Opportunity Cost: Turnkey vs BRRRR?
New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes
Opportunity Cost: Turnkey vs BRRRR?
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Douglas SkipworthBusiness Member
Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes@Account Closed,
Here's a link to the video Alex mentioned.
Investor's Guide to Memphis Real Estate
88 Replies
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Thanks @Michael Medinger! I love an alternative perspective and I like the spin you added. This conversation really just proves the answer is, it depends.
Hi @Matthew A.! I've read that you can and upon researching some TK providers, you indeed can just purchase a property from them without having them manage it. Alternatively, one can purchase a "tenant ready"/TK property individual from a company that provides TKs and either self manage or have a TK provider take over as PM for your investment...the beauty of REI - so many options/strategies!
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Great point on the differences in financing options for each strategy @Ronnie Woolbright! Thanks for adding that for consideration.
@Matt R., I appreciate you bringing up exit strategies! I have just started really exploring the subject of exit strategies and how different RE vehicles tend to lead to various exit options.
Thanks @Raymond Williams! Sounds like learning/analysis paralysis. I'll definitely be sure to jump in soon and not just keep trying to learn it all from the sidelines!
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Of course! Thank you @Brent Coombs. I'm not sure why I didn't think of that...referrals! Yes, my very next to-do item is start attending REI meetings and making offline connections. "Trust, but verify!" Great advice, thank you!
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes9y
Originally posted by @Brian Lacey:
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.
Time isn't worth much? Speak for yourself.
Surprised you would even say this living in Seoul, where you can do a new activity or restuarant every day for a year, and not even do 10% of them.
If one's time isn't worth much, they are not an investor, and shouldn't be investing.
- Investor · Levittown, PA · Member since 2016 · 34 posts · 10 votes9yWell that depends. Buying turnkey is not bad unless u pay turn key price. A deal is a deal no matter what it is.. the big difference is cash out, cash in and budget. Where I live a good rental is 1.5%.... if I find a rental that fits that guideline, I will submit an offer. For ur first property word of caution is know ur rehab price and make sure u can refinance
- Investor · Spring, TX · Member since 2015 · 126 posts · 38 votes9yTiara Stewart-Cannon You liked the numbers examples so I will describe the BRRR we did this year. Paid $125k cash ($75k of which I drew down on an unsecured personal line of credit so not really my money), invested $7k in rehab and had total $5k in closing costs on original cash purchase and the ultimate refi. Bought in April for cash and waited 6 months to execute true cash out refi based on a 75% LTV based on the new appraised value post rehab. Appraisal was $155k so I will get back all my cash except $21k which is my remaining cash at risk in the property. I could have chosen the 80% LTV financing option but didn't like the rates. Here's an important point based on my experience which no one ever talks about. Make sure you get it rented before you refi. You asked if the refi is important in an earlier post. To me, it's extremely critical and the appraisal is essential so try to maximize the appraisal as much as you can. The appraisal will be done on three methods - cost, comps and an income approach. These three methods are all competed to determine the appraised value of the home. If you don't have it rented and don't have lease terms agreed upon with a tenant then the appraiser has great latitude with assumptions in his/her income approach valuation model and they will definitely be conservative. I would also highly recommend you attend the appraisal, meet the appraiser in person, pull and provide comps for him/her that help your valuation, document how your property differentiates itself from other comps (to improve value), etc. I would be very "salesy" and pitch your property to the appraiser. They have guidelines they must follow but there's discretion. And don't leave it to them to fully understand your property's value. Walk them through it. After all, the Refi is the very last step to executing a successful BRRR. By the way, after my refi I will still cash flow $400/month after considering r&m, vacancy, taxes, P&I, fees. Hope this helps
- Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes9y
Originally posted by @Andrey Y.:
Originally posted by @Brian Lacey:
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.
Time isn't worth much? Speak for yourself.
Surprised you would even say this living in Seoul, where you can do a new activity or restuarant every day for a year, and not even do 10% of them.
If one's time isn't worth much, they are not an investor, and shouldn't be investing.
