Does the BRRRR method exist with turnkeys?

20 Replies

Hi, I am VERY new to REI. Thus far I have read a few books, practiced analyzing properties, scoured Zillow, Craigslist & the MLS, spent hours on BP and secured a HELOC. I am convinced there is money to be made but I live on Long Island and I haven't been able to get even 1 property's numbers to "work". I am considering out-of-state and have looked at numerous markets (Birmingham, Kansas City, Baltimore, etc). My question is: does the BRRRR method work with true turnkey properties? I would love to hear from some successful out-of-state and/or turnkey investors. Thank you!

Not usually because turnkey, by definition, has no value add. You are buying at, or near, retail price, so there is no way to force the value higher through renovation.

they cannot be the same, based on definition alone.

the BRRRR itself means: buy, REHAB, RENT, refi, and repeat. With a turnkey the house is already rehabbed and rented.

The rehab is where all the money is made, or rather, buying distressed leaves enough spread to rehab and make some profit. When you buy at retail price like with turnkey you are giving up all that value-add profit in exchange for ease of entry.

only way for that to work is to buy from a turnkey operator who left a large margin of profit in the deal, which no good investor would do.

BRRRR - if you want to extract massive margins out of a property by taking on a project many others might be willing to attempt

Turnkey - easiest possible way to get into a rental, but you'll get returns equivilent to the hard work you put in the deal:  Minimal

Most times when you buy turnkey you are buying with negative equity because you're buying in areas where investors are taking over predominantly owner occupied areas for the 1% rule. Tenant occupied properties degentrify owner occupied areas because they don't have a vested financial interest like an owner occupant. 

You don't want rentals on the street you live on for an easy understanding of how effects actual value.

Look in predominantly tenant occupied areas where it's accepted as the standard & rent drives demand not agent listed value. 

Highest & Best Use of the property. There are 4 tests each property has to pass to function under its HBU. 

Birmingham has good value adds, as well as the other cities you mentioned if you invest for the correct usage of the property & your goals. 

Rental areas don't appraise as easy as the suburbs. That's what has caused the turnkey bandwagon. Many investors are upside down in value because they purchase based on owner occupant value instead of cash flow value. It's a bait & switch because 99% of investors are unaware of the income approach & buy based on the sales comparison approach. 

Due your valuation research & buy based on the HBU & your goals only. 

Hi @Summer Timms . I've been investing out of state for over 10 years. I've got 3 flips going in Birmingham now. It's definitely doable. I don't think BRRRR will work with a turnkey, but I did see on the forums somewhere that someone said some companies are trying to help investors BRRR. Not sure which but search BRRR turnkey on here and maybe something will come up.

If you have any questions about out of state investing feel free to reach out. Happy to help. 

While it's technically possible, the short answer is no. Turnkey properties are sold by operators looking to make a profit. It's rare they'll have enough room to make a solid profit and still pass on 25% equity (enough to "BRRRR out" your down payment) or anything close to that to an investor. And indeed, why would they as there are plenty of people willing to buy for more? Generally, if you're buying turnkey, you're getting a deal relatively close to market (unless it's a shyster, you need to vet turnkey companies carefully) but in a cash flow market with all of the management and maintenance and what not in place.

@Summer Timms while as you can see from the thread and comments, the common train of thought is that Turnkey providers are selling at or near retail price, our experience and reality is much different.  There is even a comment on profit is made on rehab which is not always the case, in fact, rehab (especially for non established investors - local and OOS - - even experienced investments groups like ourselves) the rehab is where profit is lost almost each and every time.  Over finishing, undiscovered issues, over charging contractors is exactly where much of the profit goes on bad or low equity investments.  Any established investor will tell you investments are won the day of purchase - not the rehab.  The purchase is where you need to focus with your investments and turnkey providers.  How are they acquiring properties?  This is where equity is obtained each and every time.  Well established turnkey providers and investors have created conduits to acquire properties off market and in channels not available to the public, realtors or the average and even more experienced investors.  So ask the question - 'where do your properties come from?'  You may not get a direct answer as they will be protecting their proprietary sources, but you will get an idea.  From our experience here is Kansas City, we consistently secure homes in off market channels that allow us to show equity to investors prior to sale as part of the pre-purchase research and vetting package and ultimately deliver homes with equity at part of the turnkey package.  In fact, from our perspective, providing equity is the philosophy from which we act as we assume most investors are seeking equity in their investment goals.  So instant post rehab equity is definitely a line item we include when presenting an opportunity to investors.   

We are constantly asked to value our services and rationale is simple.  Its very easy to rationalize our services when the initial purchase of the property allows for our packaged services bring equity to the table.  Aside from the bulk discount pricing on material, savings on labor with dedicated professional, multi disciplined crews and the general passive nature of building safe investments and organic wealth is our rational and I am sure the rational of any established turn key provider.  

Good luck on the research and happy investing...

Thank you to all who took the time out to respond. Although I received a number of different responses, they are all incredibly valuable to me so I can see the thought process and look into things further! 

Yes it can work. The key is that the bank will value your house higher than the price you pay for it. Can happen if you underpay the "turnkey" company. 

Probably not with a traditional turnkey provider who offers you the final product at a premium price, as many mentioned here already.

I built my property management business by basically offering our service at a fixed cost, being the boots on the ground for the out of state or out of country investor.

