Turnkey in a hot market or BRRRR outside of the city?

Question

I'm new to the BP community and ready to begin my REI journey. I'm located in Nashville, TN, I only have $10K liquid cash, but I can take out a $100,000 HELOC on my primary residence. I'm thinking about two options.

1. Turnkey on a slight margin in Nashville. I have the option to work with a local real estate agent who can get me turnkey properties before they go on the market at slightly below market value. An example deal would be a $199,900 property that I could but $40K down on a 4.1% 30-year term, with a HELOC of 1.99% year one and prime+.29% margin for the draw period. Rent at $1600 in a great part of town (yes, below the 1%, but projected to increase in value in that part of town), and cash flow of $200-$300 after paying the mortgage and HELOC payments.

2. BRRRR Strategy in a different market. From everyone that I've talked to, Nashville is so hot that it just doesn't have any legit BRRRR properties left. So I'd look at doing a BRRRR deal in an area outside Nashville.

The only thing I'm worried about is having my HELOC tied up in a property for the 8-10 years it would take me to pay down with the cash flow from the rental. I'd rather be able to reinvest it after doing a cash out refinance, but I'm wondering if it might be good just to get one property that cash flows under my belt here in Nashville before branching out.

Thanks for any insight or advice you might have!

Mike D'Arrigo · Answer

@Larkin Briley putting markets aside, ask yourself how, as a new, inexperienced investor are you going to do a BRRRR out of state. Do you have the time, inclination and knowledge to pull it off? There are a lot of moving parts when doing it yourself from finding and evaluating opportunities, to lining up good, honest contractors and then managing a construction project remotely. Ask yourself how you are going to know the level of rehab that should be done and put a scope of work together. It can be hard enough keeping contractors on track when you're there looking over their shoulders. Managing them and making sure they are getting your project done (among the many that they may have) remotely can be nearly impossible. It's one thing if the property just needs a minor cosmetic update, but properties like that rarely have any meet on the bones. You force equity by making improvements and slapping a coat of paint down and putting in some new flooring won't force much equity, certainly not enough to do a BRRRR. I'm not saying that it can't be done, but go in to it with eyes wide open and ask yourself if you have the time and skill set to do this. Experienced turn key companies sometimes lose money on deals. Imagine what could happen to a complete newbie.

Joe Ort · Answer

@Larkin Briley

If it's not owner occupied, you aren't getting 4% on the mortgage. Talk to a lender to see what you would be at based on your credit. I'm closing on 2 properties next week and we're at 5.25% with 25% down.

Mike Huerta · Answer

Hey Larkin, how about an update? Just curious which way you went and why?

Larkin Briley · Answer

@Mike D'Arrigo Thanks for the fantastic response! These are the types of questions that I'm trying to answer for myself as well. I do have some margin in my schedule right now, and I'm very much "into the details" in almost every area of my life and think I could handle some level of complexity in managing a project. But you are right, there are a ton of moving parts and it has a high risk for such an inexperienced investor. The challenge I face is that if I stay close to home, I'm not going to get an amazing deal. It will probably just be a good deal, with no chance of hitting the 1% rule. Additionally, it would tie up my investment capital for 10-12 years as I pay down the HELOC and prevent me from further investment. Perhaps that's the direction I should go, given that there's so much risk present in an out of town BRRRR.

Larkin Briley · Answer

Hey everyone. Very respectfully, I'd like to just remind you that I was quoted a 4.3% for a 30 year term on an investment property by my bank. I showed them the numbers I ran, and they gave me that number. I'm not sure what else to tell you.

@Luka Milicevic - Thanks for the advice. I'm leaning toward looking farther away from town, but less confident in my ability to do my first deal a long way away from where I live. Just need to network and find some folks that might be able to find the good deals in the right places I suppose.

Luka Milicevic · Answer

@Larkin Briley

Not sure about those interest rates. Last loan I closed with a local lender was at 5.75%. I imagine you're looking anywhere between 5.25%-6% depending on the deal and your credit.

I would venture to the outskirts of town and surrounding counties. 1600/mo on a 200k property isn't below the 1% rule, it is WELL below the the 1% rule and there are most definitely better deals out there.

I would also consider working with wholesalers and looking for your own deal. Agents aren't the best deal finders, in fact they are probably the worst (with the exception of very few).

Wait for the right deal. Like Warren Buffet said-your investing life is like a punch card, once you make an investment it's a punch on your card and you only have so many left.

Larkin Briley · Answer

@Joe Ort

They for sure knew it was for investment properties. I have them my full business plan on a couple of properties to show what I was doing. Guaranty Loan Trust Administration quoted me at 4.1%, but there were a bunch of fees associated with getting that rate and won’t make it worth it. Fifth third bank (who I’ve been banking with for 10 years), quoted me at 4.3%.

Joe Ort · Answer

@Larkin Briley make sure they know it's an investment property. I had that experience too and then when we went to close they increased 1% for non owner occupied.

If you get that rate for investment properties send me your guys info!

Eric L. · Answer

@Larkin Briley

Might be better to find a place in Ashland city before that explodes, or near where LG is coming.

Eric L. · Answer

@Larkin Briley

I would try to stay out of turn key if possible.  Nashville is overpriced in my opinion.  I'm a realtor in clarksville and there are many people paying too much in clarksville as well. I would not buy on appreciation speculation.  I think the Nashville market will still get higher, but with the rate if supply increases, things will eventually change.  I would look for a BRRR, or find something close to a 1%.

Turnkey in a hot market or BRRRR outside of the city?

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