$175k Turn Key or $400k new build?

Question

For a fist RE property. Is it better to take a turn-key small $175 class B house with existing tenants/lease/mgmt or buy a new-build $400k class A and rent out my $450k primary? I'm approved for both.

Seems like the new build may have more hassle with getting tenants and systems in place? Thoughts opinions?

Matthew Christofferson · Answer

@Todd Anderson I made an offer on the cheaper option. We'll see how it goes. I can always buy the new build once this first one is stabilized. There's no shortage in my area.

Drew Sygit · Answer

Difficult to make Class A properties really cashflow.

They are the EASIEST to manage as you get the best tenants.

Class B is where most successful investors focus.

Also, as many have pointed out, depending on the amount of equity you have in your current primary, you could sell it and realize $250k/$500k tax free.- NOTE: I have a friend that does this with million dollar houses. Buys a $800k+ "fixer-upper" and remodels it over a 2 year cycle, then sells it and repeats.

Cory Mcclure · Answer

There isn't a one-size-fits-all answer here—it really comes down to your long-term goals, available capital, and local market. If cash flow is your priority, I'd run the numbers on both scenarios using conservative assumptions for rents, vacancies, maintenance, and future appreciation. Sometimes the deal that looks better on paper today isn't the better investment five years from now. Best of luck!

Ashish Acharya · Answer

I know it's been a while since you asked this, but if you're still working through it, worth adding the tax angle to whatever you're leaning toward now.

The turnkey $175k Class B property is simpler operationally, tenants and management already in place, but it's also a smaller basis to work with for depreciation and cost segregation, less to accelerate compared to the new build. The $400k new build works better for cost seg specifically since everything's brand new and sitting on its full original cost basis, more components to break out into faster depreciation schedules and bonus depreciation right away, but you're right that it comes with more hassle getting a tenant and systems set up before that depreciation clock even fully makes sense operationally.

The bigger tax variable here isn't really turnkey versus new build though, it's what happens to your $450k primary if you convert it to a rental. Once you rent it out, only that point forward is treated as rental use, your basis for depreciation becomes the lesser of your original cost or fair market value at conversion, and if you ever sell down the road, only the time it was your primary residence factors into the Section 121 exclusion, the rental period doesn't get that same tax free treatment and carries its own depreciation recapture. So converting your $450k primary into a rental alongside either purchase adds a layer of basis tracking and future capital gains complexity that a straightforward turnkey purchase on its own wouldn't.

Happy to connect!

Todd Anderson · Answer

@Matthew Christofferson,

Welcome to BP.

Of the 2 options I would recommend the move-up just because of the appreciation that you discussed.  But there may be another option that many people don't think about.

You could do a turnkey investment into a new construction rental.  I have worked with a number of investors that nook to new construction to find their next investment.  With this strategy you take out the worry of deferred maintenance, and for a time.  maintenance altogether.  Another great part we have found many units lately have already been filled with renters.  In today's market, with the incentives that many builders are offering this is the only way to find immediate cash flow.

Let me know if I can help with  any specific questions.

Best of Luck

Marvin Chapman · Answer

Hello Matthew. I hope that things have gone well with your choice. I am obviously late to give an answer. However, this subject is interesting because there is no simple black and white answer. It all depends on the person, the demands in his/her life, and the level of activity that he/she can devote to a property.

The $ 175 K Class B turnkey will work if you are too busy to do or learn how to do real estate yourself. That means that you already have the demands of a career, family, and civic obligations to take up your time. You do not have the bandwidth to learn how to prepare your existing $ 450 K property for rent, set a fair market rent that will create positive cash flow, lease to a stable tenant, and be on call 24/7 for maintenance issues that could arise.

These are the benefits of the $ 175 K Class B turnkey option. First, it frees your time and is hands off in terms of day-to-day management because a vetted management company is already in place. Second, you do not have the worry of trying to lease the property because the management company has already done that. Again, this frees your time and gives you a piece of mind. Third, you will have a property with positive cash flow and probably a high return on equity because its acquisition price is low. Additionally, the tax code will reward you with the deductions that you can take for standard depreciation, accelerated and bonus depreciation, writing off mortgage interest, property taxes, property insurance, and all expenses taken in the management of the property.

On the other hand, the $ 175 K Class B turnkey option may have more maintenance issues because it is an older property. Also, because this is a workforce housing property, it may present more tenant turnover.

The $ 450 K conversion of your primary residence will work if you do have the time and know how to do real estate yourself. That means that you have market knowledge to get the appropriate rent, the ability to vet tenants to establish tenant stability, and availability to effectively handle any maintenance issue that may arise. The resulting benefits would consist of having a stronger paying tenant pool because of the value of the home, positive cash flow, and less maintenance issues due to the age of the property. This option trumps the turnkey option with respect to building equity. Newer properties or relatively new properties in the $ 450 K price range will build more equity because they are driven by their location to better neighborhoods, and proximity to a retail footprint, strong school systems, and high-level job centers. As with the turnkey option, the tax code will reward you with the deductions that you can take for standard depreciation, accelerated and bonus depreciation, writing off mortgage interest, property taxes, property insurance, and all expenses taken in the management of the property.

On other hand, $ 450 K option could impose the burden of paying for two mortgages, the new $ 400 K home and the $ 450 K conversion. If you moved forward with a new primary residence and did not immediately rent out the conversion, then you would be paying for two mortgages for an indefinite time. Is that something that a first-time investor would be ready to handle. Next, you may lose your ability to shield a capital gain of $ 250 K on the converted primary residence if you sell it more than three years after the start of renting it.

If you have any questions, please reach out to me.

Matthew Christofferson · Answer

@Elizabeth Pyle Yes. Great insight. The cash flowing Class B will not appreciate in any meaningful way. My primary has appreciated 100k in 5 years. Both will cash flow about the same.

$175k Turn Key or $400k new build?

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