Opportunity Cost: Turnkey vs BRRRR?

Multi-Family and Apartment Investing
9yFollow

Opportunity Cost: Turnkey vs BRRRR?

Account Closed
New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes

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 

5Reply
180 views

Most Popular Reply

Douglas SkipworthBusiness Member
Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
9y

@Account Closed,

Here's a link to the video Alex mentioned. 

Investor's Guide to Memphis Real Estate
View Page
10Reply
See this reply in the discussion

88 Replies

Jump to latestLatest
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Lane Kawaoka, it doesn't need to be only between your definition of brrrr, OR (retail) Turnkey. 

    @Glenn McCrorey found a middle road. I don't see that his opportunity cost would have been improved by going straight towards Turnkey (which definitely don't just cost "a few thousand more"). Sure, you need to have value-for-money Contractor/s as part of your team, instead of doing the grunt work yourself because you're too busy making >$80k/y, but, you can get to the same ARV as Turnkey - a lot cheaper, which gets you well on the way towards your NEXT Buy!

    1Reply
  • Brian Lacey
    Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes
    9y

    BRRR, 100%

    As far as the value of time...unless you've reached a certain level, quite frankly, your time isn't worth much.

    Time is important, and it sounds great to hear and tell others, but the reality is, until you're making money pretty consistently in investing, your time is another currency you're using.

    You're already in Memphis. It's TK central already. Do the work yourself. Spend more time. Get more money. 

    2Reply
  • Brian Lacey
    Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes
    9y
    Originally posted by @THU NGUYEN:

    You are so wrong, it's not a few thousands more to buy retail, it's $20k to $40k equity on each house you rehab... you end up with only $3k, 4K down payment and still cf $400 a month... what kind of investment that you put $3k down and receive $400 a month cf? Only RE.

    from your mouth to God's ears, 100% accurate.

    1Reply
  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y
    Originally posted by @Lane Kawaoka:

    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.

    Investors, or atleast I, do not do rehabs myself. I hire workers to do them.  For 10 years, I was making over $100k and improving/rehabbing investment properties.  Investors have no business investing if they don't plan on improving property.  Improving property and meeting needs of higher paying renters is one of the primary ways of increasing returns.  And by acquiring property that you cannot improve, you are taking more risk.

    1Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    9y

    Hey Tiara! Ooh, thanks for this post. I was trying to figure out what to write my weekly BP blog on and this question is perfect! I've always bought turnkeys for myself, but I don't think they are for everyone, so I'll create a blog with the pros and cons for each method. My articles usually come out on Saturdays (not sure what time), so keep an eye out for it. Next week when I'm back on here I can put the link to it in here.

    Thanks! :)

    1Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    Either way you purchase you need to know your market that you are buying in.  You need to know the real values of homes in the area and I strongly suggest buying locally.

    2Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    Hi @Amy A.! I'm not sure how I missed your post, but thanks for sharing your experience too! It's unfortunate that your BRRRR involved some hiccups. However, that's exactly something I feared could be a possible outcome with doing rehab... Your next point is definitely something I've thought of too. If I can't successfully increase the ARV and refinance to pull out equity to reinvest (or find tenants quickly enough), I may be better off investing in a TK property.

    It's terrible that with all your work netted you about even; however, I'm sure it was an awesome learning experience - thanks for sharing!

    0Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    You're very welcome @Aquila Leon-Soon and good luck with your BRRRR deal! I'm certainly learning a lot myself.

    Well I'm still learning about good REI practices @Lane Kawaoka, but I can definitely see how BRRRR can seem daunting and possibly not with much value added. Nevertheless, I'm starting to think that may just be when it isn't done correctly. I'm not sure yet though.

    0Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    Thanks for clarifying that @THU NGUYEN! So would it be safe to assume that refinancing successfully is a key component of a good, solid BRRRR strategy? In your opinion, is BRRRR a good option if the investor for whatever reason cannot refinance to pull the equity out? I'm trying to really understand the nuances of the buy and rehab strategy. I'm not sure if you saw, but another commenter faced issues with refinancing, thus my inquiry.

    1Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    @Brent Coombs, I really like your point. The value-for-money Contractors does seem key. Any advice on the best way to find contractors when going into a huge rehab project? I'm sure each market differs, but any insight would be appreciated!