The basic approach is, you find a good local team that will find you the distressed property, rehab it for you, rent it for you, manage it for for you. Then you refinance and repeat.
There is a higher risk in doing it, because you never fully know the final cost of a rehab. You can have a good initial estimate. But that’s exactly how it would be if you would have done it all on your own.
The challenge is buying the distressed property at a reasonable price. In Dallas-Fort Worth investors are paying 85% of market value.That’s the going rate when buying properties from wholesalers. But since the goal is to make them rentals, you are still getting about 15% of equity. But prices here have gone up so much that its hard to find a deal that cashflows.

I also invest in Indianapolis and do the same there. Challenge there is to find homes in the right neighborhoods. Most of the stuff that comes across my desk is in center township in Indy, where one street is a good investment and the next one isn’t. Just based on the type of tenants you will be attracting.
But in the end, I believe with the right local partner, it is possible to do a modified turnkey BRRRR.

Just as one more addition (and I didn't read every response in detail to know if someone already said this or not, so apologies if I'm repeating)-

There are turnkeys providers who do the BRRRR method. I call it the BRRRR+turnkey method. It's been around for a while but I avoided it up until the last couple of years because of the risk involved. See this article for details on this method vs standard turnkeys and the risks-

https://www.biggerpockets.com/renewsblog/2014/08/1...)

When I wrote that, I was pretty opposed to it. Since then, I started working with a company who I had worked with for years on standard turnkeys and then me and my crews watched them do the BRRRR+turnkey method for a couple years before we agreed to work with them. They also offer guarantees against all the major risk points. So while as a whole I caution people against going that route, there are at least a couple companies out there who are legit and do it well.

With that method, you get the perks of BRRRRing (forced appreciation) combined with the perks of turnkey (someone else does the work).

So while standard turnkeys can't be BRRRRed, you can do the BRRRR+turnkey method to start and get the benefits of both.

I don't understand why companies would do all the hard work it takes to source and rehab properties and then turn around and pass the profits for that work on to their turnkey investors (aside from commercial properties where there is scale and millions in added value to share on each transaction).

Originally posted by @Summer Timms :

Hi, I am VERY new to REI. Thus far I have read a few books, practiced analyzing properties, scoured Zillow, Craigslist & the MLS, spent hours on BP and secured a HELOC. I am convinced there is money to be made but I live on Long Island and I haven't been able to get even 1 property's numbers to "work". I am considering out-of-state and have looked at numerous markets (Birmingham, Kansas City, Baltimore, etc). My question is: does the BRRRR method work with true turnkey properties? I would love to hear from some successful out-of-state and/or turnkey investors. Thank you!

Truly turnkey no of course not. Why would someone sell you a property that is totally turnkey for less than what it's worth? They would simply sell it to another person for market value. Utilizing the BRRRR strategy involves you doing work to create equity.

@Summer Timms No. The reason is that there would be no profit left in it for the turn key company. The 25-30% equity that you need to force to make the BRRRR strategy is the turn key companies profit.

As they say the business of business is business. True turnkey is usual above market value. They would never sell below. They would simply list it on the MLS and sell it for market value. Any company that is telling you these freshly rehabbed houses with good tenants in place also has 25% of equity in it is lying.

Maybe some pre-rehabbed home sold and the company will do the rehab, but you pay for it all up front could work. We do something like that, without the pay for it all up front part. But no way a completed true turnkey. People don’t work really hard to help out capable strangers.

I would be interested to see if there's room for added value in finding an underperforming turnkey asset, reducing expenses, pushing rents, improving move-out damage collection, and collecting on other expenses incurred by residents such as utilities, waste-removal, pest control, etc. I may be wrong, but determing the value of an asset based on comparable recent sales would give a comparable cap rate, but couldn't the value of a multifamily asset be altered through increasing NOI? It wouldn't really be BRRRR, but another strategy nonethleless?

Turnkey typically means single family or at least small multi and totally optimized.

Thank you to everyone who shared their thoughts/experience/opinions! The majority consensus was "no" which is what I had already suspected. I guess my followup question is: what is the best investment route for someone in a high market? If "true" BRRRR's are risky from out-of-state and Turnkey BRRRR's don't exist.....where would you guys put your efforts/money? I know REI is what I want to do, I just have to find my "in". Any advice would be welcomed & appreciated! Thanks :)

@Summer Timms you’ve got two main options both of which I’ve done.

1. Find a reputable turnkey provider in your target market. Vet the one provider well and you’ll be fine. Also you only have to vet one company then.

Pros: save time, very easy, added “hand holding”

Cons: returns lower, less control, no instant equity

2. Find a local agent, PM, etc and buy a property using them.

Cons: time intensive at the beginning, multiple groups to vet, no handholding

Pros: higher returns, can be instant equity.

@Summer Timms I like Caleb's succinct 2 options, but there is at least a third, and the riskiest. ie: buy off market - probably via wholesaler or auction a somewhat more distressed property for cash, hire a contractor to do the rehab, a PM to place a tenant, and then finance 6 months after purchase to get your money out - ie: a BRRR

Caveat: not for the faint of heart, the really busy, or the risk adverse.

@Eric Scheele

Can you give me an example of a typical deal that you have done recently that has allowed an investor to recoup his money after refi and still cashflow?

All in cost/PP/cost to Rehab/ARV/rent to price ratio after refi, etc.

How is the deal structured (how do you make your profit)?

What class of neighborhood are these properties usually in?

Thanks!

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