{"id":82089,"date":"2019-09-14T05:00:48","date_gmt":"2019-09-14T11:00:48","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=82089"},"modified":"2024-02-13T16:56:04","modified_gmt":"2024-02-13T23:56:04","slug":"buy-rehab-turnkey-pros-cons","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/buy-rehab-turnkey-pros-cons","title":{"rendered":"Is It Better to Buy & Rehab or Purchase Turnkeys? A Look at the Pros & Cons"},"content":{"rendered":"

As I see turnkeys<\/a> becoming more popular, I\u2019m seeing more and more people wonder which route they should go when buying a rental property\u2014turnkey or buy and rehab (BRRRR<\/a>) the property themselves? It\u2019s such a great question! I think the only true answer to the question is it depends<\/em>.<\/p>\n

It depends on you.<\/p>\n

What are you wanting to accomplish, what are your interests in an investment, what skills do you have, and what\u2019s your risk tolerance? More generally, what is most important to you? Everyone is going to have a different answer. If you\u2019ve read my blog posts before, you know I always buy turnkey. But I\u2019m also the first person to say that turnkeys aren\u2019t for everyone, and they shouldn\u2019t be!<\/p>\n

How do you know which route you should go if you\u2019re on the fence about them? Well, I\u2019m not going to tell you the answer to that question because I don\u2019t know your personal situation, but I am going to lay out what I believe to the be the pros and cons of each method, and you are welcome to use that to help in deciding for yourself which route would be best suited for you.<\/p>\n

You\u2019ll probably notice that the pros and cons lists for each are essentially just the reverse of each other. The pros for BRRRR<\/a> (buy, rehab, rent, refinance, repeat) happen to be the cons for turnkey\u2014and vice versa. But I\u2019ll explain each as I go.<\/p>\n

The Pros &\u00a0Cons of BRRRR Rental Properties<\/h2>\n

Pros<\/h3>\n

Forcing Appreciation<\/strong><\/em><\/p>\n

This is the biggie for BRRRR. It\u2019s arguably the sole reason people go the BRRRR route\u2014and arguably the sole reason a lot of people invest at all. Here\u2019s what happens: You buy a cheap distressed property, you put in a certain amount of money to fix it up, and boom! The property is worth more than the total you put into it (initial purchase price + rehab costs).<\/p>\n

This is truly what real estate investing is all about. Consider it the motherlode of REI perks, also known as “free money.” With that free equity, you can either hold it in the property or cash-out refinance the property and use that cash for anything you want. People often use it to buy more properties and do it again! You keep doing that over and over, and you are well on the path to becoming financially free<\/a>.<\/p>\n

Related:<\/strong> 3 Things You Don\u2019t Have to Think About With Turnkey Properties (& 3 Things You Do)<\/a><\/em><\/p>\n

Quality<\/strong><\/em><\/p>\n

Any time you do something yourself, you have the greatest chances of having the nicest quality of whatever it is you are working on. You are probably going to buy the nicer property, you are probably going to rehab it to a slightly higher standard, and it\u2019s probably in a slightly nicer area. Unless you are a really experienced investor and only care about numbers, then maybe you don\u2019t put so much love into the process.<\/p>\n

But typically, doing everything yourself tends to happen in nicer locations with nicer properties and prettier rehabs.<\/p>\n

\"person<\/p>\n

Control<\/strong><\/em><\/p>\n

Not too unrelated to quality, you are in control of everything (hence getting that better quality). You make the decisions, you make the choices, you have a hand in everything, and there\u2019s a really good chance that you are sleeping pretty well at night because you are in control.<\/p>\n

I\u2019ve said in several of my articles that ultimately the only thing that matters in real estate investing is whether you are sleeping well at night or not\u2014with whatever strategy you are using. Different people are comfortable with different things. I would actually sleep worse at night if I were rehabbing a property, because doing that stresses me out. But I know I\u2019m the minority with that. Most people sleep better at night knowing they are in control of their investment, so I\u2019m putting this one in this list.<\/p>\n

Decision Making<\/strong><\/em><\/p>\n

I said the term \u201cdecision making\u201d in the previous bullet, but with this bullet, I mean it in a slightly different context. I\u2019ll expand more on this when I list it as a con for turnkeys, but in short, I believe that doing the work yourself encourages (or forces) you to put more effort and due diligence<\/a> into your decisions. I think that when you are the only person doing something\u2014and not listening to other people\u2014you are more inclined to put an awful lot of thought into each move\/step you take. This can be very beneficial.<\/p>\n

Cons<\/h3>\n

Time & Effort<\/strong><\/em><\/p>\n

This method can take an atrocious amount of time and effort. Once you become very experienced and advanced with it, you can get systems in place to speed things along. But especially when you are just starting, you should expect this method to be one of the most time- and effort-intensive strategies. You can lessen the time and effort by buying something that doesn\u2019t need a lot of work, but then you start risking some of that forced appreciation. This strategy can require you to find good<\/em> distressed properties, rehab them, find tenants, and landlord the property<\/a>. The latter is ongoing time and effort. The more skill you have, the less the time and effort, but you should plan to be very active and involved in this strategy.<\/p>\n