    Thanks @Brian Lacey. Good point. This is definitely what I'm leaning toward, especially when considering the difference in equity of the property.

    I like that @Jon Q. "...by acquiring property that you cannot improve, you are taking more risk." I'll take to heart the sentiment that investors have a duty to improve property. As a newbie, this is not something that's seen/said very often.

    1Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    Hi @Ali Boone! You're more than welcome. I'm excited that I'm learning so much from this post. I definitely look forward to your blog and hope you will return to post the link!

    Thanks @Ian Walsh. I certainly agree, especially after all the reading and learning I've been doing here on BP!

    0Reply
  • Marty Bills
    Investor · Rockwood, MI · Member since 2015 · 2 posts · 1 vote
    9y

    Great thread @Account Closed point we learned not to do the work ourselves. Also, find a contractor a head of time to walk through the place with you and get estimates. We were able to find a local credit union to refinance us after 6 months at 75% LTV. I did have to call about 15 local places to find them though. My vote is for BRRRR if you have the capital to do it.

    1Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    First off congratulations on your successful BRRRR @Marty Bills! It's encouraging to hear that even in spite of newbie mistakes, you and your wife still did well!!! I'll be sure to keep in mind to find a good contractor first and have them walk through any potential properties beforehand! Out of curiosity, what did you all budget for rehab initially? 

    0Reply
  • Marty Bills
    Investor · Rockwood, MI · Member since 2015 · 2 posts · 1 vote
    9y

    Thanks @Tiara Stewart.  Our original budget was $14k.  It ended up costing us $25k. We had to gut the bathroom which was not in the plan and we had to replace most of the driveway. We might have finished it too nice as well,  but we rented it for about $200/month more than the average in the area.

    @Account Closedundefined

    0Reply
  • Glenn McCrorey
    Investor · Cedar Rapids, IA · Member since 2013 · 494 posts · 407 votes
    9y

    @Aquila Leon-Soon The bank I use in Cedar Rapids is Hiawatha Bank. They only loan locally. They are the most investor friendly bank in town. To find one like them in your area you should ask at a REI meeting, ask people that live close to you on BP, call small banks and credit unions, ask for the commercial loan dept then tell them you're an investor and ask about their terms. Once you find a good bank, stay with them and build a relationship.

    2Reply
  • Aquila Leon-Soon
    Cranford, NJ · Member since 2016 · 15 posts · 3 votes
    9y

    @Glenn McCrorey Thanks for the advice!!!

    0Reply
  • Johnathan Alesso
    Investor · San Diego, CA · Member since 2015 · 111 posts · 34 votes
    9y

    Hi Tiara,

    This is a great conversation.  I invest in Pennsylvania from California so I need to rely mostly on turnkey deals.  However, l have come to learn the hard way that "turnkey" doesn't always mean tenant-ready.  I would be sure of the seller's definition of turnkey as I've had to put a lot of money into repairs. 

    I would most likely pursue a combination of turnkey and BRRR if I were to live in PA. I believe it's fair to say that BRRR is slightly more risky with more potential rewards. Turnkeys are probably a better foundation while BRRR can provide more immediate returns.

    If you are local, perhaps you can try both. If I were new and living in my target city I would probably choose BRRR to build capital more quickly.

    Hope this helps.

    Johnathan

    0Reply
  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y

    Using this rediculous term "BRRR" is doing you all a dis-service and it's frankly useless. Not only will all of you apply it differently, but one strategy does not and will not meet the needs of all investors. There are infinite REI strategies and very few will be executable in all markets.

    I would suggest that you developer your own investment goals and develop your own strategy to help you meet those goals. Even if you tried to replicate someone else's investment strategy, it would turn out differently. You are unique. You have different experience capabilities, experience, and resources. Although information can be shared, REI and your journey toward achieving your goals is a solo one.

    Soak up as much info as possible. If it applies to you and your goal great. If not, that's fine. There are infinite ways to grow wealth and succeed in real estate.  Don't let the use of a term limit your possibilities.

    Instead, focus on taking on projects where you can add value and benefit accordingly.  that could be acquiring properties at a discount and rehabbing and selling them, that could be acquiring properties and improving the property management or changing the financial structure, learning about the market and what type of properties are in most demand and changing them to meet those demands, etc.

