Turnkey Cost: Meaning, How it Works, and Example

What Is Turnkey Cost?

Turnkey cost, also known as turnkey pricing, is the total cost required before a product or service is ready for sale and use. It includes both direct costs, such as materials, and indirect costs, such as administrative expenses and product engineering.

Manufacturers and real estate developers use turnkey cost to describe the costs involved in completing a project. It represents the net cost to own or operate, including mark-ups or discounts.

Key Takeaways

• Turnkey cost is the breakeven point for a product or service before it is available in the consumer market.
• It includes both direct and indirect expenses and is necessary for producing and preparing the item or property.
• Turnkey costs are present in manufacturing, franchising, and real estate investment markets.

Understanding Turnkey Cost

The term "turnkey" refers to an item that is ready for immediate use. Turnkey cost is the total cost required to finish and make the product usable.

A turnkey business is a business that is ready for immediate operation. To be considered turnkey, the business must function correctly and at full capacity from the start. The turnkey cost of such a business may involve franchising fees, rent, insurance, and inventory.

In real estate, a turnkey property is a fully renovated home or apartment building that an investor can immediately rent out. Turnkey properties are typically purchased from companies specializing in restoring older properties. These companies may also offer property management services, minimizing the effort required from buyers. Turnkey costs for real estate include realtor fees, property taxes, insurance, and furnishings.

Example of Turnkey Cost

For example, when a home builder constructs a new home, various costs are involved, such as materials, labor, landscaping, insurance, property taxes, cleaning, inspection, and more. The turnkey cost of the home includes all of these costs and fees.

Turnkey properties provide an interesting alternative for investors who lack the time to renovate or maintain a real estate investment. These properties offer potential for diversifying assets without the hassles of being a landlord.

Investors pay a premium for move-in ready homes, resulting in lower potential returns compared to those who renovate older units themselves. They also have to pay for property management, which reduces the overall profit. Nevertheless, successful turnkey buyers can generate profits exceeding 10%.