When starting out, no your time isn't worth much.
When an investor is successful, your time is now valuable because you have proven your time to be an asset that puts money in your pocket.
Any newbie investor should be worried about one thing right now, and that's the money being created off their assets. Not if their time is worth working on a BRRR or saving the time and going TK.
And it's my opinion. Thanks for tagging along and expressing yours.
- Northern, CA · Member since 2014 · 674 posts · 444 votes9y
In my limited experience I would say if you're only saving a few grand doing a BRRR vs a turnkey you're doing it wrong. I did minimal marketing in the past 12-18 months, spent roughly 5k. From that 5k I had 5 potential deals and closed on one and will be closing on the 2nd in 2 weeks.
That may not seem like good results but lets look at the numbers, I'm in California where houses are not cheap, keep that in mind.
house #1 was bought for 95k plus 2k in closing costs. Since this was my first rehab i was not in a rush and i also helped out the contractor and did some unskilled jobs like painting, overall i maybe saved myself 5k in labor but gained valuable experience being at the house 5-10 hours a week. Im no longer concerned about estimating a rehab. Total amount i put into house was ~165k but ARV is 250-270k! i initially listed for 270k but immediately realized that rentals were in high demand so i pulled the listing and rented the house. i wont have major repairs for years, im clearing $400 a month. I also got my RE license (pulse, check) also so that there would be no legal issues, i would have mls access, and i could save on commissions.
House #2 will be almost all cosmetic, purchased at 107.5k, 20k rehab, ARV ~200k. I will be renting this house with ~$400 cleared each month.
So, my initial investment of 5k plus my time netted me ~150k in equity and $800 in cash flow, that isnt a "few thousand saved".
refinance on house one will close in 2 weeks getting all my cash back out. I started down the REI path like most new people, pay retail, rent, wait a loooooooong time to make any real money. After exhaustive research and reading on BP, I came to the conclusion that sourcing my own off market properties was the ONLY way, IMO, to make significant money both short and long term and to stay in my local market instead of buying midwest properties that will never appreciate, not to mention the distance issues.
lets compare to buying turnkey shall we? I get to pay retail if im lucky, most likely more. It will most likely take me a few years to "make" enough money to cover commissions and closing costs if i need to sell, and how many years just to make back my down payment? i then need to save up another down payment for the next, or, i could do BRRR and keep using the same funds!
IMO investors would be significantly better off doing one BRRR a year over doing 20 turnkey, do the math and you will agree.
To sum it all up, i could not be happier doing what im doing. The training wheels are now off and i know for a fact the only limitation to how well i can do in this business is my time and energy, the rest is easy.
last thing, hate to say it but I've only posted <5x this year i think, once deal one is done the whole RE world changes. i give credit to the contributors here doing 100x what I've done and still finding time.
- Investor · Cedar Rapids, IA · Member since 2013 · 494 posts · 407 votes9y
The bank I use in my town won't help you. Ask other investors which banks they like in your area but as a rule, avoid banks you've heard of and look for local banks and credit unions.
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Hi @Andrey Y.. I'm curious to know: in your opinion, what is a good balance of investing time versus investing money (especially considering a newbie investor may not have much experience)? I think this question gets to the crux of what Brian's comment was referencing. Thanks for dropping into the discussion!
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Thanks @Nick Dumas! Quick follow up question: how exactly would I ensure I can refinance beforehand? Any suggestions or tips??
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Wow @Steven Anderson - This was an exceptional example! I have not come across the advice to be sure to have the property rented before refi so I am really excited that you brought this up! Also, thank you for offering such an in detail look at the best ways to get a great appraisal! I'm learning so much. Not to mention congrats on a highly successful BRRRR! Definitely helpful post
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Wow, thanks for sharing @Lee S.! Your breakdown definitely shows a compelling case for investing in good deals and doing great rehab before successfully refinancing. I really appreciate all the detail you provided too! I am working hard to learn enough to sidestep making any obvious newbie mistakes and then jumping right in to my first investment property! Thanks for contributing!
