First property, BRRRR or Turnkey?

Question

I am currently living in California which is a horrible market to start out with not much capital. I am just looking for some ideas to get started with my first property. I was thinking about getting an FHA 203k loan in order to acquire a duplex or triplex and fix it up here in California or would buying a turnkey property out of state be a better bet for less money.

Greg Scully · Answer

@Adrian Beltran - This kind of depends on your goals.  I had a couple turnkey SFR in Tenessee that threw off about $300/month cash flow and each one took less than 20K of my own money to acquire.  It's a good investment, but there is little opportunity to make any significant amount of money quickly.  In my opinion turnkey is a long term wealth building strategy with some modest cash flow along the way.

A 203K loan by definition means the property needs some work and you would have some kind of capital return (and hopefully profit) through a refinance or sale.  It would certainly take more of your time, it's more speculative, but there is a greater short term upside potential.

Aaron DiCaprio · Answer

All good feedback for you to consider.  I personally like turnkey for out of state investments.  That's what my wife and I did for our properties in Denver and Alexandria, VA.

I also encourage you to explore buying rent default insurance that will reimburse you your lost rental income and legal expenses should a tenant default (which can be a huge headache in tenant friendly states like CA).  An average premium for a policy is roughly $300/unit, can be taken as a tax deduction and often covers up to 6 months of lost rent.

Best of luck,

Aaron

Derek Gendig · Answer

@Adrian Beltran I am a property manager here in Indianapolis.  We work primarily with out of state Owners/investors.  They each have their own strategies to include turnkey & BRRR.  We have the capability of helping owners buy/sell, rehab, & provide PM services.  Ultimately, if you end up taking a serious look into the Indy market and need some help navigating the neighborhoods, evaluating individual deals or getting plugged into the network here, please don't hesitate to reach out through BP or by sending me an email.

Bryan Blankenship · Answer

@Adrian Beltran Agree with the others - if you're looking for a solid long-term strategy, investing in turnkey properties out of state is the best way to go. Your cash stretches farther where the cost-of-living is lower, and as long you have a great team on the ground wherever you decide to invest, you can pretty much just sit back and collect your monthly cashflow!

Bo Kim · Answer

Hi @Adrian Beltran, looks like you're right in my neck of the woods. I can share my experience. I did a little bit of both actually. Not a 203K FHA Loan, but got a conventional loan 5% down newly built townhouse in 2017 and house hacked it for a year to essentially bring down my mortgage to levels I paid at my apartment.

After doing that for a year and a half, I started investing in OOS rental properties and have quickly grown that to 17 units using Turnkey and BRRRRs.

I still think that house hack (if an option) is the best way to get started, create equity, and learn the game.

Rex Celle · Answer

@Adrian Beltran In my view you should acquire turnkey properties with your capital outside of California in states such as Tennessee, Georgia, Indianapolis, Pennsylvania, etc. these areas have a high rental markets and are affordable for RE investors. I live in New Jersey and all of my properties outside with the exception of one are in Georgia all being managed by well-established property management companies, as my strategy is focused around revenue generating real estate portfolios in higher rental markets across the US

Adrian Beltran · Answer

@Derek Gendig I really appreciate all the info I'm getting back!! Its awesome! I have actually been doing alot of research in Indiana. I would really like to talk with you about some properties.

Clayton Mobley · Answer

@Adrian Beltran You've gotten some great responses here already and I agree with all of them regarding the necessity of identifying your goals first. Turnkey is not a short-term investment - you need to be able and willing to leave your capital in the property for at least 10 years. You don't sell a turnkey prop after just a few years without likely taking a loss after closing fees etc.

The one thing I wanted to elaborate on a bit, however, was the WHY of these answers. The questions of turnkey vs BRRRR is, like most things, a matter of the time/money trade off. If you primary goal is to sell the property in the next few years for more than you bought it for, turnkey isn't the answer. BRRRR/househacking is a better bet BUT the tradeoff for that potentially higher return is that all the risk is on you from start to finish.

That's not just the risk of vacancy, that's the risk of not knowing how to find and vet a property (not all distressed props are created equal and its crucial to know what to look for in terms of 'good bones'); it also includes the risk during rehab - if something unexpected comes up or you need to take time away for any reason and work needs to pause, that's additional time that you're paying the mortgage with no income. If done well, the result of all this risk can be that you have a rehabbed property worth more than you paid (incl rehab costs). You can either sell for a profit or hold as a rental - either way you've traded time and risk for the potential return of forced appreciation.

Turnkey works the other way. You trade some money for less risk and a lot less time. You don't (or shouldn't) close on a property until the rehab is finished, inspections passed etc. That means that all the down time with no tenants isn't your propblem. If you buy from a reputable provider who lives and works in the market they sell (crucial) and has a good track record, you're also reducing the risk that the property you buy is a dud - turnkey companies have honed processes for finding and securing the best properties in the best rental areas (being able to buy in cash helps us get the best deals, faster than individual investors would be able to). The risk of shoddy rehab is also reduced with a reputable provider (read: not all turnkey providers are created equal, do your research!) since they have in-house teams and streamlined processes to ensure high-quality rehabs and the same results in every property.

What you've traded for all that reduced risk (and time) is the chance to force appreciation the way you do in BRRRR - because the turnkey company has already done that, that's how we make money. You get a solid cash flow property at market price with new (or nearly new) capex items (roof, flooring, HVAC etc), but you can't just turn around and flip it for a profit.

Elise Bickel Tauber · Answer

Have you considered possibly either a hard money lender or a 203K loan so that you can purchase something that needs work, renovate, lease, and then refi? (BRRR with a twist). This is sometimes a really good approach as you can usually pick up a really good deal, renovate so that the property is in good condition (for less repairs and top rents), and also not have to put in a ton of money. I've had a few investors do this recently and it has worked out really well. If you consider doing this on a few single families, you can usually have some decent cash flow. Hope that helps a little.

Clayton Mobley · Answer

Both strategies can be hugely powerful, but one or the other may not align with your goals and needs right now. Many folks start with turnkey because of the reduced risk and hands-off appeal (although there's still a lot of homework to do up front when vetting), and then diversify into BRRRR when they have more capital, have other cash flow available to help offset vacancy risk during rehab, and have more experience in REI in general.

It's like choosing between building your own stock portfolio from scratch and investing in a mutual fund or ETF (professionally managed). You don't have to pick one strategy for life, but it is crucial that you be really clear with yourself about how much time, energy, and money you are willing and able to invest right now, and how much risk you can reasonably take on vs how much return you're willing to sacrifice for a lower-risk investment.

First property, BRRRR or Turnkey?

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