Funding strategy for first Turnkey?

Question

Complete beginner here looking for some advice. I’m about to be an empty nester and in one year plan to move to an apartment and turn my 4 bedroom Houston home into a rental. I’m also thinking of investing in Turnkey properties. I like the passiveness of TK and have no interest in doing the searching, renovating, leasing or maintaining work myself.

I just recently transferred a huge chunk of savings to pay off my house (before I considered I might do turnkey). Rental estimate is 1750 so I think that would be about ~800 monthly cash flow.

Would it be better for me just to wait another 8 months or so to save for the first TK down payment ? Or should I look into a home equity loan for this type of deal now. I have excellent credit, excellent job and no debt.  My ultimate goal is extra cash flow for early semi-retirement in 6 years as most of my other investment is tied up in 401k and I wont be able to withdraw from that for 10 more years without penalty. So a SDIRA won’t work either.

Thanks in advance for any advice.

James Wise · Answer

I'd wait & use a traditional residential loan. In my opinion that 30 year traditional loan is the key reason folks should be looking to invest in real estate. That type of low interest leverage is unattainable in any other business venture.

Cristin Andrews · Answer

@James Wise thank you

Scott Passman · Answer

@Cristin Andrews Personally I would wait to save for the TK down payment and in the meantime start working on locating and vetting TK providers in the market you are looking to buy.  It will take some time to reach out to some providers, ask questions, check their references, and really get a feel for their reliability and the quality of property they provide.

While TK may not provide the fastest way to build equity, it can be a useful strategy for someone such as yourself who is looking to be a more passive investor and generate some cashflow while reaping some of the other benefits of rental property ownership.  Make sure you perform your due diligence on the property and the provider to ensure you acquire a quality property.

Cristin Andrews · Answer

@Ali Boone I was nervous when the first one left but now I’m ready to get some freedom back 😀

I appreciate all the advice here. Im trying to get my head around all of the numbers - taxes, depreciation, cash flow etc.

My house is paid off and I will be living in it still another year. I’m a project manager so always plan things well in advance. That’s why I’m trying to figure out what moves to make now to be ready a year from now. My thought is if I plan to retire in 6 years - my effective tax rate will be lower in retirement and my goal is maximum cash flow. I don’t know that a turn key property with a 25% down conventional loan could generate much in the way of cash flow in only 6 years. Then again I’m new to this so open to someone saying I’m completely wrong there.

Cristin Andrews · Answer

@Jay Hinrichs thanks. The house is much too big for me to live in it alone 4 bedrooms, study, game room etc so I will need to either sell it or rent it. I’m wondering if a better idea is to sell it and put that cash into a few more properties?

Ali Boone · Answer

Hey Cristin! Ooh empty nest... nervous??

As far as your options, I would run some numbers scenarios. So like if your house is paid off or whatever equity you have in it, run the numbers on what a cash-out refi would look like. Compare the interest on that financing to what you could buy with that money turnkey, and see what it would do to your cash flow. If you still have cash flow after the refi (or HELOC or whatever you do), and assuming the turnkey returns will be higher than the interest you're now paying on the refi or HELOC, then it's worth it to keep that house, do that, and keep the tax benefits on all the properties. That's how people snowball into profits. The more properties you can snowball into more cash flow, the better off you're doing.

If the numbers don't work though, then figure out where/how they do work.

And as far as turnkeys, I've almost primarily just bought turnkeys for myself and I absolutely love them. I also have absolutely zero interest in all of those things- searching, renovating, leasing or maintaining anything. Last year I bought a duplex local to me that I'm the landlord on, and it only reaffirmed that I have no interest in any of those things.

Reach out anytime if I can ever be of help!

Jay Hinrichs · Answer

One thing to consider is talk to your accountant.. you dont want to turn a Owner occ prop that has appreciated a decent amount into a rental.. you lose your owner occ TAX FREE benefits..  Its the best tax treatment we have the in the US>. so you can sell it tax your gain TAX Free then go shopping.. once you turn it into a rental for a few years the tax free is LOST unless you move back into it for a number of years.. then U have to take depreciaiton on it.. and then if you then sell you have to recapture... AS most in later years are not looking to continually 1031.   So my advice ( free at that) is if you have any appreciable amount of GAIN take it tax free then go shopping

Cristin Andrews · Answer

@Scott Passman

Thank you for the advice.

Cristin Andrews · Answer

Thank you for your response. I can’t sell this house for another year as my nest won’t be empty until then. Once it is empty, I was operating under the thought that it wouldn’t make sense to sell a paid off property that I could get maximum cash flow from only to buy a different one incurring additional closing costs etc. Is this faulty thinking?

Michael P. · Answer

Sounds like your emotionally attached to the Houston house? Just sell it and boom you have money for turnkey.

Funding strategy for first Turnkey?

Most Popular Reply