Young people are investing in real estate — just not the same kind as their parents
Millennials and younger members of Gen X appear to be delaying the financial responsibility of homeownership.
But it's hard to blame a group who watched the housing market skyrocket and plummet just as they were entering college or becoming young professionals gearing up to buy a starter home.
As the economy improved, and financial arrested development started to end, some 20- to 30-somethings have started to invest in real estate, but not in the traditional sense.
Many have turned to turnkey properties, which offer the opportunity to become a homeowner while adding another revenue stream to an investment portfolio.
Jay Dao, a 30-year-old engineer who lives in Santa Clara, California, felt priced out of the market in the Bay Area, so he turned to investing in more affordable regions and now owns properties in Chicago and Indianapolis.
"Turnkey investing is a much more passive form of real estate investing for busy professionals or investors who simply don't want to put in that much work themselves, but still would like to own rental property," says Dao, who chronicles his adventures in real estate on the blog FIFighter.com.
Buying for short-term housing, long-term investment
Unlike house-flipping that might require significant repairs to make a home livable, a turnkey investment is typically ready to rent the day it's purchased.
Mario Bonifacio, 34, used a turnkey investment initially as a place to live when he arrived in Fort Hood, Texas, as a young soldier, but he bought with the forethought of renting it out in the future.
"I figured out that the best way to take advantage of high rent and low real estate prices wasn't just to own a home to live in; it was to own a building with enough units to rent out to others," Bonifacio says.
Today, Bonifacio owns turnkey properties in Foot Hood and Killeen, Texas, as well as Des Moines, Iowa, while he lives in New York City.
A turnkey property should generate cash flow from day one.
How to buy a turnkey property
Buyers can go through a real estate agent or a turnkey company. Just note that the process is research heavy and requires a lot of time upfront.
Investors identify where they plan to purchase property and then contact a company to get a properties packet listing the available homes in an area. An investor should do due diligence and actually visit the area, properties and the turnkey company itself.
Once an investor finds and vets a property, he or she can either enter into negotiations with the turnkey company or move straight into the closing process.
"With turnkeys, a standard condition to closing is to have the property leased up with a paying tenant in place before the buyer closing escrow," Dao says. "In other words, the property should be ready to generate cash flow for the owner as soon as day one."
You can create your own turnkey property.
Making a property turnkey on your own
Going directly through a turnkey company may be the simplest way to invest in real estate, but it isn't the only option for owning a turnkey property.
"I actually purchased each home on my own and then went about the process of making them as turnkey as possible," says Sandy Smith, 37, who lives in Queens, New York.
Smith purchased two properties in Wilkes-Barre, Pennsylvania, and then went through a number of management companies in order to find one that suited her needs. Her current management company handles almost every aspect from cutting the grass to ensuring mortgage payments are made.
"I am only ever involved if a repair will cost more than $500," says Smith, whose rentals make up about 30 percent of her total investment portfolio.
Any real estate investment can be risky.
Any investment comes with an element of risk.
Turnkeys sound like a dream investment with a guaranteed return, but no investment is foolproof.
Smith is experiencing taxes rising at a rate faster than she can increase rental rates to offset the cost.
Dao has experienced the typical loss of money that's part of owning any rental property: vacancies, maintenance and tenant turnovers.
Bonifacio dealt with being underwater on one property for a few years after 2008, but he held on to the place and it continued to bring in rent while the property lost value.
Any turnkey investor should have an emergency fund buffer to handle the potential financial strain of owning multiple properties.
And keep in mind there are no magical investments. Buying a turnkey property requires a lot of research, a significant chunk of money and a most valuable commodity — time. Anyone interested in investing in a turnkey property needs to be on the lookout for scam artists and perform their due diligence before taking the keys.
"Rental property is highly illiquid, and it can be much easier to buy than it is to sell," Dao says. "The only way to really minimize risks is to invest in quality."
Source: Business Insider, Erin Lowry, May 26, 2015