Expertise<\/strong><\/em><\/p>\n

You have to be the expert. If you\u2019ve never rehabbed a house before, you have to rely on a contractor\u2019s expertise, and that can be treacherous. Or if you aren\u2019t skilled in finding good distressed properties, you have to figure out how to do that. How do you know if the property you are buying is a good candidate for BRRRR and how do you know where to buy? Potential layers of expertise you may need when you are doing everything on your own are: finding good distressed properties, negotiating, creative financing<\/a>, rehabbing, and landlording. I would easily consider some of those to be advanced skills that are not inherent right off the bat.<\/p>\n

Risk<\/strong><\/em><\/p>\n

Speaking of skills being not inherent right off the bat, any time you are talking about needing to do something and not knowing exactly how to do it right, you are increasing your risk. If you\u2019ve never rehabbed a house, your risk may be very high. If you don\u2019t know how to tell what a good distressed property is and\/or where is a good spot to buy it, you increase your risk dramatically with the potential of extra unexpected rehab costs and a poor quality of potential tenants. Your risk for delays is higher if you don\u2019t exactly know what you are doing, your risk for getting bent over by contractors is higher, and you may even be at risk if you don\u2019t know exactly all the laws pertaining to the property (more on the management side). Aside from skill set, it\u2019s your money in this property until it gets settled and cash flowing, so if anything goes wrong, it\u2019s your money that could be lost.<\/p>\n

May Require More Cash Up Front<\/strong><\/em><\/p>\n

This one depends on your situation, but unless you can get a good hard money loan or short-term financing loan, you may need to use your own cash for the rehab. This may require substantially more capital than you have. I\u2019m not familiar with hard money lending, so I don\u2019t know how hard it is to get, but if you are thinking of going the BRRRR route, make sure you know your financing options as compared to your available capital.<\/p>\n

\"turnkey-expertise\"<\/p>\n

Related:<\/strong> Choosing Between Turnkey & DIY Rentals? This is a MUST-Read Before You Decide!<\/a><\/em><\/p>\n

The Pros &\u00a0Cons of Turnkey Rental Properties<\/h2>\n

Pros<\/h3>\n

Time &\u00a0Effort<\/strong><\/em><\/p>\n

Turnkeys require minimal. Note that they are not 100 percent hands-off, though they are pretty dang close. The only time and effort you need to put into turnkeys is first with due diligence while you are buying and then with just keeping an eye on the property manager once you own it. I\u2019ll say some things below in the cons section about due diligence, but I do encourage doing a good bit of that. But once that is over and you purchase the property, managing the manager is really pretty minimal effort.<\/p>\n

Even when I\u2019ve had bad years on my properties or some kind of drama with the property manager, I still didn\u2019t spend more than a few hours the entire year dealing with it. The only property I\u2019ve ever had to spend weeks on is my non-turnkey property (wasn\u2019t even a BRRRR) when I had to manage a rehab on it. The turnkeys are already rehabbed, so anything that happens is usually more small-scale. But even with the worst of managers, the time and effort involvement has been minimal. If you have a good property manager, you might spend five minutes a year on your property.<\/p>\n

Expertise<\/strong><\/em><\/p>\n

Turnkey providers usually seriously lack in customer service expertise, but they tend to be great experts on everything else (the important stuff). Assuming you are working with a good<\/em> turnkey provider, you are really getting a lot of expertise in your property. They know how to find the good distressed properties, they can negotiate well because they buy in bulk, they know how to rehab a house, they know how to screen and place tenants, and they know how to manage tenants.<\/p>\n

Well, the latter isn\u2019t their strongest suit usually, but they can do it well enough. Management is pretty easy to deal with; it\u2019s the buying properties (quality and location) and rehabbing that\u2019s really where someone else\u2019s expertise makes a big difference. Those things are not easy or for the faint of heart\u2014and definitely not something a clueless noob should take on. If you don\u2019t have skill or interest in those things, let someone who does do them so your risk factor can be dramatically lowered.<\/p>\n

Risk<\/strong><\/em><\/p>\n

Speaking of risk, this one is dependent. It\u2019s actually dependent up in that pros list for BRRRR, too, but I didn\u2019t think to mention it. The risk level with either method depends on your own skill set. In my case, my risk is dramatically lower with turnkeys than with BRRRR, because I haven\u2019t the foggiest (nor care to have the foggiest) clue how to find the best properties and rehab a property. So if I let experts do it for me, my risk will be much lower than if I do it myself. If you know how to do all of those things yourself, turnkeys might be arguably riskier.<\/p>\n

