Opportunity Cost: Turnkey vs BRRRR?

88 Replies

Hi BP members! I'm an aspiring multifamily investor from Memphis, TN. Currently in the learning and information gathering stage, I am trying to wrap my mind around the major differences and opportunity costs between choosing to buy a turnkey property or to BRRRR. Can anyone share personal experiences with whether they chose to buy Turnkey or to buy and rehab? Likewise, if you've had experience with both, I'd love to hear how you chose which strategy to utilize and the pros/cons for your investment in each situation! Whether you have experience in SFR/SFH, multis, or something else - I am interested in hearing all different perspectives!

Thanks 

I was up in Knoxville a couple of weeks ago with the mindset of buying my own properties, doing my own rehabs, finding my own lenders, finding my own property manager, etc etc etc.  Took way to much time, I am going TK.  It all depends what one's time is worth. Even being your own property manager can be a major pain in the a$$.  @Douglas Skipworth has the best video I have ever seen of why to hire a property manager.

Thanks @Alex Craig ! I can certainly see how time can be a major deciding factor. And I'll be sure to check out the video you mentioned.

I do OK with TK properties but have never bought one through a 3rd party TK company. My best deals have been when I find a property that is a good candidate for BRRR. You don't have to buy run down properties to be successful if that is not your cup of tea.

Both have its pros and cons. I have experience in both and given a choice and time by my side, I would do BRRRR instead of TK. You have to make a call what's your time worth as BRRRR is active and involving vs TK which could be complete hands off with all the ducks aligned by the TK provider. you just have to collect rent from day of closing...

If someone is newbie and have some time crunch but have cash to spend for DP, I would recommend going TK route to get some landlord experience (it's not completely passive as masses think), then slowly build a network, working relationship with that provider and other key people in the target market and then plunge into BRRRR side. One thing to remember BRRRR works when you buy distress properties to some degree and that may mean financing eligible or not, in that case it is purely a cash deal. Hope this helps!

Thanks @Glenn McCrorey ! Can you tell me a little bit more as to why you've personally chosen not to purchase via a 3rd party company? Also I'd love to know what factors seem to make your BRRR properties better deals.

Thank you @Douglas Skipworth !

Thanks @Mayank S. ! That definitely gives me more to think about. So I can easily see how BRRRR can be more time and possibly capital intensive; however, why is it that you would still choose this approach over buying a TK property? I believe I must be missing something. I'd hate to assume incorrectly, but is it that BRRRR properties give better returns?

I have thought about buying in Atlanta or Memphis through a TK company but when I look at the rent, cash flow, and return on investment ROI, I can do better buying right here in my town.

I do the BRRR when I can get a property that needs some work but has potential. Adding an egress window to a non conforming bedroom to make it a legal bedroom for example. I recently bought a house for 107K cash, put 19K in it (126K total) and it appraised for 145K. The bank I use lets me borrow 85% of the appraised value so I got a loan for 123K. It cash flows $400 a month after a property management fee (not counting repairs and vacancy). That might not seem like a lot but I only have 3K invested in it.

@Tiara Stewart-Cannon I like doing things my way where I have some control over what price, how much rehab and what budget to set and having an oversight of how things work on a grass root level. These things are missing on TK side where you just go and buy product after some due diligence and start getting returns. One thing that really is huge for me is equity right off the bat when doing BRRRR vs TK which mostly leave no meat on the bone and sell at market price. That gives some downside protection too and after six mth to a year seasoning, get all the investment back via cash out refi. Retrun wise, I have not held properties long enough to say one is better than others, both are doing equally good but BRRRR has good equity than TK for sure...

BRRRR are better than turn key properties. There's a few markets that turn keys might have an edge but overall BRRRR/buy and hold is the smarter decision.

Why?
1- BRRRR has higher cash flow.
2-BRRRR has higher equity.
3-BRRRR better renovation.

The big key as a contractor I see here that BRRRR helps you sleep better a night knowing you did a nice renovation on that BRRRR property and know everything behind that wall. But with a TK property you will spend tons on plumber for a leak you have no idea where it's coming from, an electrician figuring out where the short circuit or bad wiring is at and a contractor to fix a patch up Sheetrock or chip paint and all while the tenants are moved and living there months down the line.

Hope nobody gets offended when I say this but turn keys properties are for people who don't want to do any grunt work. They have the money to buy the property and wants to fell like an home owner and start thinking in few years equity will improve to cash out with profit.

I think the key is which do you have more of time or money?

Originally posted by @Tiara Stewart-Cannon :

Hi BP members! I'm an aspiring multifamily investor from Memphis, TN. Currently in the learning and information gathering stage, I am trying to wrap my mind around the major differences and opportunity costs between choosing to buy a turnkey property or to BRRRR. Can anyone share personal experiences with whether they chose to buy Turnkey or to buy and rehab? Likewise, if you've had experience with both, I'd love to hear how you chose which strategy to utilize and the pros/cons for your investment in each situation! Whether you have experience in SFR/SFH, multis, or something else - I am interested in hearing all different perspectives!

Thanks 

That's the wrong question to be asking.

What you should be asking is "how can I achieve my investment goals"?

And you should be very specific about what those investment goals are.  All activities of real estate investors should flow from accomplishing their investment goals.  If they are spending time doing things that do not lead them closer to accomplishing those goals, they are wasting time!

