Have you ever wanted to start investing in real estate? Maybe you've had an idea, but then you get scared about what it actually means to own a property. What about the work? Finding tenants? All of it? That's where turnkey real estate investing comes into play.
Turnkey real estate investing is the concept that you're buying a property that's "turnkey" - meaning it's ready to go, and may already have tenants in it.
The downside of turnkey real estate investing is that the returns are typically a bit lower than other forms of real estate investing - but the big upside is that all (or most) of the work is done for you. That can be huge for entry-level real estate investors.
But in this changing marketplace, is real estate still even a good investment? I sit down with Zach Evanish from Roofstock to ask some tough questions and help you understand the real estate market a little better.
Meet Zach Evanish
As Director of Retail, Zach Evanish has helped shape the growth trajectory of Roofstock’s retail marketplace since the company’s founding in 2015. By building a team of real estate experts that works directly with both buyers and sellers, Roofstock has built a platform for rental property investors that leads the industry.
If you're not familiar with Roofstock, it's a marketplace that allows you to buy and sell turnkey real estate. The goal of the platform is to make it easier to start investing in real estate, while also reducing the costs associated with real estate transactions.
We sat down with Zach to ask him his thoughts on the current state of the real estate market, what the future holds, and how investors should think about investing in turnkey real estate.
If this is something you're considering, check out the Q&A below.
Is there any concern that a decrease in the Fed rate will inflate home values, making it a less-than-ideal time to invest in real estate?
Every time the fed has talked about raising interest rates, they keep them steady or lower them, so it’s not worth speculating on what their plans are.
However, if your instinct is that the Fed may lower rates again, now would be an IDEAL time to buy!
With more and more jobs becoming remote, does Roofstock have any insight into which parts of the country's real estate market is seeing the most activity? I assume the Midwest?
Based on investor activity on the Roofstock marketplace, signs point to growing metros with strong job growth where real estate prices are still a bit more reasonable (relative to major coastal cities) as the most attractive markets for investors.
This currently includes Atlanta, Memphis, Kansas City, Chicago, Indianapolis, and major metros across Texas, all of which are attracting a younger populous due to attractive job opportunities and a reasonable cost of living.
Strong job growth typically correlates with rental demand and rising rents, making the potential returns attractive to investors. Although this can’t be correlated to trends in remote work being on the rise, we expect similar factors to be attracting residents who aren’t limited by geography in where they choose to live.
Is it recommended to invest in real estate when I'm dealing with student debt still? Taking on more debt seems really irresponsible but my prospects of making passive income are limited!
This is likely not the answer anyone reading this wants to hear, but it really depends. If you’re taking on more debt assuming that your returns will outperform the interest rate on the debt, then investing in real estate could work out for you.
However, it really depends on your personal risk tolerance and how much student debt you still have. For example, if you’re only a couple thousand dollars away from paying off your student loans, it might make more sense to focus on paying that all off first and then getting into real estate investing afterwards.
Are the costs of retaining a property manager for my remote rental property investment factored into the operating expenses listed on Roofstock properties? How do you arrive at those estimated expenses?
Yes, property management is one of the expenses that we factor into the return projections and financial analysis for each property listed on the Roofstock marketplace. We also factor in estimates for property tax, leasing fees, property insurance, reserves for repairs and maintenance, and capital expenditures to help investors get a sense of the potential returns for each property.
Roofstock, in general, uses conservative estimates as the default view, but investors can customize all expense estimates which then updates financials in real time.
You can find a detailed breakdown of projected expenses for any property by selecting the Financials tab, and then scrolling down to the Cash Flow tab. You’ll find our estimated property management fees alongside other operating expenses.
Considering all the factors involved in direct rental property ownership - property managers, vacancies, reliability of inspections, etc. - what are the advantages over investing in a REIT and do they outweigh the risks?
There are several advantages when you directly invest in property versus investing through a REIT (think Fundrise):
- You can use leverage to buy a bigger investment - Instead of putting $20K into a REIT, you could use that $20K as a down payment on a $100K home and finance the rest.
- Higher return potential - Many equity REITs have annual dividends in the range of 2-3%, while owning property directly can bring annual returns of 5-8%. REIT dividends are less risky and more predictable, but have more modest potential returns as well.
- You build equity - As your tenant is paying your mortgage each month, your equity stake in the property increases. The hidden benefit here is that you have the option to refinance over time to pull out the equity you’ve built and use it to grow your portfolio.
- Tax advantages - When you buy a home, you can deduct operating expenses and take depreciation to minimize your tax burden. There’s also the advantage of 1031 exchanges, which allow investors to sell appreciated property and reinvest it into new properties to defer all capital gains taxes.
- You’re in control - You have full control over which markets and property types you want to invest in.
There are, of course, disadvantages associated with buying real estate directly. Direct ownership requires some work and involvement, whereas REITs are a completely passive investment. Direct ownership is also less liquid than a REIT, and typically requires more capital to get started.
Rather than ask “which is best?” start by asking yourself “which is best for me?”
There are pros and cons to each with varying degrees of risk and reward, so it really comes down to your investing preferences.