The turnkey discussion

[Jami Morton]

Looking for some advice...I am fairly new and wanting to create steady passive income the best way I can via rentals and I thought turnkey...

When doing the turnkey thing its very hard to find a company that provides built in appreciation when they sell to you.  They mainly sell you the cash flow.  A lot of people buy for cash flow. I think this is great. But I am looking for cash flow yes, but also built in appreciation as well.  And hopefully some basic appreciation over time in the Midwest.  Then if the market takes a turn for the worse, I should still have my cash flow correct? ... And still be able to sell if  i would  for some reason need  to even though the market depreciates the value of the house.  I would have some padding in there because I bought it correctly?   This is all based on buying these houses for cash.   Would this scenario change if these were leveraged.  I guess what I am asking is how do we protect ourselves as investors and our passive income if the market takes a downturn. What is the best strategy and is buying for just cash flow a good idea and will it sustain a bad market?

[Bryan O.]

Hi @Jami Morton Turnkey providers are typically in markets that have higher cash flow, lower appreciation. "Working class" neighborhoods seem to be the bread and butter for their model. You will have to vet the market, and the neighborhood, to see if it fits your strategy should you choose to go turnkey. If you want to get built in equity you will need to manage the process (or pieces of the process) yourself: Find the deals, run the crews, etc. That is how you save money and build in that equity. When you buy turnkey, you are paying someone else for having done that service for you and they will not happily accept less for the work they are doing. Imagine asking a real estate agent to only accept a 1% commission because you'd like to pay less and have more equity in the house ;) Both turnkey and traditional methods are great, but for different reasons. You have to choose how passive you want to be, what your skills lend themselves to, what time you have, and many more things. Those are what will point the right direction for you.

The way you protect yourself from a market downturn is to vet the market to make sure it is resistant (i.e. not single industry as Detroit was), vet the neighborhood (improving? getting worse?), avoid heavy leverage (this removes an exit strategy if the market goes down) OR do not plan to sell (long enough to wait out a dip), ensure your rent rates are good enough that if they dip you can still cover your payments / expenses, get great managers or manage well to ensure solid tenants, and have enough money in reserve to operate in a bad scenario.

There are a million ways to do everything in real estate. What are you after? What is your personal risk tolerance? What lets you sleep better at night? You will have to choose what fits your own personal view of the world.