 Cash Flow, 15% Cash on Cash But isn’t $50k better than $15,000? Yes, but with that same $500,000, the investor can purchase 5 properties instead of just 1 and earn the $15,000 on each. Total Cash Flow = $75,000
Not only will investor two get more cash flow ($75,000 vs. $50,000), they will have five properties instead of one AND see 100% of any appreciation!
Bottom Line – this is why cash-on-cash return is so important to truly optimize real estate investing, just looking at cash flow is no bueno and you can miss out on huge opportunities.
How To Buy Turnkey Rental Properties that Maximize Cash Flow and Cash-on-Cash Returns.
Based on the above, its easy to see how real estate investors can utilize turnkey rentals to build great returns in real estate. However, not all returns are equal and the importance of not only cash flow, but maximizing your capital through maximizing cash-on-cash returns is clear.
Thus, choosing the best financing, or loans, for your rental properties is of utmost importance. The next section will illustrate how rental property buyers are finding success with DSCR Loans, which are well-suited for the turnkey strategy for their easy qualification requirements and flexibility around qualification through rental income rather than personal income.
Loans for Turnkey Rental Properties: DSCR Loans
Buying rental properties is always going to be different, and require different financing strategies, than buying a home to live in or a property in rough condition needing repairs. This is especially true when it comes to turnkey properties that are already rented, the most popular real estate investors buy these rentals.
DSCR Loans are defined as “mortgage loans secured by residential real estate turnkey properties strictly used for a business purpose and underwritten primarily based on the property”:
So when an investor looks to qualify to purchase a turnkey rental property, qualification is primarily going to be based on the property’s cash flow rather than personal income, like a traditional mortgage loan that qualifies the borrower based on metrics like DTI, or Debt-To-Income Ratio. So when applying for a DSCR Loan to buy a rental property, the lender is going to look at the DSCR Ratio, comparing the property’s rental income to the property expenses.
Not only will DSCR Lenders be okay with properties that are already leased when purchased, it is often preferred even, as these loans are strictly made for rented and cash flowing investment real estate. Investors looking to maximize cash-on-cash returns through turnkey rentals love DSCR loans because it is easy to get a loan for a rental with only 20%, or even just 15% down with some lenders!
Easy Street Rental Loans – The Best DSCR Lender for Buying Turnkey Rental Properties?
While there are many DSCR Lenders to choose from, Easy Street Capital tends to stand out from the flock when it comes to loans for investors looking to buy turnkey rental properties? Why? While there are many options to choose from, Easy Street’s EasyRent DSCR Loan Program has some really attractive features for turnkey rental buyers. These standout features include:
Rates starting at just 5.50% for DSCR Loans – these are some of the lowest interest rates in the industry, and can make all the difference in getting positive cash flow when hefty debt service costs can make or break deals. RS Note – add to running list of things that need to be updated when we change rates
LTVs up to 85% for Acquisitions – generally investors utilize the standard 20% down (or 80% LTV) loans to buy rentals to maximize cash flow and returns, however for investors that aim to minimize capital outlays, Easy Street is the rare DSCR Lender with 85% LTV DSCR Loans available!
Rent Qualification for Over-Market Rents This aspect of Easy Street’s underwriting and qualification may only seem important for sophisticated and experienced investors with multiple DSCR Loans under their belts, but can be a key difference maker to get some deals done. Typically, DSCR Lenders will qualify the DSCR Ratio using the lower of the in-place rent and the “market rent” as determined by a third-party appraiser. This means, even if a property is rented at, for example, $2,000 per month, if the appraisal deems the market rent to be $1,500 per month, the loan must be qualified based on the lower, “market rent” number.
Easy Street Capital however, is a forward-thinking and common-sense lender that understands that sometimes appraiser’s estimates can be off, and seeks to make loans that make sense, especially ones that have strong leases already in place showing the cash flow in real life! As such, Easy Street will utilize a qualification approach of the lower of “in-place rent and 125% of market rent,” which gives more credit for in-place rental income that overshoots estimates of market. So in this example, Easy Street will use $1,875 to qualify (125% of $1,500), a solid common-sense estimate between the in-place number and the appraiser’s guess of market. This approach, especially in tight markets with little room for error, can make the difference between getting financing to make the buy and losing the deal!
Ready To Get Started?
Have your eye on a turnkey rental property to buy, or simply would like to learn more about Easy Street’s DSCR Loans for future investing? Request a Term Sheet or book a call with one of our turnkey rental loan specialists today!
Disclaimer: The information provided in this article is not intended as financial or legal advice of any kind. Regulations regarding short-term rentals are subject to change and all investments are subject to risk. Information included in this article may contain information that has not been verified by licensed attorneys and should be subject to independent verification. Readers are advised to consult with qualified legal or financial professionals prior to investing in real estate investment properties.
About the Author
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