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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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    @Jay Hinrichs

    I think if investors wanted too, they could find enough extra figures and expenses to take into account that would make any deal not work out.  

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    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Zach Davis  love it   term  " out of stater" is so Oregonian.

    When I did timber deals in the 90s here in Orygun we always talked about timber owners that were

    "out of staters"

    the other Oregon term I like is spendy  that's really spendy.. IN CA  we would just say that is expensive  LOL.. then when I first came to Orygun in 1992 I was buying foreclsoures etc. and I was with my agent and the said hey you want to take my RIG to go look at that property.. I thought they had a big rig outside never heard that one before either.. LOL

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

    @Jay Hinrichs

    True enough, I guess I've been up here too long... I'm originally from the Midwest so between here and there its likely half of the population has no idea what I'm talking about. ;-)

    Its funny, I picked up the term out of stater from a timber land owner a couple of months back. He was talking to me about all of the out of state owners that had bought timber land around him. I also use the terms rig and spendy although those came with me from KS.

    @John Upperman

    If anyone can help you with the ins and outs of making turnkey investing profitable its going to be Jay...

    1Reply
  • Michael Lee
    Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
    10y
    Originally posted by @Jay Hinrichs:

    @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.

    Hello and welcome! I would think that owning out of town properties would be OK but I think you should try to find a company to manage tyf

    0Reply
  • Michael Lee
    Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
    10y
    Originally posted by @Michael Lee:
    Originally posted by @Jay Hinrichs:

    @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.

    Hello and welcome! I would think that owning out of town properties would be OK but I think you should try to find a company to manage the units for you so you don't have to drive there or get overwhelmed by it.  That way you can look for stuff that is in your neighborhood or somewhere closer.  Always run your numbers and know the market well.  Cash flow that is positive is critical.  Just make sure they will do what you think they will do.  Having properties out of town will take up all of your time. You would have a rough time if you try to manage them.  Good luck!

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    @John Upperman

    The few numbers that you've given us paint a picture. For example:

    GRM of 94 is very high for most markets for B Class asset worth owning. This, strictly by the numbers, would lead me to assume a rather high Cap Rate number as well.

    However, your Cap is quite low at 7.5 - this tells me that OpEx on the local building are very high. This tells me everything I need to know...

    As to TK - just say no! There are lots of threads here containing plenty of rationale

    With this being said, I sense that the best thing for you now is to do some more studying. The market is already hot, so by focusing on understanding the moving parts for another 6 months you really won't miss anything. If the market goes higher, it won't be by much. Or, it might cool off. Point being - you stand to lose a lot more than you stand to gain by making the wrong decision...something to think about :)

    1Reply
  • Kevin Darrell
    NY · Member since 2015 · 101 posts · 43 votes
    10y

    I have to agree with @Jay Hinrichs, just visited Memphis, spent $1500-$2000, flight hotel and car but it was well worth the trip. Got a chance to meet @Alex Craig, @ Curt Davis  @Douglas Skipworth, Terry Kerr, and picked @James Martins mind, :-) all great guys with reputable companies also got a chance to visit their properties. Took in some great bbq and music on Beale street also. Visited the National Civil  Rights Museum, hope to bring the grandson next time. 

    2Reply
  • Douglas SkipworthBusiness Member
    Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    @Kevin Darrell,

    Glad you enjoyed your time in Memphis.  It was a pleasure meeting you and your lovely wife Latrice.

    Thanks for including CrestCore in the list of heavy hitters you met with!

    I honestly believe if every investor used BiggerPockets to research and collaborate like you have, the mistakes of overpaying, overleveraging, and mismanaging (the three deadly sins of real estate investing, in my opinion) could be avoided.

    Best of luck to you, my friend!

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

    @Kevin Darrell  Thank you Kevin for taking to time to visit us.  It was a pleasure to meet you and Latrice. 

    901-848-9028
    2Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    @Kevin Darrell

    We enjoyed meeting with you and your wife as well.  Hope the restaurant suggestions were as good as I bragged about!!!

    Curt Davis - KAIZEN Realty538 Reviews
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    2Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    10y

    @John Upperman

    I know I will upset some people by saying this but I think NC is a much better market. for only about 1% difference in return even if I didn't live there I would take NC for the strength of the market and appreciation potential. 

    I don't dislike Memphis (my family has been there for generations) but I think NC has better stats if I remember correctly. 

    1Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Alex Craig:

    @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.

     There might be a handful of people on here who get your Koko B Ware reference......LMAO!  But I liked it!  And..definitely not a reason to buy a house.  

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  • Ryland Taniguchi
    San Francisco, CA · Member since 2015 · 786 posts · 717 votes
    10y
    Originally posted by @John Upperman:

    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

    I think when you are brand new turnkey is the way to go. You don't know yet what you don't know. Get a reputable turnkey provider and buy a couple of turnkey properties to get under your belt. Alternatively, find a reputable local experienced get and JV with them 50/50 and provide credit/cash or deal/credit. You will learn real estate investing much faster this way than going the turnkey route.

    But a lot of new investors think that why should I split a deal when I can have it all myself. If that be your limited mindset, then again turnkey is the way to go.

    When you get more experienced, you don't need out-of-state turnkey providers. You can build your wholesale pipeline, construction company, property management company, etc. When you become experienced, you can learn how to BRRRR and get your down payments back. Then local investing is the way to go.

    I invest in Seattle and many say there are no deals here. There are tons of deals in seattle but we find them because we built the systems.

    2Reply
  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    10y

    @Chris Clothier and @Alex Craig

    Come on man!!!! EVERY BODY knows the BIRD MAN!!! LOL!!

    2Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    I was hoping to find Frankie buried in the backyard.

    901-848-9028
    1Reply
  • John Upperman
    OP
    Investor · Clayton , NC · Member since 2012 · 63 posts · 86 votes
    10y

    I want to thank everyone who has provided input on this thread.  You have given me some great input and a lot to consider.  You're willingness to take the time to participate in this conversation is what makes BP such a great resource.  

    I'll come back and let you know what I decided along with the final numbers.

    John

    1Reply
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