Buy local or Turnkey

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Buy local or Turnkey

John Upperman
Investor · Clayton , NC · Member since 2012 · 63 posts · 86 votes

Okay BPers....I need some input.

First - a quick intro. I am new to REI and this will be my first investment. I will be making these purchases through my Solo 401k so the usual tax benefits don't apply and my up front cash requirements will be higher than a traditional, non-qualified purchase.

I live in the Raleigh, NC area and have spent the past two months analyzing more deals than I can remember. I have looked at numerous SFH opportunities locally and have yet to find anything that offers the ROI I require to support the cash investment (especially considering the fact that I have to discount any depreciation or tax benefits).

Here is my current situation:

Behind Door # 1 is a local Triplex with the following stats:

Purchase price $215K

Improvements $15K

Total rents (after improvements) $2475/mo

GRM 94.1

Cap Rate 7.5%

ROI w/o appreciation 11.84%

Cash on Cash 9.5%

Behind Door # 2 are 3 SFH located in Memphis, TN through a turnkey service:

Total Purchase price $249K

Improvements $0 (all improvements are part of the turkey service)

Total rents $2800

GRM 88.8

Cap Rate 8%

ROI w/o appreciation 13%

Cash on Cash 10.5%

I know all the math nerds are going to ask specifics about expense assumptions.  Being a math nerd myself, I have a detailed spread sheet that I am pretty confident captures all of the details, which is how I developed the high level results above.  

On the triplex I feel like the positives are the fact that it is local. I have driven the neighborhood and the person advising me on the purchase manages multiple MFH's in that area and has been investing locally for 20+ years. The cons for me are having all of my eggs in one basket (building) and the fact the MFH's don't appreciate as quickly as SFH.

For the Memphis properties I think the positives are a reputable company managing the rehabs and property mgmt (I have gotten references and confirmed).  The obvious downside is the fact that I have never set foot in Memphis and don't know that market.  

I would really appreciate some input/advice on this one.  Cash on Cash return is VERY important to me since there are retirement funds I need the money to GROW.  Otherwise I can just throw the money into a SPDR fund and forget about it.  I would especially like @Brandon Turnerto weigh in (although I'm pretty sure I know what his response will be). 

Thanks!

John

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y

I would actually advise investing your own personal money, outside of the 401k, locally first, before you do anything REI with your retirement funds. If you are new to REI, then the first thing you need is an education (and you are starting out in a great place) and shortly after that local hands on experience (the best kind of education). With a solo 401k you will by definition be hands off, even if the properties are local.

Another thing to consider is taxes. Is your solo 401k roth or traditional? Buy-and-hold REI is generally already fairly tax efficient, so make sure you aren't doing the equivalent of buying muni bonds in a Roth IRA. Also, leverage is one of the major benefits or buy-and-hold REI that you won't necessarily be able to take advantage of through a 401k (unless you are getting non-recourse commercial financing, but that tends to be expensive). Hard Money Lending or Notes, on the other hand, are tax inefficient and not suited for leverage, so may be much better options for REI in a 401k, but they are not typically methods recommended for a newbie.

I'm generally not a big fan of out of state turn key. Investors are giving up too much control and upside to make it a good deal IMHO. If you want to invest out of state, I would 1)buy a fixer (via realtor), 2)fix it up (via contractors), and 3)rent it out (via property manager) so that you can profit at each of those steps rather than giving up the profits of the 1st & 2nd steps (and maybe the 3rd step too) to a turnkey operator. However, to do this effectively you will likely need some education and local hands on experience first.

Good luck!

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41 Replies

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  • Roxanne Baisden
    Property Manager · Yorba Linda, CA · Member since 2015 · 11 posts · 5 votes
    10y

    Interested to see responses ... Good analysis.

    1Reply
  • Scott Carder
    Investor · Owasso, OK · Member since 2013 · 166 posts · 90 votes
    10y

    IMO local, but I think anything not local is crazy. Its a comfort level for me.

    0Reply
  • Brett St Clair
    Investor · North Pole alaska · Member since 2015 · 123 posts · 13 votes
    10y

    curious on which turnkey company curious because I'm thinking of doing the same thing

    0Reply
  • Douglas SkipworthBusiness Member
    Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    @John Upperman,

    We manage hundreds of properties for hundreds of owners who have never seen their properties or the Memphis market.

    I don't which option you should select for yourself (both sound very reasonable to me), but as long as you are "partnering" with a turnkey and property management company that you trust, you shouldn't have to worry that you've never been here.

    Best of luck to you!