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes9y
Hey! It came out late, but it's out now.
https://www.biggerpockets.com/renewsblog/buy-rehab...
This chain ended up getting long...I wish I had had it when I wrote it so I could have included everything! :)
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes9y
Originally posted by @Brian Lacey:
Originally posted by @Andrey Y.:
Originally posted by @Brian Lacey:
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.
Time isn't worth much? Speak for yourself.
Surprised you would even say this living in Seoul, where you can do a new activity or restuarant every day for a year, and not even do 10% of them.
If one's time isn't worth much, they are not an investor, and shouldn't be investing.
When starting out, no your time isn't worth much.
When an investor is successful, your time is now valuable because you have proven your time to be an asset that puts money in your pocket.
Any newbie investor should be worried about one thing right now, and that's the money being created off their assets. Not if their time is worth working on a BRRR or saving the time and going TK.
And it's my opinion. Thanks for tagging along and expressing yours.
Thanks for chiming in. I agree with your 2nd sentence, to an extent. However, "working" on a BRRR or flip is working, not investing. I've known folks who were independently wealthy and intelligent to begin with, and wanted to pull their hair out after deciding to manage a flip. What you are describing is a JOB.
I would still argue that if a newbie's time isn't worth much, they are thinking the wrong way. Maybe I am biased since I see and diagnose cancer in young folks all the time... but, money is easily made and easily lost (by newbies too), but time is not manufactured.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes9y
Originally posted by @Account Closed:
Hi @Andrey Y.. I'm curious to know: in your opinion, what is a good balance of investing time versus investing money (especially considering a newbie investor may not have much experience)? I think this question gets to the crux of what Brian's comment was referencing. Thanks for dropping into the discussion!
Tiara, see my last comment. Adding to this, I think this is a question you have to answer for yourself. I think learning of any kind (not just real estate related), is time spent wisely. I would invest my money to a lower returning asset and spend the 30 hours I save reading 10 books - very easy decision. If you are BRRRing or flipping, you may spend well over 30 hours, even on a single project. Wholesaling? You may spend 2 or 200 hours to make a single deal.
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes9y
As you are in Memphis one of the main things to consider is that turnkey will mean you have paid too much for the property and there is muted, almost zero appreciation so you have no exit strategy except selling at a loss. It could take ten or even 20 years before you could sell at a profit. This makes the do it yourself approach better from that perspective. The flip-side is if you rehab yourself finding good contractors etc. in Memphis is difficult and you can get ripped off. So it will come down to what sits best with you. If you are time poor or risk averse go turnkey but not in Memphis. Go to a city that gets at least 5% or more genuine appreciation annually so you don't have to keep the homes like a tattoo.
If you want to stay in Memphis buy wholesale and rehab them yourself. Then you can always exit at a profit if your circumstances change.
For example this home LINK would cost you around 100K from a turnkey. You can buy a home like this from the likes of us for 74K or buy a similar one unrehabbed for around 50K and put 20 in it.Either way you have 25K more in your pocket and the ability to sell it which the Turnkey will NOT give you.
- Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes9y
Originally posted by @Andrey Y.:
Originally posted by @Brian Lacey:
Originally posted by @Andrey Y.:
Originally posted by @Brian Lacey:
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.
Time isn't worth much? Speak for yourself.
Surprised you would even say this living in Seoul, where you can do a new activity or restuarant every day for a year, and not even do 10% of them.
If one's time isn't worth much, they are not an investor, and shouldn't be investing.
When starting out, no your time isn't worth much.
When an investor is successful, your time is now valuable because you have proven your time to be an asset that puts money in your pocket.
Any newbie investor should be worried about one thing right now, and that's the money being created off their assets. Not if their time is worth working on a BRRR or saving the time and going TK.
And it's my opinion. Thanks for tagging along and expressing yours.
Thanks for chiming in. I agree with your 2nd sentence, to an extent. However, "working" on a BRRR or flip is working, not investing. I've known folks who were independently wealthy and intelligent to begin with, and wanted to pull their hair out after deciding to manage a flip. What you are describing is a JOB.
