The good and bad of turnkey properties
Daniel MendezPro Member
Investor · Dallas, TX · Member since 2018 · 254 posts · 47 votesThe good and bad of turnkey properties
Most Popular Reply
Clayton MobleyPro Member
Birmingham, AL · Member since 2014 · 875 posts · 947 votes@Daniel Mendez, @Charles Carillo is spot on - the issue many folks have with turnkey as a general model is that the opportunity to force appreciation and sell quickly for a profit is removed - because that's what the turnkey company has done, that's how we make money.
If you BRRRR or other DIY method, you find a distressed property, you renovate it, you either flip it for a profit or hold it as a rental. Either way, the value of the property after rehab is/should be higher than the total cost of the purchase and rehab work. That spread is called forced appreciation and its really the whole point of the BRRRR method. However, it is, of course, a ton of work and time. If you have a lot of free time, are handy yourself, or have a good network of folks you can contract to do the work, this can go quite well. But the inherent risk is that rehab takes longer, there's some unfortunate surprise along the way that adds time and dollars to the budget, etc. The longer it takes, the longer you're paying the mortgage (if you financed) without any rental income to cover it.
BUT when it's done, if it's done well, you have a property worth $200k that you only put $150k into, for example. If you want to hold it as a rental or flip it, you make money either way. You've traded a TON of time and energy and risk for a higher potential reward.
With turnkey, the primary benefit is that you don't need to do any of that. The company (which has networks and systems in place to find the best props and rehab to a high standard quickly etc) does all that legwork on their dime and on their time (ie no vacancy risk to you during rehab). You close on the prop after rehab is done and inspections are passed, so there's no risk to you during the rehab phase. In exchange, the turneky company is the one that benefits from the spread between what they put into the prop and the market price they sell to you at (should be market price, a reputable company won't inflate their values and third-party appraisals should back up their prices). Your returns will come from cash flow each month and, presumably, long-term appreciation (never guaranteed). You've traded extra potential return from forced equity for the luxury of having your time and energy back and having someone else shoulder the rehab risks.
For some investors who don't work full time or just think DIY stuff is enjoyable, it seems crazy to trade away forced equity return for convenience, which is where a lot of turnkey naysaying comes in. But for folks who work full time or more, live in pricey markets, or just want something more passive, turnkey can make a lot of sense. It all depends on your goals and what you need from your investment right now. Many folks start with turnkey because its simpler and lets them put capital to work while they learn the ropes of higher-risk strategies. It's not a lifelong choice- you can alwasy move into BRRRR after you learn more and have a cash flow buffer behind you.
It's sort of the difference between building your own stock portfolio from scratch and leanring as you go and investing in a professionally managed mutual fund or ETF. You trade higher risk-higher potenial return for lower risk-limited upside potential.
Before you decide either way, just make sure you have an honest conversation with yourself (and/or partner) about your goals and what you can realistically dedicate to REI right now in terms of money, time, energy, and risk.
39 Replies
- Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes7y
A turnkey property can be a good investment; especially if you work full-time and it is out of state. The thing with a turnkey property is the value has already been created/increased. You are not going to see rapid appreciation. The key with real estate is you are rewarded for the value you create. This is normally done by renovating, increasing rent and thus increasing the value of the property.
- 7yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Daniel Mendez, @Charles Carillo is spot on - the issue many folks have with turnkey as a general model is that the opportunity to force appreciation and sell quickly for a profit is removed - because that's what the turnkey company has done, that's how we make money.
If you BRRRR or other DIY method, you find a distressed property, you renovate it, you either flip it for a profit or hold it as a rental. Either way, the value of the property after rehab is/should be higher than the total cost of the purchase and rehab work. That spread is called forced appreciation and its really the whole point of the BRRRR method. However, it is, of course, a ton of work and time. If you have a lot of free time, are handy yourself, or have a good network of folks you can contract to do the work, this can go quite well. But the inherent risk is that rehab takes longer, there's some unfortunate surprise along the way that adds time and dollars to the budget, etc. The longer it takes, the longer you're paying the mortgage (if you financed) without any rental income to cover it.
BUT when it's done, if it's done well, you have a property worth $200k that you only put $150k into, for example. If you want to hold it as a rental or flip it, you make money either way. You've traded a TON of time and energy and risk for a higher potential reward.
