The good and bad of turnkey properties

[Daniel Mendez]

Hey BP,

I am looking into purchasing my first investment property out of state. Most likely in Indianapolis, Indiana.

I am currently debating on whether or not I should start with a BRRRR property or Turnkey property.

However, It seems like people aren’t fond of turnkey companies.

Can anybody tell me why? If i do go with a turnkey property what are some tips that you guys can give me in order to get a good turnkey property?

[Clayton Mobley]

@Daniel Mendez, @Charles Carillo is spot on - the issue many folks have with turnkey as a general model is that the opportunity to force appreciation and sell quickly for a profit is removed - because that's what the turnkey company has done, that's how we make money.

If you BRRRR or other DIY method, you find a distressed property, you renovate it, you either flip it for a profit or hold it as a rental. Either way, the value of the property after rehab is/should be higher than the total cost of the purchase and rehab work. That spread is called forced appreciation and its really the whole point of the BRRRR method. However, it is, of course, a ton of work and time. If you have a lot of free time, are handy yourself, or have a good network of folks you can contract to do the work, this can go quite well. But the inherent risk is that rehab takes longer, there's some unfortunate surprise along the way that adds time and dollars to the budget, etc. The longer it takes, the longer you're paying the mortgage (if you financed) without any rental income to cover it.

BUT when it's done, if it's done well, you have a property worth $200k that you only put $150k into, for example. If you want to hold it as a rental or flip it, you make money either way. You've traded a TON of time and energy and risk for a higher potential reward.

With turnkey, the primary benefit is that you don't need to do any of that. The company (which has networks and systems in place to find the best props and rehab to a high standard quickly etc) does all that legwork on their dime and on their time (ie no vacancy risk to you during rehab). You close on the prop after rehab is done and inspections are passed, so there's no risk to you during the rehab phase. In exchange, the turneky company is the one that benefits from the spread between what they put into the prop and the market price they sell to you at (should be market price, a reputable company won't inflate their values and third-party appraisals should back up their prices). Your returns will come from cash flow each month and, presumably, long-term appreciation (never guaranteed). You've traded extra potential return from forced equity for the luxury of having your time and energy back and having someone else shoulder the rehab risks.

For some investors who don't work full time or just think DIY stuff is enjoyable, it seems crazy to trade away forced equity return for convenience, which is where a lot of turnkey naysaying comes in. But for folks who work full time or more, live in pricey markets, or just want something more passive, turnkey can make a lot of sense. It all depends on your goals and what you need from your investment right now. Many folks start with turnkey because its simpler and lets them put capital to work while they learn the ropes of higher-risk strategies. It's not a lifelong choice- you can alwasy move into BRRRR after you learn more and have a cash flow buffer behind you.

It's sort of the difference between building your own stock portfolio from scratch and leanring as you go and investing in a professionally managed mutual fund or ETF. You trade higher risk-higher potenial return for lower risk-limited upside potential.

Before you decide either way, just make sure you have an honest conversation with yourself (and/or partner) about your goals and what you can realistically dedicate to REI right now in terms of money, time, energy, and risk.