I would still argue that if a newbie's time isn't worth much, they are thinking the wrong way. Maybe I am biased since I see and diagnose cancer in young folks all the time... but, money is easily made and easily lost (by newbies too), but time is not manufactured.
The issue with TK, as many find out, is the exit.
You buy at retail value. Best case scenario, you actually get the $100-$200 in CF/month with minimal to no headaches. At best your basic 2-3% market appreciation.
Where is the upside?
Going BRRR, yes, it is more work, yes, it is a job. So is a bad TK, which is very possible. The upside on BRRR is the built in exits. You can refi, you can flip, you can exit mid progress, and price in your work for a potential net zero exit. So many more exits with much more upside. Built in equity, cash flow, recycling money, it's now scalable.
Is there risk in BRRR? Absolutely, there is always risk with any security.
Is there risk in TK? You betcha.
If you're ever going to pay retail in any security, you will never in a single lifetime maximize your wealth. Will you have more free time? Yeah, you're right. You're paying retail prices for time, but assuring yourself that you'll have to trade more time down the road because of your retail price and minimal upside and exits.
And it's not that time isn't worth much, it's just not worth a lot if you're just starting out in RE. A newbie hasn't done anything to prove that their time is an asset that produces wealth. It can be, but they haven't proved it yet.
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Thanks @Ali Boone for coming back to share the link!
@Andrey Y., thanks. I missed the notification for your previous comment. Definitely will vary person to person but I can certainly see where you're coming from.
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Thanks for the excellent illustration @Dean Letfus. I've learned a great deal from this thread and after doing some of my own independent research, have come to the same conclusion: my first few projects, especially in Memphis, will be rehabs.
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Hi @Account Closed and thanks for adding to the conversation! It definitely seems a turnkey makes it much easier to obtain conventional loan financing. To sidestep this, I'm seriously considering house hacking my first investment. I'm undecided on how I feel about the whole refinancing and leveraging tactic, but it is starting to make more sense to me. As a newbie, I was in a mindset of all debt being "bad", but I am starting to see how that perspective is flawed. Once I get a bit further along/closer to being ready to invest, I will certainly reach out if I have any questions!
- New to Real Estate · OH/TN/FL · Member since 2016 · 135 posts · 35 votes9y
Thanks for the confirmation @Account Closed! Good to know I am starting to figure things out
- Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes9y
Many people talk about how their BRRRR's cost them close to $0 out of pocket. What I have found in my research is that these instances are extremely rare or the rehab wasn't a full long term investment rehab. Now, you can wait around for several months or so and hope an opportunity comes up or be flexible. I am being flexible due to opportunity cost, plus I am in the growth phase. Over the next five years keep acquiring properties, turn keys, light rehabs ($10k or under), and if a BRRRR comes up jump on it. After 5 years or so see what homes are providing the best returns and which are providing the least. Then if I want, sell the duds and keep the good ones. Basically acquire, filter, acquire, and so on.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes9y
So I personally like the idea of doing a mix of BRRR and TK. For my first purchase I'm going the TK route, because I have the money for the DP but very little time to actively manage a renovation. The information I've learned throughout the TK experience has been very helpful. Down the road, I'll probably do the BRRR, but you will likely need more cash for this strategy.
A brief example of the BRRR strategy for a house I recently saw was this: buy for 25k, renovate for 15k and ARV of 55k. So after its all done, you're 40k into it and a few months in you refinance and pull that money back out again. and then you use that money to do another BRRR and in theory you create a self sustaining model.
- Real Estate Agent · Gilbert, AZ · Member since 2016 · 220 posts · 122 votes9yI agree with much of what was said here. I chose the BRRR method because it would take me too much time to save up for each down payment buying TK. By doing BRRR I can reuse the same funds over and over. I'll also echo that a true BRRR where you get all your money back to include carrying, financing, etc. costs is tough, the cash outlay is much less than 20 to 30% required for a turnkey down payment. Yes it's more time and effort but I can grow the portfolio faster.
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