    Investor's Guide to Memphis Real Estate
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    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I would actually advise investing your own personal money, outside of the 401k, locally first, before you do anything REI with your retirement funds. If you are new to REI, then the first thing you need is an education (and you are starting out in a great place) and shortly after that local hands on experience (the best kind of education). With a solo 401k you will by definition be hands off, even if the properties are local.

    Another thing to consider is taxes. Is your solo 401k roth or traditional? Buy-and-hold REI is generally already fairly tax efficient, so make sure you aren't doing the equivalent of buying muni bonds in a Roth IRA. Also, leverage is one of the major benefits or buy-and-hold REI that you won't necessarily be able to take advantage of through a 401k (unless you are getting non-recourse commercial financing, but that tends to be expensive). Hard Money Lending or Notes, on the other hand, are tax inefficient and not suited for leverage, so may be much better options for REI in a 401k, but they are not typically methods recommended for a newbie.

    I'm generally not a big fan of out of state turn key. Investors are giving up too much control and upside to make it a good deal IMHO. If you want to invest out of state, I would 1)buy a fixer (via realtor), 2)fix it up (via contractors), and 3)rent it out (via property manager) so that you can profit at each of those steps rather than giving up the profits of the 1st & 2nd steps (and maybe the 3rd step too) to a turnkey operator. However, to do this effectively you will likely need some education and local hands on experience first.

    Good luck!

    6Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    I am a turnkey provider and I always suggest going local if you can. Learn the business, make your mistakes, learn from them, maybe even hire a Property Management company the first 2 years. Network with other local landlords, go to your local REIA, network on BP, etc and next thing you know, you will be a local expert to and could be part of bigger deals if you so choose. No one is going to manage your 1 unit better then you. We do an excellent job, but you being local, if you so choose to drive past the home everyday, you can do that. Self management is a huge savings, especially if you have a couple of premature tenant turns.

    901-848-9028
    5Reply
  • John Upperman
    OP
    Investor · Clayton , NC · Member since 2012 · 63 posts · 86 votes
    10y

    @David Faulkner - thanks for the feedback. I agree with your assessment of putting tax advantaged assets in an already tax advantaged account. In most cases this doesn't make a lot of sense, but my motivation is not really about the tax benefit but rather the return on cash invested as well as the overall appreciation of the asset. Even with the discounted benefit of non-recourse lending I feel that REI is advantaged to the stock market and I get the added benefit of control over my asset versus turning it over to a boardroom or a CEO that may or may not align with my goals.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @John Upperman:

    @David Faulkner - thanks for the feedback. I agree with your assessment of putting tax advantaged assets in an already tax advantaged account. In most cases this doesn't make a lot of sense, but my motivation is not really about the tax benefit but rather the return on cash invested as well as the overall appreciation of the asset. Even with the discounted benefit of non-recourse lending I feel that REI is advantaged to the stock market and I get the added benefit of control over my asset versus turning it over to a boardroom or a CEO that may or may not align with my goals.

     Good to hear you've given the tax angle thought ... my advice on starting local hands on 1st still stands, otherwise instead of a boardroom or CEO, you may turn it over to a turnkey provider that may or may not align with your goals :)

    1Reply
  • Haim Mamane Palman
    Investor · San Francisco, CA · Member since 2013 · 147 posts · 97 votes
    10y

    stay local if the numbers make sense in your own market. You can drive by the property whenever you feel like, verify all expenses reported by your property manager and a triplex in my opinion is a better investment than 3 SFH unless you are in a market which has a huge appreciation upside (which is not the case with Memphis). It also sounds that you will need to make repairs on the triplex so I would assume that you have some equity in the deal as well. You will buy at or above retail price with most turnkey companies in Memphis or elsewhere so if you need to liquidate the assets quickly it may be a challenge.

    Just for the record, I don't have anything against turnkey companies or Memphis I personally purchased from turnkey companies in Memphis because the numbers don't make sense in the SF Bay Area to buy and hold.

    Good luck.

    3Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y

    @John Upperman, 

    Just eyeballing your two deals without my spreadsheet in front of me, I can say with 95% confident that your cap rates seem at least 1% too high based on my experience. Be sure your vacancy is in line with the area, and don't forget to include repairs and maintenance and capex in your analysis. 

    Good luck. 

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @John Upperman 

     for ONE HALF of percent of return.. this is an absolute no brainer you go local.. you will lose that half of % just travelling to Memphis.. and I am sure your not going to buy a quarter million dollars worth of RE without eye balling it.