Okay @Glenn McCrorey , when you put it that way I can certainly see what you mean! Thank you for including the numbers, as that aspect really helps clarify the differences. That's actually pretty cool, especially when you put it in the perspective of just having invested 3K.

@Mayank S. I really appreciate you breaking it down that way! I'm really learning a lot from this thread. I can tell I really didn't understand some of the key nuances involved in BRRRR. Thanks for such a detailed explanation!

Thanks for your straightforward reply Account Closed! I especially appreciate your perspective, being that you are a contractor. Would you happen to have any tips on finding quality contractors when personally managing RE rehab? I'm sure each market is different, but any general guidelines for a complete renovation newbie would be appreciated.

I am in the rehab stage of my first BRRRR and I will definitely say it is worth making sure that you have your ARV correct and know very well what the rehab will cost upfront. I am wishing in retrospect that I not only had an inspection but also had my contractor view the property in the due diligence period. There were several small things I expected to do in the rehab that ultimately my contractor told me were infeasible and a change of plans was necessary. Just my two cents for my personal experience, although not 100% on topic. Good luck with it!

I think that pretty much gets to the crux of it, thanks @Paul Ewing !

Hey @Jon S. , thanks for joining the conversation. I'm pretty new to all this, but I firmly believe knowledge and a sound foundation is always the first step in achieving any goal or major undertaking. While specific steps will differ per endeavor, being unclear on basic concepts simply won't do. So I can see how it likely isn't the ultimate question, but I don't think it's necessarily wrong. However, to your point: how would you advise me in achieving my first investment goal of acquiring a cash flowing multifamily property in Memphis, TN? I've read and researched a lot, but first steps tend to differ. I'd love to hear your perspective on first steps!

Hi @Michael Kennedy and thanks for joining in. First off, congrats on getting out there and getting started! I'll definitely keep that in mind. As I plan to be in your position a short time from now, I will certainly not skip the inspection or having a contractor view the property upfront. Are there any other things that you'd wish you'd have known or done, in retrospect?

@Tiara Stewart-Cannon  For one, I was not aware of the BiggerPockets community until just before creating the deal, so I would say just being on here reading and talking to people is a huge advantage that I missed out on leveraging the first go 'round. I had read a significant amount but did not have the experience of talking with and hearing experiences in so many different markets or with different strategies.

Originally posted by @Tiara Stewart-Cannon :

I think that pretty much gets to the crux of it, thanks @Paul Ewing !

Hey @Jon S., thanks for joining the conversation. I'm pretty new to all this, but I firmly believe knowledge and a sound foundation is always the first step in achieving any goal or major undertaking. While specific steps will differ per endeavor, being unclear on basic concepts simply won't do. So I can see how it likely isn't the ultimate question, but I don't think it's necessarily wrong. However, to your point: how would you advise me in achieving my first investment goal of acquiring a cash flowing multifamily property in Memphis, TN? I've read and researched a lot, but first steps tend to differ. I'd love to hear your perspective on first steps!

Your first step should be developing a very specific goal.  A deal that generates any cash flow at all? $200 a month? 10% cash on cash return? what? How much capital invested? I can cash flow with any property if I put more $ down.  Be more specific.

2. Are you ready to acquire multifamily now or do you need to prepare or gain more experience before doing so?

3. Is Nashville a market that will provide you with best chances to achieve your goal? May be...or maybe not!

4. Are you confident that you can even analyze a deal properly to see if you'll actually cash flow when you locate it? I suggest you google "APOD" or annual property operating data spreadsheet for the correct form/template to use in order to properly evaluate investment properties.

5. What is your plan for property management?  Cash flow isn't always found, often it is made...through negotiating a purchase price, efficient management, and capital structure.

There are a lot more questions you should be asking...but this is a good start.

My BRRR was terrible. Took way too long to do the rehab and I couldn't find a bank to refinance for 2 years! There's some requirement that you wait 2 years for a cash-out refiinance, at least that was the case a couple years ago when I tried. With the cash that I had tied up in that house (which was vacant for about 7 months!) I could have had downpayments for 2 fully occupied multiunits that cash flowed immediately.

 Of course, part of the delay was because I was using a $10k grant from the city for part of the work and had to do things on their slow government timeline. Somebody who needed to sign a form was always on vacation!  The contractor they recommended was very slow too!  The $10k was nice, but some of it was spent on stuff that was required by them that I wouldn't have done normally, plus with the lost rent I ended up about even.

Good stuff @Michael Kennedy - I'll be sure to really dig deep and learn and interact as much as I can then!

@Jon S. , thank you for pushing me in the right direction! I'll be sure to answer all the questions you put forth and focus in on conscientiously committing to being laser sharp in specifics!!! By the way, special thanks for point #4! This is my first time seeing the acronym "APOD". I'll be sure to get on that! Thank you for a great start of questions to ask/answer. I look forward to looking back on this thread and seeing not only my growth but knowing the answers to all of these offhand and with confidence!

This is a great thread. Thanks for starting this Tiara Stewart-Cannon.

@Glenn McCrorey Your post was very helpful as we are in the process of trying to complete our first BRRR deal. As others on BP have shared, the refinance part can be tricky. What bank do you use?

I am not a fan of brrrr because of the opportunity costs. Holding costs is one thing but if you are making 80k or more a year you really need to evaluate if you 1) like doing this rehab stuff or 2) you should just pay a few thousand more for retail and save yourself the risk and headaches and get back to your w2 jobs and pound stuff out there.

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