Which is a better rental investment turnkey or fixer upper?

Question

I'm a newer investor from Columbus Ohio, and I'm hoping to get some insight as to what's the better investment to make as far as starting out. Right now id like to know what is the difference between buying turnkey and buying excellent shape retail SFH just off the MLS? Is one a better investment to start off with than the other

Aimee Sowards-Mounts · Answer

Hi, welcome to BP!  Here in Columbus, it just depends on the property.  If you don't have lots of resources and ability to do the work yourself, then buying a fixer upper can be a money pit.  Often times small repairs become big repairs. Unless you have a good arsenal of contractors and suppliers that are affordable and reliable, you can get way over budget.  There are many homes that are affordable that just need "lipstick", things like carpet, paint etc. This keeps your costs down, and the property is ready to rent much quicker.  And there quite a few properties I've seen, even just this week that are turnkey, and some even have a renter in place!  Those are ideal and instant money makers. One was listed at $39K, had a tenant in place (a good one that pays on time) paying $650/month and pays all utilities. Thats an excellent cap rate!  I suggest finding a good agent who is investor friendly, that knows the city well, and can help crunch the numbers on properties listed.  Let me know if I can be of any assistance! Good luck!

Mike D'Arrigo · Answer

@Justin Frye It depends on a lot of things including the turn key company. There's always an assumption that you can save money by doing it yourself, but that's not always true and in fact, can cost you more money when you don't know what you're doing. Let's start with the "excellent shape retail SFH just off the MLS". It's true that turn key's don't generally have equity built in (but sometimes they do), however, properties in excellent shape on the MLS don't have any equity built in either. These properties are being sold at full retail. There are several reasons that you don't have to pay more than market price (which is what you're paying for an MLS property) for a turn key. Here are some of them:

• Turn key companies have far lower acquisition costs than an individual. Turn key companies are buying distressed properties for cash at significant discounts and are usually buying further upstream at auctions, tax sales, direct for distressed owners etc.
• Turn key companies have far lower construction costs. They are generally getting substantial discounts on materials since they are volume customers.
• Turn key companies have far lower labor costs because they have more control over their crews and keeping them employed
• With a turn key property, you don't have any nasty construction over runs.
• With a turn key property, you are not paying for a mortgage, taxes, insurance and utilities while the property is being rehabbed and marketed for a tenant.
• With a turn key property, you don't pay a lease up fee for the first tenant.
• With a turn key property you are receiving cash flow from the day you close.

Do you pay more than market value with some turn key companies? Yes, but it's easy to tell if you are. If the turn key company sells mostly to cash buyers or if they don't allow an appraisal contingency, there's a good chance you are paying over market value. We sell lot's of turn key properties to mostly financed buyers which means the lender requires an appraisal. In all the years we have been doing this, I can probably count on one hand how many came in below the appraisal and not by much. In this day of inconsistent and over cautious appraisers, that's unusual. So don't automatically assume that you can get a better deal on the MLS.

Steven Gesis · Answer

Hi Justin-

Great questions, I think we can break this down to much simpler terms:

• How much time can you personally afford to give up to investing in RE? 
• Retail SFH = no property management, no infrastructure = you will be hands on
• Turnkey = all work is complete and the property is producing income immediately = passive income

It all boils down to how much time you have to entertain all the infrastructure that REI requires to be successful. If you are not a busy professional and want to self manage go for it. Otherwise go for a solution that is proven and has a good team of talented people that can help you gain equal or more value then you would trying to go step by step on your own.

Turnkey is just like your conventional investment vehicles, you place your money in as an investor and gain passive income.

At the end of the day you must determine, if Turnkey has the right value for your strategy.

Trent Currie · Answer

There is a lot in this question. Adopting an existing tenant can have come caveats. Check out

https://www.biggerpockets.com/renewsblog/2013/06/0...

An excellent shape retail SFH sounds like you might just have the option of placing your own tenant. Either way you will have to do your regular due diligence on the property and deal etc.

Jay Hinrichs · Answer

In your market the latter is probably very doable. since your local you can just get with an agent look at the houses on MLS  a walk through will give you the general feel for the place... just compare those turn key to mls and see if prices are in line.

then if there are turn key your area just go look at a few of those and compare.

Justin Frye · Answer

@Mike D'Arrigo wow great answer and great feedback. Yes it makes me think buying off the MLS is almost pointless in this day and age we live in.

Melroy D'Souza · Answer

Justin, there is no free lunch.

Going the route of Turnkey may give you instant returns, but you have to spend time researching the provider and management. Then manage the manager or self manage. Typically in the Central Ohio area, I have not found turnkey prices very attractive. They also tend to not sell homes in the suburbs, which is where I am interested. It might be different in your case.

You can go the MLS route, and pick up one of two kinds of properties - everything done up which will sell at market or slightly below market. If it is slightly below market they are snapped in a day or two. The other option is to pick properties that are beat up (to varying degrees, a little carpet & paint to a complete rehab). This will take a month to several months to eventually start cash flowing. If you buy these correctly and go through the hassles of dealing with contractors, etc. you should be all in below market value. Then refinance, cash out and rinse. (BRRR method @Brandon Turner) Higher returns than Turnkey but more work involved.

There is a 3rd method where you buy properties outside the MLS. Here is where you get the best deals and possibly more creative financing. However, you have to do a lot more work. Don't buy a $997 course and think it is going to be easy. You find motivated sellers and grab these deals. You could also work with area wholesalers.

Good luck and search stuff on BP, it's an amazing tool.

Matt R. · Answer

@? If you are local a fixer normally has more wiggle room for profits and this is how a professional investor would likely handle it. Some could find rent ready stuff on the mls or nearest rent ready. In some markets rental properties are dumped off market for a song, mostly by burned out landlords. Some homes are in mid stride with new roofs, windows etc... then they run out of money.  Many pros work all these angles for better value. Taking on any major fixers could backfire if you don't have all the know how in place first. Turnkey retail is suited better for someone with no time or clue typically. Either way a property manager is optional. Many local full time Pros manage their own like a small business would.

Good luck!

Aimee Sowards-Mounts · Answer

David is correct, and I too heavily focus on investors and investment properties. Hence my verbage in my comment, lol. That was me self promoting without self promoting, as BP frowns on soliciting in the threads. Let me know if I can help in any way!

David Panzera · Answer

Hello @Justin Fryeand welcome to the site!

Disclaimer: I'm an investment realtor and property manager and don't offer turnkey solutions, but I do see that this question pops up a lot on BP, so I would suggest just putting "turnkey properties" in the search bar and you'll come up with some other great posts and forum threads about it, like @Trent Curriepointed out. There are people on this site who have strong opinions on both sides and it's worth spending the time reading a bunch of things to get a feel for the issues.

My opinion is that you fully research any turnkey company you're looking at. And get opinions from people on this site as to whether they've worked with that company before. Turnkey properties can be a great choice if you're working with a reputable company with proven results.

If you do want to take @Aimee Sowards-Mountssuggestion and work with an investment realtor who knows the city well and can help you crunch numbers, feel free to contact me and I can help you with your questions. Good luck!