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    5Reply
  • David Tipton
    Los Angeles, CA · Member since 2015 · 197 posts · 59 votes
    10y
    Originally posted by @Alex Craig:

    I am a turnkey provider and I always suggest going local if you can. Learn the business, make your mistakes, learn from them, maybe even hire a Property Management company the first 2 years. Network with other local landlords, go to your local REIA, network on BP, etc and next thing you know, you will be a local expert to and could be part of bigger deals if you so choose. No one is going to manage your 1 unit better then you. We do an excellent job, but you being local, if you so choose to drive past the home everyday, you can do that. Self management is a huge savings, especially if you have a couple of premature tenant turns.

     Makes sense to me.  Might be a different analysis if your local market was overpriced and harder to access, I suppose.  

    0Reply
  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    10y

    @John Upperman

    I am in 100% agreement with @Alex Craig @Haim Mamane Palman and @Jay Hinrichs

    it's a no brainer if you can buy local and achieve the 11.84% ROI that you state above by all means that's the deal I would take all day everyday!! You will learn the REI business much better hands on with deals like that in your own backyard than going the turnkey route.

    just my 2 cents

    2Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
    10y

    John!

    If you like weekend vacations in Memphis, do the Memphis deal. If you don't like weekend vacations in Memphis, stay in The Triangle. The numbers are so similar--if any assumption is off just a little bit one way or the other, it changes the math. It's tough to be that precise. 

    Where in the Triangle is the property? Are you joining us at Deal Maker Sessions on the 7th?

    Adam

    1Reply
  • Max James
    Investor · Cincinnati, OH · Member since 2015 · 229 posts · 50 votes
    10y

    I haven't done extensive research, but turnkey rentals seem like a poor investment.  Unless you are a filthy rich doctor or someone who has zero time to dedicate to understanding the biz, why would you want to take the hit on your returns and cash flow?  I'd go local and hold yourself accountable.

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    10y

    If an investor is looking at very similar price points between a local investment and an out of state one it would be prudent to stay close to home. If you are close to home you have the option of self management.

    5Reply
  • Brett St Clair
    Investor · North Pole alaska · Member since 2015 · 123 posts · 13 votes
    10y

    @max 

    @Max James it might be that there local market you can't buy and hold because of prices. Say San Francisco where the median home price is 1+million dollars just a 20% down on that you could have 3 houses in Ohio or Memphis paid off.

    1Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Jay Hinrichs  It is true, he would give that 1/2% back on the travel, but the travel to Memphis would be an eye opening experience in that John would find out that Memphis BBQ is better then Carolina BBQ. :)

    That is worth a 1/2%.

    901-848-9028
    3Reply
  • John Upperman
    OP
    Investor · Clayton , NC · Member since 2012 · 63 posts · 86 votes
    10y
    Alex Craig - I'm originally from Texas, so if I want good BBQ I'll buy a property back in Austin. :-)
    3Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @John Upperman  Probably not a good idea to buy a property because of BBQ.  I once bought a house that a ex-WWF professional wrestler owned to whom I was a huge fan as a kid.  The #'s were very tight and to this day I still can't convince myself the only reason I bought the home was because it was owned by Koko B Ware.

    901-848-9028
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Alex Craig  Travel to and from your out of state investments is from what I can see never put into anyone's profroma on buying income property.   I look at a lot of these Aussies that came over here its at least 5 to 8k for a couple to come to the states .. that eats up 2 to 3 years of cash floor generally right out the gate.. I know when I travel its always 1500 to 2k minimum to move from West to East.. buy your tickets your hotel your car your meals etc etc... and its a write off so it should be expensed towards income on that property.

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    2Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    All great advice. IMO real estate is fundamentally about location. You can fix or adjust anything but that. It is like a marriage and the location is your spouse. A percent here or there will be meaningless in the long run. Good luck with your search.

    @John Uppermanundefined

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Agree 100% @David Faulkner. Talk to a good tax guy before making that move. I just sent the OP a PM.

    0Reply
  • Cliff Harrison
    Rental Property Investor · Shawnee Mission, KS · Member since 2014 · 205 posts · 136 votes
    10y

    Stay local and be patient.  Enough bad things can already happen on any one investment without even introducing Out of State and Turnkey risks and costs.

    0Reply
  • Zach Davis
    Investor · Portland, OR · Member since 2013 · 143 posts · 105 votes
    10y

    I used to do property management and have seen first hand the numbers and issues with out of state or even local, hands off investing. After dealing with all that, I believe in the hands on approach. I self manage, and will do so until I sell or my kids take over. Never met an out of stater that made any more money than they could have at home. When you take into account travel, property management, and the additional cost of paying someone else for maintenance, turnover, and repairs. The deal starts to look less impressive. Yeah, I can invest in BFE and probably gross more than I do at home but how much of that is going to property managers and contractors just to run it? Personally, I'd rather pay myself to run it. But that's just me, I don't trust other people with my livelihood.

    1Reply
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