With turnkey, the primary benefit is that you don't need to do any of that. The company (which has networks and systems in place to find the best props and rehab to a high standard quickly etc) does all that legwork on their dime and on their time (ie no vacancy risk to you during rehab). You close on the prop after rehab is done and inspections are passed, so there's no risk to you during the rehab phase. In exchange, the turneky company is the one that benefits from the spread between what they put into the prop and the market price they sell to you at (should be market price, a reputable company won't inflate their values and third-party appraisals should back up their prices). Your returns will come from cash flow each month and, presumably, long-term appreciation (never guaranteed). You've traded extra potential return from forced equity for the luxury of having your time and energy back and having someone else shoulder the rehab risks.
For some investors who don't work full time or just think DIY stuff is enjoyable, it seems crazy to trade away forced equity return for convenience, which is where a lot of turnkey naysaying comes in. But for folks who work full time or more, live in pricey markets, or just want something more passive, turnkey can make a lot of sense. It all depends on your goals and what you need from your investment right now. Many folks start with turnkey because its simpler and lets them put capital to work while they learn the ropes of higher-risk strategies. It's not a lifelong choice- you can alwasy move into BRRRR after you learn more and have a cash flow buffer behind you.
It's sort of the difference between building your own stock portfolio from scratch and leanring as you go and investing in a professionally managed mutual fund or ETF. You trade higher risk-higher potenial return for lower risk-limited upside potential.
Before you decide either way, just make sure you have an honest conversation with yourself (and/or partner) about your goals and what you can realistically dedicate to REI right now in terms of money, time, energy, and risk.
- 7yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
I should also note that a lot of negativity about turnkey also comes from the occasional scam artist calling their 'business' turnkey, when it's absolutely not. It's become a bit of a buzzword lately so be sure you look for true turnkey companies: full-service, everything in-house from finding props to rehab to management; live and work in the market they sell; no used car salesman or pressure tactics.
Look up Morris Invest on BP to get a good idea of what to look out for.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes7y
The comparison of a turnkey vs brrrr are polar opposits.
Turnkey = On market, no work, little if any equity capture.
Brrr = Off-market (hopefully), tons of work and tons of equity capture when done right.
A closer comparison would be to buy a rent-ready house off the MLS in your market and hire a PM or do an OOS TK.
Do you have the time, knowledge, team and inclination to go out, kill something, drag it home and prepare it OR would you rather stroke a check and go to a restaurant?
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes7y
You won't be able to BRRRR a turnkey property. In all likelihood, you won't be able to get any built-in equity upon purchase and will likely be into it for a bit more than it's worth. Some turnkey companies are good (some are not) but they're really for passive investors IMO
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes7y
Originally posted by @Steve Vaughan:
The comparison of a turnkey vs brrrr are polar opposits.
Turnkey = On market, no work, little if any equity capture.
Brrr = Off-market (hopefully), tons of work and tons of equity capture when done right.
A closer comparison would be to buy a rent-ready house off the MLS in your market and hire a PM or do an OOS TK.
Do you have the time, knowledge, team and inclination to go out, kill something, drag it home and prepare it OR would you rather stroke a check and go to a restaurant?
Great way to describe it Steve. Comes down to time. Do you have the time to do it, to learn, to find all vendors? Some investors have more time than others and everyone values their time differently. Pick the one that fits you best. BRRR does not work for everyone.
- Real Estate Consultant · Whitestown, IN · Member since 2014 · 547 posts · 933 votes7y
@Daniel Mendez We work with a lot of OOS investors and I generally don't recommend a new investor to take on highly distressed property. It's a lot of trust, risk, and stress. I'm not always a turn-key fan for the reasons listed above, but it is a great way to start a portfolio. IMHO, I think that the first home in your portfolio is going to determine the strength and ability to grow as time goes on. It's really the foundation of your portfolio, so I recommend less risk for your first home or two. This will also give you more time and experience with your team. When investing OOS, trust and communication is vital. I recommend you visit your target city, interview several professionals/providers in the area, and network with other OOS investors in your target city. Start with something easy like turn-key or a near "rent-ready" MLS home. The ROI will not be as great, but you will learn a lot. I always recommend finding something with predictability, not speculative neighborhoods or "pigs" marketed as "cash-cows." What seems to be a "cash-cow" tends to get "milked" every year or two when your tenants move out.
- 7yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
@Daniel Mendez You've gotten a lot of good responses that are spot on. I don't think it's a matter of good or bad. It's more a matter of what your goals are. If your primary goal is equity and you have the time, skills, desire and risk tolerance, then the BRRRR strategy might be the best way to go but it's not easy to pull off remotely and is risky. It really only makes sense if you plan to do it on a larger scale. It's too much work of you're only going to do 2 or 3 deals. If on the other hand, if you have a business work, family etc and don't have the time or inclination to manage all the moving parts of a DIY and your primary goal is cash flow, turn key is usually the best way to go.
- Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes7y
@Steve Vaughan I love the comparison!
I agree that there's some solid middle ground as well.
I've seen hundreds of out of state investors buy existing rentals in OKC. So these properties aren't fully rehabbed but the seller is taking care of all structural, safety and mechanical. Also there's already a tenant in place, so you know what you'll make from rent and that it's cosmetically acceptable to rent. You're not paying top of the market, because it's not been fully rehabbed, but you're also not putting in a ton of work either. You factor for the appropriate amount of maintenance that is likely given the condition of the house and if the numbers still make sense you're good to go! There's not a ton more work to be done, because property management takes care of those requests.
- Investor · Dallas, TX · Member since 2018 · 254 posts · 47 votes7y
Originally posted by @Andrew Syrios:
You won't be able to BRRRR a turnkey property. In all likelihood, you won't be able to get any built-in equity upon purchase and will likely be into it for a bit more than it's worth. Some turnkey companies are good (some are not) but they're really for passive investors IMO
Andrew,
How do I know that a turnkey company is a good company that I know won't do anything dirty?
- Investor · Dallas, TX · Member since 2018 · 254 posts · 47 votes7y
Originally posted by @Ross Denman:
@Daniel Mendez We work with a lot of OOS investors and I generally don't recommend a new investor to take on highly distressed property. It's a lot of trust, risk, and stress. I'm not always a turn-key fan for the reasons listed above, but it is a great way to start a portfolio. IMHO, I think that the first home in your portfolio is going to determine the strength and ability to grow as time goes on. It's really the foundation of your portfolio, so I recommend less risk for your first home or two. This will also give you more time and experience with your team. When investing OOS, trust and communication is vital. I recommend you visit your target city, interview several professionals/providers in the area, and network with other OOS investors in your target city. Start with something easy like turn-key or a near "rent-ready" MLS home. The ROI will not be as great, but you will learn a lot. I always recommend finding something with predictability, not speculative neighborhoods or "pigs" marketed as "cash-cows." What seems to be a "cash-cow" tends to get "milked" every year or two when your tenants move out.
Ross,
You make some great points.
I hear a lot of investors saying that people should visit at least once the city that they are planning to invest.
In your opinion, what are a few tasks that every investor must accomplish when traveling to the state that they are looking to invest? Is it to meet and interview potential real estate agents, property management companies?
- Investor · Dallas, TX · Member since 2018 · 254 posts · 47 votes7y
Originally posted by @Alyssa Dyer:
@Steve Vaughan I love the comparison!
I agree that there's some solid middle ground as well.
I've seen hundreds of out of state investors buy existing rentals in OKC. So these properties aren't fully rehabbed but the seller is taking care of all structural, safety and mechanical. Also there's already a tenant in place, so you know what you'll make from rent and that it's cosmetically acceptable to rent. You're not paying top of the market, because it's not been fully rehabbed, but you're also not putting in a ton of work either. You factor for the appropriate amount of maintenance that is likely given the condition of the house and if the numbers still make sense you're good to go! There's not a ton more work to be done, because property management takes care of those requests.
Alyssa,
Have you invested in turnkey properties? If so, what has the experience looked like?
- Investor · Dallas, TX · Member since 2018 · 254 posts · 47 votes7y
Originally posted by @Frank Wong:
Originally posted by @Steve Vaughan:
The comparison of a turnkey vs brrrr are polar opposits.
Turnkey = On market, no work, little if any equity capture.
Brrr = Off-market (hopefully), tons of work and tons of equity capture when done right.
A closer comparison would be to buy a rent-ready house off the MLS in your market and hire a PM or do an OOS TK.
Do you have the time, knowledge, team and inclination to go out, kill something, drag it home and prepare it OR would you rather stroke a check and go to a restaurant?
Great way to describe it Steve. Comes down to time. Do you have the time to do it, to learn, to find all vendors? Some investors have more time than others and everyone values their time differently. Pick the one that fits you best. BRRR does not work for everyone.
So basically, if I just want cash flow and not worry about building immediate equity then going turnkey would be the best right?
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @Daniel Mendez:
Hey BP,
I am looking into purchasing my first investment property out of state. Most likely in Indianapolis, Indiana.
I am currently debating on whether or not I should start with a BRRRR property or Turnkey property.
However, It seems like people aren’t fond of turnkey companies.
