Turnkey Real Estate: When Is The Right Time To Buy A Turnkey rental?
The coronavirus pandemic has got many investors wondering what the future holds for real estate. The current economic uncertainty makes it difficult to answer the question “when is the right time to buy an investment property?” For turnkey real estate investors, the answer is even more complex, since it involves looking at both the real estate sales and rental markets to gauge the best timing for each stage of the turnkey process.
While it’s important to consider the life cycles of both markets when timing a buy and hold rental investment strategy, you don’t have to be an expert in macroeconomics to do this effectively. If you understand the long and short-term trends that affect your chosen market, you can decide when the best time is to buy and lease out a rental home in that area fairly easily.
Here are some tips on how to time purchasing and leasing a turnkey property to maximize the return on your investment.
Examine Real Estate Life Cycles
One way to think about the right time to buy an investment property is by looking at where your chosen market currently falls within the real estate life cycle. There are 4 phases in each cycle: recovery, expansion, hyper supply, and recession. These cycles are specific to individual metropolitan areas and types of properties, so look at data for your local area and the home profile you’re investing in (e.g. SFHs in Metro Detroit) to assess which phase the market is in.
If you’re planning on investing in turnkey real estate, you ideally want to buy at a time when property prices and interest rates are low, but demand for rental properties is high. Typically, investors see the recovery and recession phases as the best times to buy, since house prices are lower and there’s an opportunity for greater long-term equity returns.
However, waiting around for the next recession might not be the best strategy for timing a turnkey investment, because economic downturns will impact your rental income as well. While you may want to try to buy in a down market to get a better deal, your rental investment will perform better in an upcycle. Vacancy rates are higher and rents lower during the recession and recovery phases – so even if you buy at a lower price, it may take longer to realize ROI.
That being said, right now might actually be a good time to buy if you’re looking to find a deal on a turnkey property. Property sales have slowed and prices have decreased due to the global health crisis, so motivated sellers might be more willing to accept a lower offer.
However, finding a tenant for your turnkey rental will almost certainly take longer than usual in the current climate, so if you’re after immediate revenue, look for properties which are already tenanted. If you’re buying a property that has an active lease, talk to your property management company and ask if the current tenant can provide financial information regarding their ability to pay rent in the coming months.
Understand Local Economic Trends
Ideally you want to buy a rental property in an up-and-coming area, rather than one which has already peaked in terms of house prices and rents. You can research various economic indicators to find out whether a location is likely to see an increase in rental demand and prices in the future. Look for areas with a rising population and economic diversity, and which have plans for local infrastructure and business development, or neighborhood revitalization projects. All of these are good signs that point to a strong rental market in the future.
Take Advantage of Seasonal Swings
The real estate sales market has low and high points throughout the year, and the same is true for the rental market. During the summer months, there are roughly 50% more home sales nationwide than during the winter, meaning more competition amongst buyers. House prices are also at their highest in summer, and at their lowest during the months of January and February (8.5% lower than in summer, on average). This trend is even more pronounced in midwestern markets. In Detroit, for example, prices are 18% lower than average in January, and over 16% higher in July.
Summer is also peak rental season. According to SmartMove, there is 51% higher demand for rentals in summer than in winter, with the months of May-August seeing the highest number of tenant applications. Families are keen to move before the start of the school year, and better weather makes professionals more likely to go out and view properties.
Increased rental demand means that rental prices also peak during the summer months. RentHop collected the data from the top 10 metropolitan areas across the US for 2017-2019 and found that summer rents for a 2-bedroom apartment were 1.6%-7.1% higher than winter rents. So timing your turnover during these months could significantly impact the amount of rental income you receive over the course of an investment.
Buying in winter and renting in summer thus can provide the best of both worlds, and it doesn’t have to mean allowing for a 6-month vacancy period. If you want to buy a turnkey property in December, but time the yearly rent contract to begin in June, you can search for tenanted houses with a summer start date on the existing lease. Alternatively, if the current tenant’s contract is set to renew out of peak season, you can sign a 6 or 18-month lease instead, so that your next turnover will fall in summer, rather than winter.
As they say, timing is everything – and when it comes to property investments, this ultimately translates into higher returns in the long run. Your property management company will be the one handling the rental side of your turnkey property, but you can help set yourself up for success by using these tips to plan the best timing for both your purchase and lease contracts.