Turnkey Properties vs. Real Estate Syndication: Which is the Better Investment?
By Michelle Clardie on 02/02/2024.
Reviewed by Josefin Gatsby
Is it better to purchase a turnkey investment property or invest in real estate syndication?
Traditional real estate investors who prefer lower-maintenance projects have opted for turnkey rental properties rather than fixer-uppers. Turnkey units are ready-to-rent, meaning there is no time, money, or energy needed to renovate the property or prepare it for market.
However, real estate syndication has skyrocketed in popularity over the last decade, touted by many as the future of real estate investing. Commonly referred to by the more general term crowdfunding, this zero-hassle investment model pools money from multiple investors to fund a given real estate project, which is professionally managed by a real estate sponsor. This model required nothing from the investor except to review the sponsor’s financial projections for the deal and wire the initial investment amount.
The expansion of syndication is causing many investors to weigh the pros and cons of turnkey properties vs. syndication.
In this article, we’re taking an objective look at the strengths and weaknesses of each model. By the end of the article, you’ll be able to make an informed decision regarding which is the better investment option for you: turnkey properties or real estate syndication.
The Pros and Cons of Investing in Turnkey Properties
Turnkey investments can come in a range of property types. For example, you might decide to buy a second home as an investment property. Or you might purchase a newly-renovated multi-family building to fill with long-term renters. You could even find a commercial or retail space that’s ready to accept new tenants.
Whatever the property type, you have a space that is ready to accept new renters immediately without any renovation needed on your part.
The Benefits of Investing in Turnkey Properties
Turnkey investment properties offer several benefits, including:
Potential for Immediate Cash Flow. Some turnkey rentals actually come with leases in place, allowing you to start collecting rental income immediately after closing on the purchase. Even if tenants are not lined up, turnkey properties come rent-ready, so it may take only a month or two to get a tenant in place and begin seeing cash flows.
Ownership and Control. Direct ownership over a rental property gives you control to make decisions about tenants, rent prices, and property management.
Tangibility. As a physical property, a turnkey rental offers the security of a tangible asset.
Potential for Relatively Easy Management. Turnkey properties are often recently renovated or newly constructed. This means less likelihood of appliances and systems requiring repair in the near future. It also means you have more time until the property needs to be updated.
The Potential Downsides of Investing in Turnkey Properties
Before you consider investing in a turnkey property, consider the following potential negatives:
Higher Initial Cost. Turnkey properties can be more expensive than other real estate investments because they are ready to rent. Compared to real estate syndication, a turnkey investment is much more expensive because you are shouldering the financial burden on your own, without other investors to help with the costs.
Complex Acquisition Process. Buying a property is a lengthy, complicated process. Simply finding the right property, and then conducting due diligence checks, including home inspections and appraisals, requires a substantial investment of time. You may also need to secure a mortgage loan, which can be difficult, depending on your financial position and general market conditions.
Maintenance and Management. While easier than a fixer-upper, turnkey properties still require ongoing maintenance and tenant management. You may be able to do the work yourself if you live nearby. Or you may have to pay a team of property managers, landscapers, and maintenance professionals to handle the ongoing work on your behalf.
Low Diversification Potential. When you purchase a turnkey property, you have a substantial amount of capital tied up in a single project. If the investment were to fail, the financial fallout could be devastating.
Less Opportunity for Customization. As the property is already in a rent-ready state, turnkey investors have little chance to influence the design of the unit(s).
No Chance to Force Appreciation. Similarly, being rent-ready means that investors have limited ability to add value through improvements or renovations.
Risk of Overpaying. There's a risk of paying too much for a property, relative to its value and rental potential. This is particularly true for part-time investors who aren’t in the business of buying and selling properties regularly.
Lower Liquidity. Traditional real estate investments, like direct property ownership, have low liquidity. The process of selling a property to cash in on its value is lengthy and complex.
The Pros and Cons of Investing in Real Estate Syndication
Real estate syndication requires even less from investors than turnkey properties. Rather than managing the property on your own, you have a dedicated sponsor to handle every detail of the deal. But that’s just the beginning of the many advantages offered by syndication.
Before we dive into the pros and cons, please note that this article focuses on the benefits and potential downsides of real estate syndication compared to turnkey rental investments. For a more complete list of the general pros and cons of syndication, please read our article, The Pros and Cons of Real Estate Syndication.
The Benefits of Investing in Real Estate Syndication
Real estate syndication offers advantages, including:
Comparatively Low Investment Minimums. Because the initial investment amount is spread among multiple investors, minimum contributions are just a fraction of what you would need to pay to purchase a turnkey property on your own.
Access to Unique Deals. Syndication allows individual investors to participate in larger real estate deals (or harder-to-find deals) than they might be able to acquire alone.
Diversification. Because of the low minimum investment amount, investors have the option of spreading their capital across different projects. Diversification is key in investing as it mitigates the inherent risk of any investment.
Professional Management. These investments are typically managed by experienced real estate professionals, reducing the burden on individual investors. This allows you to leverage the skill and knowledge of your project’s sponsor. It can also bring economies of scale to your portfolio; since syndication sponsors often complete many deals each year, they are usually able to negotiate better deals on labor and materials than individual investors.
Flexibility. Syndication offers more options than turnkey investing. In addition to long-term rentals, syndication projects can also include everything from single-family flips to ground-up multi-family developments.
Ease of Investment. With syndication, you simply review a list of available investment projects online and choose your preferred project(s). Even the due diligence and financial projections are done for you!
Passive Returns. Syndication projects don’t require any day-to-day involvement. The project sponsor will handle the details and keep you updated via an online dashboard.
Potential for Higher Yields. Syndicates often invest in properties with proven potential, which can yield higher returns than individual properties purchased by private investors. For example, those who invested with Gatsby Investment earned average annualized returns of 23% from 2017 through 2023.
The Potential Downsides of Investing in Real Estate Syndication
As with any investment type, there are a few potential drawbacks with real estate syndication.
Less Control. Because each syndication project is managed by an experienced team with a pre-determined plan for the project, individual investors do not have control over the day-to-day management of the property.
May Require Accreditation. Real estate syndication, like many other investment types, is overseen by the SEC (Securities and Exchange Commission), which requires that investors be confirmed as accredited before they can invest in many syndication projects. This means you must meet the SEC’s financial requirements for accredited investors.
Limited Exit Strategies. While syndication is more liquid than direct property ownership, your syndication agreement may state a set holding period before you can cash out your investment. For example, a long-term rental project may require investors to agree to a 5-year investment period. For short-term investors, small fix-and-flip projects might require an investment period of just 10-14 months.
Which is the Better Investment: Turnkey Properties or Real Estate Syndication?
Turnkey properties and syndication can both be strong investment options. Determining which is the better investment depends on your investment goals.
For acquiring a tangible asset that you can control, turnkey investing is the better option.
For minimizing your ongoing involvement, syndication is the better investment.
If you’re not an accredited investor, turnkey investing is likely the better investment for you.
If you’re looking to invest with a smaller upfront amount, diversify your portfolio, or enjoy higher return potential, syndication is the better investment.
How to Start Investing in Turnkey Properties
Investing in a turnkey property starts with finding the right property. You may need to analyze dozens of options to find one that is likely to provide the returns you’re looking to achieve.
Start by partnering with a real estate agent who specializes in investment properties. They can alert you to new options as they hit the market. Your agent might even be well-connected enough to learn of new deals even before they come on the market.
You should also get a mortgage lender in your corner early in the process. Getting pre-approved for a mortgage loan will help inform your budget and assure sellers that you are a serious buyer, which can help you get your offer accepted.
