Opinions Please... Turn Key: Single vs Multi- Family, Turn Key??

26 Replies

Wondering if people have pros/cons to share about TURN KEY investments out of state?

I am researching my first Investment Property.  I live in San Francisco, CA (ultra expensive market) and wondering if a Turn Key out of state would offer me a safer, higher return, than if I go sourcing a property by myself in a an area like Sacramento or outskirts of Los Angeles.

Also, is a SINGLE FAMILY a safer/smarter 1st investment than MULTI FAMILY?

Cheers,

Ryan

@Ryan Zweng

The forums are filled with opinions and insights on your topic. Just use the search function.

Hi Ryan,

I don't have the experience to help you but it seems to me out of state might be tuff for your first. 

Hi @Ryan Zweng

Without a doubt, you'd be better of searching for a turn key rental outside of SF area. Perhaps a few hours away so you could eventually see it easily. Find a reputable turn key company and I'm sure you'll find the numbers work. You'll earn great monthly cash flow, but can expect smaller dollar-value property increases. 

Whether single or multiple unit properties has quite a bit to do with the market you're in. Where I am, it is my opinion that multi-unit properties are less risk, in that, all of your eggs are not in the same basket. If you lose a tenant in a SFR, you lose all your income, but if you lose a tenant in a MFR, you only lose partial income. This would help immensely if you don't have enough being reserved for your vacancy rate or if some unfortunate and unforeseen event takes place.

I'm a beginner investor in Sacramento. (1 duplex as primary, and one SFR, looking for number 3). You can still find some turn key flips in poorer neighborhoods that can cashflow and almost hit the 1% rule. (I suspect my next property will be below the 1% though). I count on appreciation along with knowing the neighborhood to make the numbers attractive. Personally, I haven't found any multi-families in this area that pencil out for my goals. Every time I start looking at one, I come to the conclusion that I'd be better off multiple SFR. (Although I would love for someone to show me where I'm wrong on this!)

The best money around here is still going to be buy and renovate along the gentrification line, which may be a little more than you want to bite off at first.

@Ryan Zweng

There's no one easy answer to that question. It depends on what your objective is. If you're looking for cash flow then it doesn't really matter if you're sourcing a property or buying a turn key in the Bay Area or Sacramento. Nothing in those markets will cash flow. If you're looking for appreciation, duplexes or 4 plexes aren't a good choice in my opinion. They don't have good appreciation. SFR is the much better choice for appreciation, but personally, I think investing for appreciation as your primary goal is risky. You're speculating on something you can't control. If you want cash flow, then going out if state is a much better choice. I wrote a report on how to invest out of state. I'd be happy to share it with you if you'd like.

@Ryan Zweng - investing for appreciation is a risky business. For more information please see the real estate market in 2004-2007. There are ways to force appreciation, like fix and flip, or raise rents on an income property. 

Investing for cash flow is great. However often times, cash flow and appreciation are inversely related. They work against one another. Consequently, a fast appreciating market, like SF Bay Area, is likely to have properties that generate a relatively low cash flow. 

There are areas around the Bay that do produce a cash flow, but the cash-on-cash return is going to be paltry compared to out of state properties. 

I hope this is helpful. Please let me know if you have other questions. 

@Ryan Zweng ,

How are you doing? I jumped in even though I don't have any turnkey out of state since I saw you started this one..

Generally speaking - and this is true for out of state also - is that multi-family will generally generate higher cash flow than single family, all else equal. Generally, single family homes are thought to have greater appreciation potential. What is a safer/smarter investment? Depends on your goals..

I have some of both, but lean towards multi-units to limit total number of addresses as I grow, higher cash flow for each dollar invested, and some efficiencies in cost, maintenance, and management. Also, will be less likely to run into 10+ loan issues..

What are your goals? How large do you plan to grow your portfolio? How much do you want cash flow today, versus potential for the future? Does it make you nervous that you may have one investment that's 100% empty (this one doesn't bother me about SFR actually, especially as the portfolio grows.) You know I'm a fan of buying a 2-4 unit with an FHA loan locally, but you didn't ask about that, so I'll shut up! Good luck!

Maybe touch base with @Andrew Fingado , a local buying of State. Might be interesting to hear @Jay Y. jump in. @Brie Schmidt also has purchased a sizeable portfolio of essentially "turnkey" properties. Maybe she can chime in with her perspective (and Ryan, check out turnkey-reviews.com ).

@Derek Daun , I'm curious what numbers you're looking at in Sacramento that you prefer multiple SFR's to 2-4 unit. I assume you like the appreciation potential on SFR vs cash flow on 2-4? Or a demographic/income difference? Or is the cash flow really that close on the two in Sacramento? It is very different in Richmond and Oakland where I invest. But the less utilities on SFR partially offset that.. I'm sure the ratio of rents between SFR and 2-4 vary in different areas..

Hi @Ryan Zweng ,

Welcome to BiggerPockets!

You just happen to live in a beautiful market but one that doesn't make sense from an investment perspective.  For many people the best deals are rarely found locally.

SAFER?  Yes, the high land cost in your market is where you have the downside risk, so when the market turns and cycles down you will see values drop quickly.

RETURNS?  Good luck finding property with decent cap rates and cash-on-cash returns.  Unless you can find a real "steal" of a deal to keep your cost basis very low, you will not likely find something with good returns.  Another reason why out-of-state properties might be your best option.

TIME?  Do you have the time to try and source an acceptably good deal in your local market?  You may find what you're looking for, but in my experience, we get a lot of calls from Californian investors looking for good deals in other markets because they can't find what they're looking for locally.

Your question about single-family versus multi-family is not so much about "safer" as it is about what you're investment criteria is  They both offer advantages and disadvantages.  You will do well with either but start with the end in mind.  What is it you're wanting to do?  (This is how I start most every conversation with clients.)

