Turnkey vs. DIY Deal Hunting
There seems to be a common sentiment that buying turnkey rental properties means you are leaving money on the table. I understand this viewpoint because the turnkey company does have to make money somehow and their profit does in fact come from you, their buyer.
With so many different ways to invest though, we need to define what we are actually comparing things against. If you were to do everything the turnkey provider does for a living and essentially BRRRR a property on your own instead of going TK, you are almost definitely going to make that into a better deal (assuming you do it right). You are also going to do a lot more work.
A More Specific Comparison
For the purpose of this discussion I am more interested in comparing turnkey against DIY, low-cost rehabs purchased through the MLS or other more traditional means of finding deals. This comparison is meant to bring two strategies that have similar work effort required into the spotlight. It seems likely that many investors, especially new ones, might find themselves choosing between each of these paths and having a solid understanding of the pros and cons as well as potential returns for each strategy would be very beneficial.
I chose to start building my portfolio through a turnkey provider, so I'm going to look more closely at the turnkey case here and hopefully the community can join in to discuss the alternative (low-cost rehab/MLS/more traditional deal finding) in relation to what turnkey has to offer.
Deal Flow
I actually think that setting up your own deal flow through rockstar agents and a really good team is probably as good if not better than getting deal flow through turnkey, but turnkey makes deals come to your inbox VERY easily. I don’t think either necessarily has an edge here, a good turnkey provider can be a part of a good team but in any case you just need a good team bringing you deals and both strategies can have that if done right.
Fresh Rehab
This might be my favorite part of turnkey investing. The house I just bought in Memphis has a brand new roof and a brand new hot water heater. The central air and heating systems are 6 years old. Most of the house is covered in brand new vinyl plank flooring. I didn’t have to manage this rehab in any way, but for the first few years of ownership my concern for major capital expenditures coming up is greatly diminished. This does not mean I don’t still plan for cap ex, I do; but I position myself to have a higher likelihood of smooth sailing early on when I buy immediately after a full rehab (a rehab done intentionally for the purposes of renting it out).
Property Management
I’m certain there are good property managers that are not also turnkey providers, but when I have my turnkey provider also act as my property manager I remove a possible conflict of interest. While my provider does make money managing my property, they make quite a bit more money when they sell me one. It is in their best interests to keep my costs low and keep me happy with their property management so that my investment goes well and I will come back for more. If a company only makes money through property management then that is where they are looking to make their money - some will navigate that conflict of interest better than others and look at the long term relationship as more important, but I like removing the conflict altogether.
Cash-on-Cash Return
This is my real-life example of buying through a turnkey provider where I was able to get all the benefits listed above that I found appealing.
Purchase price: $122,500
Neighborhood rating: B
Rent: $1,195
Down payment + closing costs: $31,870
Property tax: $144
Insurance: $57
PM fees: 8% = $96
Vacancy: 4% = $48
Repairs + cap ex: 8% = $96
Monthly cash flow: $235
Cash-on-cash: 8.8%
What about the alternative?
With an 8.8% cash-on-cash return, was I leaving money on the table as compared to finding my own deals on the MLS that might need some minor rehab work? How much money? Was it worth it to get the extra benefits of working with a turnkey provider?
There are many variables and I don’t expect there to be a clear cut answer, but I’d love to tap into the knowledge of this community to further this discussion and see what kinds of returns folks are getting with their different strategies and why they prefer one approach over another.
Thank you all in advance!