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
- Rental Property Investor · Rockwall, TX · Member since 2017 · 87 posts · 49 votes9yDean Letfus YOU are selling turnkeys. So what you are saying is OTHER turnkeys are overpriced, but not YOURS? Tiara Stewart-Cannon I have only been studying REI for about 3 months, but I'm pretty sure that MY first purchase (maybe 2-3) will be turnkey. If you're buying for long term buy and hold cashflow, appreciation is really just gravy. I believe that you CAN find reputable TK providers that might even give you a little bit of equity. And there are even some that will let you go both ways. You can buy post-rehab with a tenant in place (TRUE "turnkey") which will cost you more and leave you less equity but also less risk; OR you can buy pre-rehab (using the TK as a wholesaler), have them do the rehab (TK as contractor), place the tenant and manage the property which will be a little more risk on your part. Unless you are doing the rehab work yourself, it doesn't matter who does the rehab, your TK provider or some other contractor. I would argue that it would be better to have the TK provider do the rehab because they have an interest in you doing it again. And again. I'm also a fan of having the contractor who did the rehab also do the ongoing repairs. They would already be familiar with the property and what has been done to it and they would have an incentive to rehab well so that you would continue to buy from them. A key to ALL of this is building RELATIONSHIPS. If you are buying TK, you want to build a relationship with the TK provider. You want a TK provider who has relationships with realtors/wholesalers, contractors and property managers in your market, whether that relationship is in-house or outside. If you are going DIY, you're probably/hopefully NOT actually doing it all yourself. So YOU will need to build relationships with realtors/wholesalers, contractors and property managers. In the end, the bottom line is, do the numbers make sense and meet your criteria, or not? And yes, your time IS valuable, even if you're unemployed. If you're in a high $ W-2 job or business, your time can be better spent doing that job (or finding one if you're unemployed) and paying others to take care of the real estate work. (Under your supervision of course!) ESPECIALLY if you are a newbie. Your team are experts. (At least they BETTER be!) They can SAVE you money. Down the road, as your REI knowledge and experience grows, your REI time will become more valuable and you can begin shifting from full time W-2 to full time REI. But you will still want to have a TEAM doing most of the "real" work. MY plan is to research and find reputable out of state TK providers and purchase my first properties fully TK. We are in it for the long haul so cashflow is king. Appreciation is gravy. The plan is to shift to a more active role as we get more comfortable and hopefully be able to BRRRR properties using the team that we have built relationships with to do the heavy lifting. We will probably need to do some "flips" using this same team in order to bring in more capital for the buy and hold business. We also plan on keeping our capital working between purchases with short term private money lending. But buy and hold will be our primary business. The goal is $10k/month of PASSIVE income. My wife and I started building relationships last week with a road trip through the mid-West to tour TK operations and neighborhoods in Indiana and Ohio. We will be a lot more comfortable dealing with people and neighborhoods that we have actually met and seen. We have found 2-3 teams that we feel comfortable with and we will be building relationships with these teams over the next months and years. Man! Did that turn into a ramble! I hope there's some good information in there. Good luck. And it's been about 7 months since this discussion was started; where are you now? What have you decided? How is it working out?
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes9y
@Mark Whitted, no I don't sell turnkeys. We even changed our company name once we realised how turnkey operated. That's why our homes are 15 to 25% cheaper.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes9y
Originally posted by @Paul Ewing:
I think the key is which do you have more of time or money?
Paul - that's funny on so many levels :)
- Rental Property Investor · Rockwall, TX · Member since 2017 · 87 posts · 49 votes9y
@Dean Letfus OK. You don't call it "turnkey", but if I buy from you, what do I have to do before I start collecting rents? I'm a little confused.
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes9y
@Mark Whitted, good question! I guess it depends on ones definition of Turnkey. My observation is that a true Turnkey, such as Memphis Invest for example, has completely rehabbed absolutely everything in the home. If the roof was aging it's been replaced, any little thing that might fail in the future has been redone etc. So you know when you buy that you should have absolutely zero maintenance for 2 years and hopefully longer. This is the reason that Turnkeys are somewhat expensive because they may put up to 25K into a rehab.
