Turnkey Rental? Or Fix & Hold?

Question

Hey Everyone,

General question on starting out: given the choice between purchasing a turn-key property or a property that needs some love, what makes the better option for someone looking to buy their very first rental property?

My wife and I bought our first house (primary residence) this summer, so cash reserves are a little light, but we still are extremely interested in getting into real estate investing. We know we want to invest in cash flowing properties, but are torn between trying to find a fix-and-hold, or to keep it simpler for our first property and only worry about land lording. From listening to the podcasts and reading blogs, it sounds like managing contractors can be a bit of a pain and we have less than no experience in dealing with contractors. I'm curious - is there anyone who started with a fix and hold? What are some of the pitfalls to be conscious of? Am we off our rockers in wanting to start out this way?

Thanks for any advice or anecdotes to help us start our journey!

Ali Boone · Answer

Hey Nick, definitely good thoughts! Just to clarify, your end goals are good to know but more of what I meant with "goals" (which, in hindsight was a really inaccurate term to use) is...still using the goals term...your immediate goals as far as what do you want to get out of this property. For instance, some of my immediate goals when I buy a property are: good returns, good property, as few headaches as possible, as little effort as possible. With those as my criteria (which would have been the better word than goals), turnkeys are obviously what I will go for. But if you have some time, some desire, and are willing to put in the effort, absolutely go for the fix-and-hold route because your returns will be higher. As Marco phrased it (quite nicely), what resources do you have available to you? If none, maybe turnkey is better. If you have time and people available, go the fix-and-hold route.

Nothing is wrong with either route, just have to figure out which fits best with your a) comfort level b) immediate goals (long-term goals matter if all roads lead to having the rental property) and c) availability.

Tom Yung · Answer

Hi Nick:

I am out of country RE investor in US.

I can only inform you what my strategy I use when I bought in Las Vegas(2011).& Atlanta, GA(2012) when I first started out.

1) I first check out the area of town that I want to invest,

I  try to pick the lower crime area, then I check into schools. rent to price ratio. walk score. renter vs homeowner ratio.

2) price range

what I can afford within my price range, ranch or two storey. I also checked the age group in general renter in the area. If the area has a younger age renter group. Then it makes no difference of ranch or two storey. with more mature age group area, I like to buy ranch style for the ease of mature renters.

3) newer homes(2002 & newer Homes)

I do not like older homes, it costs more for rehab. I also try not to rebuild as there are too many unknowns. I like basic cosmetic rehabs, not rebuilds.

I like 3 bedrooms & 1.5 bath, hopefully double garage.

4) home inspection

Always have home inspection, these will give you a general idea of rehabs that you need.

5)property management -  I have to use property management in my situation, you probably do not need to. Really check them out if you need one.

I do not believe in turnkey properties, It really restricts the choice of option that you can set out for your own criteria.

On the other hand, I will not buy into anything that I need to rebuild to bring up the value, there are just too many unknowns.

Nick W. · Answer

Thanks everyone for the response! It means a lot to have so many experienced people weigh in.

I guess I should have been a bit more specific in my post, as @Ali Boone  inferred - our long term goals are still a bit ill-defined. We know we're interested in purchasing buy-and-hold investments, but we're not sure of the scope of our end game: do we want to stick with small multi-family units (tris, quads), or do we have interest in owning 100-unit complexes a la Ken McElroy? Either way, we know we want to start accumulating a portfolio of small multi-family properties in the short to midterm.

As @Jerry W.  suggested, I think long term we are interested in buying properties that need minor renovations in order to reduce our cost-basis. When I say "needs some love," we don't intend to take on a project that requires stripping a house to the studs, at least not as our first. I did not realize, as @Brant Richardson pointed out, that turnkey in real estate involved having the whole infrastructure in place. I should amend my statement to entail only having the property in pristine. Thanks for the distinction!

We're also looking to start investing in markets outside of our local area, as property values in our part of Maryland are a significant barrier to entry. We both have roots in the Philadelphia area and are looking to start there in one of the suburbs. Property values are lower, we know the area well, and are back there often enough to drive by whatever property we end up purchasing. However, it is far enough away that, with our full time employment, we are definitely planning to need property management.

After reading what everyone had to say above, it's really helped validate and codify our thoughts on our first step. I think we'll be following in the footsteps of @Rolanda Eldridge - buy something rent-ready as our first property in order to minimize risk and start the cash flow as soon as possible. That way, once the business has some positive cash flow, we can save up to start purchasing fixer-uppers.