So it\u2019s relative, but I do believe that when someone can contribute expertise in all of the necessary areas related to a successful rental property, your risk will be lowered. But! There is one aspect of risk that isn\u2019t dependent and is lower with turnkeys. The turnkey provider is the one who has their money invested in the property before it is performing. You don\u2019t buy it until it proves to be performing and up to the standard that it was advertised to be in.<\/p>\n

So if the rehab takes longer than planned, or ends up more expensive than planned, or anything else goes wrong along the way, you aren\u2019t responsible! That\u2019s major risk mitigation. You are allowed the opportunity to verify everything before you sign on the dotted line. This is fantastic for minimizing risk. For anyone who will argue that turnkeys aren\u2019t good quality so the risk is higher, first read the bullets below that I\u2019m about to write, but also know that in no way, shape, or form do you have to close on a turnkey property that isn\u2019t up to the standard it was advertised to be in when you put it under contract. If you put one under contract and then you find anything sketch about it or anything below par, you aren\u2019t obligated to buy it.<\/p>\n

So don\u2019t buy it. Simple as that. Move onto the next one and try again. You get to figure all of this out with no money out of your pocket.<\/p>\n

\"\"<\/p>\n

Cons<\/h3>\n

Forcing Appreciation<\/strong><\/em><\/p>\n

This is by far the major downfall of turnkeys. Turnkeys typically sell around market value, and because they are already fully rehabbed, there isn\u2019t usually a way to improve anything to force appreciation. You can increase your chances of gaining appreciation. For example, if you buy in the most infant stage of a market\u2019s growth cycle, you should see appreciation over the next couple or few years.<\/p>\n

I did this when Atlanta was in its infancy stage a few years ago, and all of my properties appreciated about $40,000 in two to three years. That $40,000 per property was now free money available to me to do whatever I wanted with. For the most part, you buy turnkeys for the monthly cash flow. Appreciation can certainly still happen (and most likely will) but in smaller amounts and not right off the bat like you could get by BRRRR-ing. No contest, this is the deal-breaker for a lot of people.<\/p>\n

Quality<\/strong><\/em><\/p>\n

Because someone else is doing all of the work and they are doing a large number of properties at the same time, plus they draw on investor profit numbers and not emotions or looks, you probably won\u2019t end up with the cutest property in the nicest area. A good turnkey provider won\u2019t buy or sell you in a bad neighborhood, but it probably won\u2019t be quite as pretty as if you bought yourself. It could be, but remember that turnkey providers work hard and fast and cater to advanced investors who only care about numbers, so where they buy isn\u2019t necessarily going to be the prettiest. It\u2019s going to be the areas that are the best combinations of cash flow, sustainability of cash flow, and exit strategy.<\/p>\n

A good turnkey provider also won\u2019t do a poor quality rehab job, but they probably won\u2019t use quite as pretty of carpet as you might have chosen. They will use the best rental-grade carpet. Remember with rental properties, things like carpet and paint and all that often have to be changed out, so it does make sense to use the most practical versus the prettiest. But if you\u2019re into higher quality, you are more likely to see that if you do it yourself.<\/p>\n

Control<\/strong><\/em><\/p>\n

In talking about doing it yourself on the rehabs and buying, someone else is doing all of that with turnkeys. You aren\u2019t doing it. Some people just can\u2019t stomach the idea of leaving the control to someone else. As I said before, if you will lose sleep because other people are managing your investment, in whatever capacity, it\u2019s not worth it even if the numbers are much better. Don\u2019t think you don\u2019t have any<\/em> control with turnkeys\u2014because you do. You control who manages your property (you can hire and fire), and you can approve and disapprove anything you want. You just aren\u2019t controlling the day-to-day operations, whether on the buying\/rehab side or the management side. You are trusting other people.<\/p>\n

Decision Making<\/strong><\/em><\/p>\n

Now an important one. People do have a tendency to go into turnkeys thinking the whole point of them is to trust other people. The flip side to getting comfortable trusting other people to run your investment property is trusting everything! I don\u2019t think you should trust everything. You should do due diligence on each piece of the puzzle, just as if you were doing everything yourself.<\/p>\n

Turnkeys, I believe, tempt people to really short out on confirming each piece of the puzzle. So much so, I wrote a previous article detailing this problem that I see as being so rampant with turnkeys (and consequently giving turnkeys an unjust bad name). Check out “The Downside About Turnkey Rental Properties That No One Tells You<\/a>.” Read the details there, but in short, turnkeys make skimping on due diligence very tempting. Because I don\u2019t think due diligence should ever be skimped on, I highly consider this to be a con of turnkeys.<\/p>\n

\"life-on-half-income\"<\/p>\n

There are my lists. Now, if I were to shorten them down dramatically and tell you the most notable single pros and cons to each method, I would say they are:<\/p>\n

BRRRR<\/h2>\n

Biggest Pro<\/em>:<\/p>\n