We buy homes that are already in great shape and rehab anything that needs doing but we do NOT replace, update and fix every tiny thing we can find. This means often we can buy a property recently rehabbed and rented and onsell it without having to spend any money. All those savings we pass on to our clients.
My philosophy is why pay 5 grand for a new roof now and reduce cash flow when that roof may last 5 or 7 years. Replace it then with the cashflow generated before it failed.
So we will sell a home that a true Turnkey would sell these days for 90 to 100K for 65 to 75K. We would rather clients had the money in their pockets and dealt with maintenance issues as they come up. It's far more profitable for the buyer IMHO.
Having said that I can see why some people like the Turnkey approach. Some of it is cultural, I am a kiwi (new Zealander), and most of our clients are from similar cultures to ours where we tend to resent paying for anything. So buying cheaper and fixing as you go is far more acceptable in our culture. Only "rich pricks" :-) would "waste" money fixing everything now so it's perfect!
- Rental Property Investor · Rockwall, TX · Member since 2017 · 87 posts · 49 votes9yDean Letfus OK. We're pretty close in philosophy. I'm kind of in between. I think to be a little conservative I would say if a major item (roof, hot water tank, furnace) has less than five years life, or if the electrical or plumbing is not "modern", replace it at rehab. I would NOT go anywhere less than 2 years. I want to have the option for a 2 year lease and I don't want to be fixing major stuff like that during the tenant's first lease term. I would then apply the same test during turns so I could TRY to take care of that stuff when the house is empty. Some TK providers will give you the option of tweaking the rehab if you are involved early enough. I wouldn't say they or you or someone like Memphis Invest or American Real Estate Investments are not "true" TK providers. We just need to know what the deal is. Do our due diligence. Make sure the numbers work for US. If I make a reservation at a Marriott and it turns out to actually be a Motel 6 or a B & B when I show up, I'm going to be pissed. But if I'm willing to pay for a Marriott or only a Motel 6 or I only want the limited/unique service of a B & B, then I can make that decision. And Marriotts and HI Expresses are both "hotels", but they're not the same. For my first property, as a newbie, I'm willing to pay a little more for a full TK, although not a high end TK in a class A neighborhood. I want good cashflow with minimal repair expenses in the first couple of years. With most of what I'm looking at, I reportedly should get good cashflow with minimal repair expenses for 5-10 years, for $40-60k. That's hard to argue with. (OK. Release the Class C Haters. 🙄 )
- 9yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 888 votes
Turnkey has some major benefits and the BRRRR strategy works well too. I work with investors to do both! The key is to find a great team! Ideally you would find a company that has everything under one roof. Acquisitions team, renovation crews (fully licensed and insured), Property Management, and a Real Estate Investment Brokerage in case you ever decide to sell.
By teaming up with a solid firm you can mitigate your risk and have some "boots on the ground" that have your best interest in mind.
- 9yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 888 votes
@Lee Wenger @Jennifer Slaughter both of you guys have done BRRRRs in Memphis. What do you think?
- Investor · Englewood, CO · Member since 2016 · 1 post · 0 votes9y
I've been very happy with the BRRRRs I've done - the math is just better to my way of thinking. I haven't gone the final step of refinancing but once that step is done i'm in that Goldilocks zone where I now own something where I have none of my own capital trapped - It's literally creating something from nothing... My investment is back in my hand and free'd up to go do another project and the renters are now building equity for you. Of course the real magic starts when you get multiple of these and rapid pay down one of the properties at a time. Once the mortgages are paid off each property is a nice little cash generation machine. My biggest issue with TK is that you have your own capital trapped in the properties - BRRRR allows you to use the same capital multiple times. BRRRR is really nothing more than using the economic and market principals that make house flipping a profitable endeavor and just applying the strategy to buy and holds.
- Real Estate Agent · Fort Collins, CO · Member since 2016 · 246 posts · 142 votes9y
I totally agree with what @Lee Wenger said. The way Dave Ramsey talks about the "snowball" effect you can do it with properties and income- building cash flow, mortgage payoff, etc. I like the opportunity that I have to force appreciation and add value. I think there are greater returns if you're willing to go out of state, especially if you have a team with in house maintenance where costs for rehab are lower due to scale.
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