Thanks everyone, again, for all of your insight! It's truly invaluable.

Chris Adams · Answer

Since you said you cash reserves are tight, buying a rehabber will have a lower cost of entry as long as you can manage to finance the rehab somehow.

Everything I buy is distressed, then I rehab, rent, and refinance. Most of the profit you make in REI is when you purchase a property, turnkeys can offer cash flow, but rarely will they offer equity at purchase.

I made a detailed post of my procedure here if your interested.

Engelo Rumora · Answer

lol

I love the above statement Jerry :)

There is a huge stigma on all turn key operators on the forum lol

Thanks and have a great day.

Rolanda Eldridge · Answer

@Nick W. ...Welcome!

I purchased the first 3 properties retail/move in ready(premium price) because I didn't want the hassle of repairs.  After, I only bought Fixer Uppers!! This was the easiest way for me to buy low(market tanked), add value and rent with better cash flow.  Depending on how much time you will commit and money to invest you can determine the best fit for your goals...

Brant Richardson · Answer

@Nick W. Since you are new to this, and you wrote about "purchasing a turn-key property or a property that needs some love", I just want to make sure you are aware that when you talk about turnkey real estate it means something much different than when buying other things turnkey.  When buying a turnkey boat it just means the boat doesn't need work.  When buying a turnkey property it generally means not only does it not need rehab but there is already a tenant in place and a professional property manager running the property.  You usually pay full market price to have those benefits in place.  .

If you plan to invest in Maryland and do the land lording yourself then there is no reason to buy turnkey.  Whether to buy a property that needs rehab depends on how much of a discount you get versus how much the rehab will cost.  You want to buy the property below market value, generally it is a lot easier to do that with a property that needs some rehab.  My first one needed rehab and I recommend it.  Nothing major like foundation work but paint, flooring, kitchen counter are manageable and are not likely to turn into a nightmare.

Barry Ratliff · Answer

I have investors up and down the scale. I'm a real estate broker experienced in coaching investors as I have and still practice some investing still.

To play it safe since you're a little tight on reserves and by the way since you're newbie investors, the lender will want 20% down, possible property manager to manage and 6 month reserves and maybe rental loss insurance.

Now finding the property, analyze the market and search for 1985 or newer smaller homes in an area the homes in or near higher priced homes. Since they are newer and probably well kept, you can even purchase them at retail prices with no fixing up needed and get above average rents. I have investors targeting those kinds of homes and purchase 1000-1200sqft 3br2ba homes from 80-92k and rent them out for 1000-1200 a month. Typical homes like these in most if not all other areas are renting for 700-900 a month. Do your homework and buy one that are ready to rent at closing.

Jerry W. · Answer

@Nick W. Welcome to BP.  Keep in mind you just had 3 folks in the turn key business answering your question.  I am going to disagree some with them.

First do not believe anyone who tells you that you do not need to know the prices in your market if you buy turn key.  That is like saying you do not need to know the prices of new cars let the dealer tell you whats right.  It will be pure chance if you get a reasonable deal, and odds are you will not.

Next, I started by buying fix and hold as the prices were much cheaper and I did not have much money to spend.  Do not buy one that needs 70K$ to fix up, get one that needs $5k or a figure you are more comfortable with.

If you wish you can go to a turnkey, but one of their big sales points is having a property and management.  If you are buying local and going to manage it your self, why go turnkey?  Now if you plan to buy out of state in a strange area and wish to be as hands free as possible by all means consider turn key, but never take a salesman's word for value check it out for yourself.  Look around on the forums before making a decision.

Marco Santarelli · Answer

Hi @Nick W.,

Welcome to BiggerPockets!

The short answer to what can be a long one is to consider what resources you have available.  Some of the biggest benefits to truly passive turnkey investment properties are "done for you" investments with immediate cash-flow and low risk.  When you set out to buy-fix-and-hold a property you are taking everything on yourself from finding the right property in the right area, assembling a team to renovate it, putting up most (or all) of the cash to do so, and that assumes you have the experience and time and required to invest in the project.

You might end up with a lower cost basis in the end, assuming everything goes well, but you take on all the risk to try and get there.

So, you might be "off your rockers" thinking this way.  :-)

Turnkey Rental? Or Fix & Hold?

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