Can anybody tell me why? If i do go with a turnkey property what are some tips that you guys can give me in order to get a good turnkey property?
A property is a property. At its core, there is no difference between a turnkey property & any other property. What you are trying to compare is apples to oranges. Successfully pulling off a BRRRR requires you to seek & find a distressed property from a distressed seller, buy it at a below market price, successfully rehab it at a cost that makes the property comparable to turnkey properties in the market but for an all in price that is below what these comparable turnkey properties are being sold for in an arm's length transactions. Turnkey companies do everything above & then sell you the property.
So it's not about the property. It's about you and your ability to pull off the BRRRR. You'll need to be good at marketing, rehab management, rehab estimation, an expert in the local market & a great team building. Can you successfully do all of that? Do you want to spend the time, energy, resources and take on the risk of trying to pull that off? If the answer is yes then go for it, your business will probably make some money. If the answer is no and you just want a passive way to park your money then you want to pay someone to do all of that for you, those people are turnkey providers. Think making your own dinner vs going to a 5-star restaurant, that's what we are really comparing here.
- 7yHarvey LevinPro MemberProperty Manager · Indianapolis, IN · Member since 2012 · 205 posts · 157 votes
A third option would be to use a reputable realtor who can find your property that will help you accomplish your specific needs and goals . We manage a lot of properties for investors that utilize Realtors very successfully
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Clayton Mobley:
I should also note that a lot of negativity about turnkey also comes from the occasional scam artist calling their 'business' turnkey, when it's absolutely not. It's become a bit of a buzzword lately so be sure you look for true turnkey companies: full-service, everything in-house from finding props to rehab to management; live and work in the market they sell; no used car salesman or pressure tactics.
Look up Morris Invest on BP to get a good idea of what to look out for.
ya Turn key is taken way out of context.. like its some animal of its own.. its simply a company that instead of retailing homes to home buyers sells them once rehabbed to investors.. nothing more nothing less.
nothing different than going to the grocery store and buying your food.. you can plant your own garden.. and you can grow your veggies from seeds.. or you can buy starts or you simply go buy whats in the market..
The reason flippers ( which is what turn key companies are they are flipping for profit) exist today is the huge demand for return dollars on leverage.. And some smart folks realized this 20 years or so ago and instead of selling locally they brought their weirs to market on the west and East coasts and out of country.. Then we have to back into why anyone would buy a home for a rental in another market.
This demand comes from primarily high priced markets were the cost of entry is quite a bit higher than the quote un quote turnkey markets of Central US and deep south and Rust belt cities.. that's were the inventory is that can be bought.. there is more houses than there are owner occ's to fill them.. so this creates inventory for flippers for rental purposes.. take it another step along the food chain an these companies realized for customer care and a full service package they needed property management in house and tight controls on rehabs..
So bottom line is out of area investor with 25 to 30k can get in the game.. and that is the attraction.. were 25 to 30k in the high priced markets not so much.. and then you have others that have more wherewithal than that and they scale it .. bottom line investors chasing yield.
If investors can get a 5% return in CA.. as opposed to 5% in the mid west what would they do.. But they can get 7 to 10% these days so they take on out of state risk chasing yield.
And then of course there is the BP mantra of cash flow is everything and investing for appreciation is for suckers.. and that frankly is the majority opinion on this site.. But that's generally from investors that are not in the business. They are just looking for a passive investment that will throw off better than average returns and have easy financing and leverage.
- Johnston, IA · Member since 2016 · 129 posts · 50 votes7y
@Daniel Mendez Get to really know the TK providers in the area you are looking to invest in. Whenever possible, I recommend a visit to the area and set up meetings with the companies you have narrowed down your search to. If travel isn't possible, and it's not possible for a lot of people, get on the phone. Make connections that way. Check BP, BBB, Google... all great avenues to check their reliability.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Steve Vaughan:
The comparison of a turnkey vs brrrr are polar opposits.
Turnkey = On market, no work, little if any equity capture.
Brrr = Off-market (hopefully), tons of work and tons of equity capture when done right.
A closer comparison would be to buy a rent-ready house off the MLS in your market and hire a PM or do an OOS TK.
Do you have the time, knowledge, team and inclination to go out, kill something, drag it home and prepare it OR would you rather stroke a check and go to a restaurant?
too funny your killing meat and I am a vegetarian my analogy was like planting a garden.. LOL>
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes7y
Turnkey vs MLS is maybe the closer comparison. You basically can find turnkey type homes on the MLS and a larger selection compared to TKs company inventory. On the MLS you might be competing against retail buyers vs TKs OOS investors. From what I can tell OOS investors pay more than local retail buyers might. So you have a cottage industry marketing for those OOS suckers I mean investors.