Remember:  Live where you want.  Invest where it makes sense!

Continued success!

@Ryan Zweng - I think it all depends on the market. I invest in dense urban environments where 2-4 unit properties make up over half the housing stock, so tenants are used to living in multi unit properties. If I was in a market that was mostly SFH then that is what I would invest it

@Ryan Zweng Yes, as @Brie Schmidt mentioned above, a lot will depend on the market you want to invest in. In Chicago, for example, you'll find 2-4 units all day long, and they're probably easier to come by than SFHs out there...

As already mentioned, cash flow tends to be (not always) stronger with multis than SFHs.

In general, with SFH you get a better exit strategy. If this is your first out-of-state investment, that's something worth thinking about. If things were to somehow go bad (hopefully not!), it will be a lot easier to offload a SFH than multi-family property. With multis, you're going to be selling it back to another investor, who is 99.9% less likely to become emotionally attached and as a result overbid for your units. With SFH, all it takes is one homebuyer to fall in love to bail you out.

No such thing as turn key out of state of its your first deal.

Granted outside ca you can find 7-10% caps
But what are your goals?

Better off investing in stocks or lending club in my opinion

Value add is the reason why multi family investing is the best. Forced appreciation, cash out refi, infinite returns. You don't get that with turn key

Originally posted by @Nick Patterson :

No such thing as turn key out of state of its your first deal.

I'm not sure I understand this comment. In my opinion, turn key is the safest way to go for a first deal out of state. It's very risky for an inexperienced investor to buy an out of state property and try to rehab it themselves. Someone with no experience can do well if they're working with a good turn key company that they can trust if cash flow is their objective.

J. M. Here's my breakdown of the Sacramento market:

A and B neighborhoods are too expensive. Even though the costs are still less than on the coast, the price to rent ratios still make them a non starter.

Instead, I look for the niche C/D neighborhoods that are in the process of transitioning into B neighborhoods, and are adjacent to A/B neighborhoods. If I'm lucky, I might find a recently remodeled SFR in the 120k range. The key will be to find one that is either a 3 bedroom, or has a bonus room, since a lot of the central Sacramento homes are 2/1. With these stats I will be able to attract B tenants from the adjacent neighborhoods looking for cheaper or bigger options, and are willing to do a little urban pioneering. I'll be able to get 1100+ a month, and have short vacancies due to high demand. Not quite 1%, but it will generate a little cash and have great appreciation potential.

A 4-plex in the same neighborhood will run me 250k-300k, and generate revenue in the ~700 per unit range. On the surface, the cash flow is a little better than the SFR, but the tenants will be much lower quality, with higher turn over. Plus the building will be in rougher shape, and likely have more repairs. Plus there are 4 tenants, and 4 kitchens, and 4 bathrooms. I suspect that the extra cashflow would get eaten into really quickly. All this for a lot more work. Oh and appreciation will be less than a SFR. Overall, I'd rather buy two SFR than one 4 plex

@Derek Daun

I can speak from the recent experience of getting my first SFR up and running in Sacramento. It can be done you just have to find the right deal that will make sense for your criteria. Me, I found a SFH that I bought for 125 k I have put ~ 45 k into renovations and it has tenants moving in at 1,415 a month in rent. When I re appraise it in the summer I am hoping for a value in the 190-200 k range so I can pull out almost all of my invested capitol.

So it can be done you just need to find the right property to fit your goals.

I live in LA and I've always bought turnkeys out of state. The cons are few, in my opinion, as long as you work with the right team(s). 

For SFR vs. MFR, I wrote an article comparing them. Neither are a bad choice, just pros and cons to each.

http://www.biggerpockets.com/renewsblog/2014/12/28...

Thanks so much for the info guys!  Sifting through it all....

As a local Bay Area newbie investor, this thread is full of great info. Thanks to all who contributed!

Hi @Ryan Zweng

I started out with a triplex, converted a detached garage, so now that's a 4plex. Has been cashflowing well. So far it has been quite easy to manage. Knock on wood. 

I've considered going out of state, but so far I've decided to build up my experience locally as long as I can find deals that make sense. I figure I won't get the same levels of cashflow that I might out of state, but I like knowing my area and being able to check up on my places on a regular basis, and I figure that being in the wine country not too far from San Francisco there's a good chance appreciation will work in my favor. 

Cheers

@Derek Daun and @Chris Vail , thanks for the insight on the Sac market, what do you think of the Elk Grove area?  Do you consider that class A?  Kind of hard to make the 1% work in that area, but I like it a lot.

@David C.

 I am not familiar with the Elk Grove area unfortunately so I can't steer you one way or another.  However I feel like I can be pretty confident in saying that all of Elk Grove is not "class A" it would be very rare a city as big as that is 100% the same.  There are going to be all ranges of areas across the city.  Ultimately you will need to look at what makes sense for you and you expectations, and that lens should be how you evaluate any property you look at.  

Don't rehab out of state first deal. And go MULTI-- definitely. Risk is less. Cap rate higher. Losing one or two tenants, expenses are still paid by existing tenants. I don't know why, but mentally SFR's SEEM less risky until you buy your first apartment. You will be glad you did. If you go SFR, you'll be kicking yourself when you finally step up to 5 plus units and see how easy and stable it is to make money.

You can buy a $50,000 property that will cash flow $600/mo in the mid west. I can help if that is something that interests you. 

Kevin

@David C.


I don't have much insight into the Elk Grove area. One my goals in the next 6 months is to expand my knowledge past the midtown/1st ring suburbs area, and see if there are better numbers elsewhere. I'd agree with what Chris said about it though. I know Elk Grove was overbuilt during the boom; and I'd guess there are probably still some problem areas around there.

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