    1Reply
  • Michael Medinger
    Real Estate Agent · Oceanside, CA · Member since 2016 · 28 posts · 22 votes
    9y

    I'll throw out a devil's advocate notion conditionally in favor of turnkey properties and positive opportunity cost.

    It's well-known that if you buy a turnkey property (and is indeed in good condition) then you can get a renter into that property and begin to cashflow sooner rather than later.

    Consider also the intrinsic value of the property.  Here's a video by Phil P* that describes the concept in detail: in short, the intrinsic value is the sum total of the costs of building or replacing a property.  The number will vary from one location to another, but suppose for the sake of argument that in your target area, the cost to build new is at or around $100/sq.ft.  If you are able to consistently buy turnkey properties at below this value, then you have a good value -- especially if you have reason to believe that local prices are likely to go up (new employment coming to the area, Main Street restorations, or other identifiable trends).

    The area I buy in has turnkey properties at $40-60/sq.ft and the local cost to build is at roughly $100/sq.ft.  I am uncertain about any organic source of appreciation -- the local economy is a bit stagnant -- however the cashflow is good.  And so I remain confident in my decision to buy when everything pencils out.

    Turning to the pitfalls of buying turnkey properties however, please understand that these require the same levels of due diligence that a BRRR property does. Starting out as an absentee landlord and relying on the word of a self-interested and distant real estate agent and his lazy brother-in-law home inspector will get you in a heap of trouble. Do the right thing, protect yourself, and assume nothing regardless of what kind of property you intend to buy.

    Good luck @Account Closed!

    *edit: Linking to a Phil P video is not an endorsement of his service.  I just like good information whatever its source.

    3Reply
  • Matthew A.
    New Haven, CT · Member since 2016 · 90 posts · 99 votes
    9y

    Can you purchase a Turnkey property and get rid of the PM? That might have been answered, but I think it's relevant to this post.

    Matt

    0Reply
  • Ronnie Woolbright
    Investor · Arlington, TX · Member since 2015 · 22 posts · 13 votes
    9y
    Hi, Welcome to BP! I have done both and either way can work. When I think of turnkey I'm not limited to properties from turnkey companies- I'm thinking of homes that are able to go Fha and need no work. The plus here is you can immediately cash flow with low financing costs. Brrrr works great too. The difference is the home is under Reno for 1-2 months and if you don't use cash then the financing costs are generally higher. I'm thinking of hard money lenders. I have done a couple "turnkey" deals on Mls where the price was discounted enough that the returns would be close to a brrrr deal and it was a lot less work. My main point is financing costs are a big difference. If you do a brrrr deal your numbers have to be really good to cover the financing cost or you need to use cash.
    2Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    BRRR is more profitable if we are comparing to the Turnkey marketing companies business model. If we are talking MLS style rent ready turnkey condition that varies a bit more and based on location etc. The biggest difference is the exit options for Brrr vs Turnkey biz model. Brrrr has better, quicker, more profitable exits. Like Jon S says, most BRRRers don't pound hammers, they hire out. Some TK marketers like to create the false narrative that Brrr investors always do all the physical labor or every rental needs a full rehab. Don't believe that for a minute.

    1Reply
  • Raymond Williams
    Upper Marlboro, MD · Member since 2016 · 14 posts · 6 votes
    9y

    In reading the information you posted my advice is that you may be better of finding ?your niche market."  You can review the city or township you want to work in and see what will work best for you.   You may want to learn as much information as you can, however, that's where many people get burned out:  Buy courses, going to seminars, going to boot camps, trying to learn and know it all before they start and work their business.  Look and see what is selling in your market then repeat that success.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Account Closed, you asked me: "Any advice on the best way to find contractors when going into a huge rehab project?" The best way I've seen work is by REFERRAL from people you already trust, who can back up their recommendation/s with verifiable outcomes. One way to START finding those people who may have relevant recommendations is through attending local REI meetings, and perhaps even following up on like-minded threads here on BP for example.

     Of course, don't become too trusting, too early. It's wisely said: "Trust, but verify"! All the best...

    2Reply
  • Account Closed
    OP
    New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
    9y

    Thank you @Johnathan Alesso! I do think I may simply try both (tenant ready and fixer upper) to see which suits me best. It's one thing to read stories online and do market research but there's no experience like jumping in and seeing for one's self!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free