Brrrrr is another ball game all together.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Steve Vaughan:
The comparison of a turnkey vs brrrr are polar opposits. ....kill something and drag it home and prepare it OR would you rather stroke a check and go to a restaurant?
too funny your killing meat and I am a vegetarian my analogy was like planting a garden.. LOL>
I like your garden analogy, Jay. More options of effort/cost ratios wiith seeds vs starters, etc.
I guess one could go to the woods and drag some morels home vs buying them in a store or restaurant as a vegetarian analogy. LOL
Our OP just wants cashflow ()ike most as you mention) and thinks it exists in low value areas. Most learn it's IRR that matters in the end, not the $200 month you average for a year or 2 until a bad tenant or cap ex wipes out 5 years worth in one swoop.
- Real Estate Consultant · Whitestown, IN · Member since 2014 · 547 posts · 933 votes7y
Originally posted by @Ross Denman:
@Daniel Mendez We work with a lot of OOS investors and I generally don't recommend a new investor to take on highly distressed property. It's a lot of trust, risk, and stress. I'm not always a turn-key fan for the reasons listed above, but it is a great way to start a portfolio. IMHO, I think that the first home in your portfolio is going to determine the strength and ability to grow as time goes on. It's really the foundation of your portfolio, so I recommend less risk for your first home or two. This will also give you more time and experience with your team. When investing OOS, trust and communication is vital. I recommend you visit your target city, interview several professionals/providers in the area, and network with other OOS investors in your target city. Start with something easy like turn-key or a near "rent-ready" MLS home. The ROI will not be as great, but you will learn a lot. I always recommend finding something with predictability, not speculative neighborhoods or "pigs" marketed as "cash-cows." What seems to be a "cash-cow" tends to get "milked" every year or two when your tenants move out.
While he's a competitor, I hate sending business his way, @Mike D'Arrigo's outfit is probably the most established and dependable one in Indianapolis. I've had a few clients purchase from them. We had inspections done and the few items that came up were handled. The tenants that we took over were good tenants. The homes were rented at or near the top of the market. The only issue with them... is the issue with TK's in general... the price. I would certainly check them out. There the only ones that I would personally refer (and I do not get any kickback's from them.)
As far as visiting a city... start with understanding the market. My thought is this:
- Look at a map of your target city on Zillow and Trulia. Look at sales prices of active listings in various neighborhoods. Look at rental prices in various neighborhoods. Look at days on the market for those areas. Compare your rent/price ratios, consider retail demand, research crime and schools, etc. That will help you understand the layout of the city... but understand that Indy has distinct boundaries of neighborhoods and homes 2 blocks apart can be very different. You can use sites like niche.com, city-data.com or point2homes.com to research neighborhood and zip code demographics as well.
- I'm a big fan of building your team around your property manager. In the long run, they will be your longest partner and have similar financial incentives. Basically, a realtor gets paid when you buy a home, their goal is to sell you a home and how much they get paid is relevant to the purchase price. Wholesalers are the same way. Property managers get paid by renting your home. They get paid based on how much they can rent it for. They don't get paid when it's vacant. There incentive is to keep units occupied at the highest rent reasonable... pretty similar to yours.
- To identify property managers, I recommend starting with their leasing departments.
A good PM should have the ability to take good pictures, create compelling listing descriptions, utilize technology (online applications, social media campaigns, etc.,) and have a leasing team that you can get in touch with and is flexible to schedule showings. There are PM's out there who will not show a property until you fill out a $35-$50 application which is a turn off to a majority of tenants. There are PM's who only respond to online inquiries. There are leasing teams who are impossible to schedule a tour of the home.
Write down the PM's who seem to be the best at what they do and start calling the leasing phone numbers and leave a voicemail if you don't get an answer. You'll be surprised how many will never answer the phone or never call you back. When you do get in touch with someone, tell them that you are relocating from out of state and will be in town late Saturday and most of Sunday and would be interested in a couple of their properties. I bet you won't be able to get a showing in that time frame from most of them. The point is this... if you home sits on the market for 60 days instead of 14, you're losing almost 2 months of rent. That is a huge increase to your vacancy rate.
After you've identified the better leasing departments... call their business departments and start interviewing. Get a short list and be sure to meet with them on your visit. - Finding investor oriented realtors can be difficult, but get a referral from other investors and your PM's probably work with some as well. See if you PM's and/or Realtors can recommend insurance agencies, lenders, contractors and whoever else you may need to put your team together. Understand, most of us are protective of our contractors though, so don't expect too much.
- When you visit your town, drive the neighborhoods and get a feel for the kind of area it's in. Do all the homes have security doors and bars on the windows? Are there blighted homes in the area? Do the streets have sidewalks? What parks are nearby? What types of homes are in the area and how are they kept?
- Meet with your short list of PM's, Realtor's, Wholesalers, Investors, etc. You might even schedule your visit around a meetup or REIA meeting to extend your network further.
I will tell you, I've met several OOS investors who were quite surprised with the difference of what they expected to see and what they actually saw. Sometimes realtors and wholesalers paint pictures that are quite different that what you'll find. Experience is the best teacher. Your putting 10's of thousands of dollars on the line, do your due diligence.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Steve Vaughan:
Originally posted by @Jay Hinrichs:
Originally posted by @Steve Vaughan:
The comparison of a turnkey vs brrrr are polar opposits. ....kill something and drag it home and prepare it OR would you rather stroke a check and go to a restaurant?
too funny your killing meat and I am a vegetarian my analogy was like planting a garden.. LOL>
I like your garden analogy, Jay. More options of effort/cost ratios wiith seeds vs starters, etc.
I guess one could go to the woods and drag some morels home vs buying them in a store or restaurant as a vegetarian analogy. LOL
Our OP just wants cashflow ()ike most as you mention) and thinks it exists in low value areas. Most learn it's IRR that matters in the end, not the $200 month you average for a year or 2 until a bad tenant or cap ex wipes out 5 years worth in one swoop.
yes if your going to look at SFR rentals on a cap rate basis like most do.. then you need to measure IRR monthly cash flow is really meaningless.. you wont know how you actually did until U exit.. However like most that post on here say they will never sell. but we know most will and within 10 years that's just a fact.
- Real Estate Consultant · Whitestown, IN · Member since 2014 · 547 posts · 933 votes7y
Originally posted by @Jay Hinrichs:
And then of course there is the BP mantra of cash flow is everything and investing for appreciation is for suckers.. and that frankly is the majority opinion on this site.. But that's generally from investors that are not in the business. They are just looking for a passive investment that will throw off better than average returns and have easy financing and leverage.Originally posted by @Clayton Mobley:
As always, Jay is so right. There are many moving pieces in investment properties and usually appreciation is the better payout unless your holding "all-cash" which will usually have a lower COC ROI than a levered position. Mike D'Arrigo has a great article breaking this down. Equity is a powerful piece of the puzzle that can't be ignored. I'm not talking about speculation... just established, stable areas with retail demand.
- Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes7y
Wow...there are some great responses here, and I'm encouraged to see that it's not another Turnkey-bashing party. Both sides are represented well. That said, as a TK provider, we get 1-2 investors per WEEK reaching out to us privately on BP, wanting to "partner" with us on a BRRRR. Namely, they want us to do all the work, and they keep all the forced appreciation. This is usually after they start understanding how much work it really is, and they still want the shortcut to the Promised Land.
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes7y
I don't love BRRR's lol- they're a lot of work... and you get your money back but the cash flow ends up being pretty skinny most times. If you're going to do a BRRR deal, I say flip it when you're done and use the profit to grow your "investing business" faster.
If you would like to be more passive about your investment, however, buying a property that is rent ready is a good option. I'm not going to say turnkey- it doesn't have to be a brand new perfect property that someone flipped. It just has to be operable with a low amount of work & additional funds required for you to stabilize.
I've got nothing against a good property provider, but like everything, there are bad ones. I think people fall into bad providers' traps because they don't make good buying decisions. That being said, here's a quick bit on how I recommend you go about buying a rental property (regardless of who the seller is) to reduce a good chunk of your risk:You've got to pick the right OOS market. You have to find a good property manager (I got mine through referrals). You need to run a conservative pro-forma. You need to get a 3rd party inspection to ensure the property is in the condition you expect. You need to get an appraisal (esp if you're new, use financing) to ensure the property is of the value you expect it to be. The people that fell for the Morris Invest BS bought cash without inspections. Shame on that company for scamming folks... but those buyers did not do their own do diligence. Work with a provider that ENCOURAGES you to do your due diligence.
Also, people need to stop buying 10-12% returns. Watch out for major cities too- they're saturated with investors. Secondary markets are, in my opinion, a better bet.
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