Would appreciate help with investing strategy: BRRR vs Turnkey

[Eran G.]

I am in a tough situation. I am ready and willing to take action but I need to narrow down a strategy. I am a busy professional with a busy private practice. I live in Socal and have decided to invest out of state (buy and hold SFR) in Indianapolis. I am an entrepreneur with a business mindset who would naturally like to maximize returns. That said, I already have a job that I love and have no plans to make real estate a full-time job for me no matter how lucrative it might be. I need a real estate investment option that is going to work with my lifestyle and that means that while I have time to continually dedicate to my real estate investments, I certainly dont have the time to make it a major priority in my schedule on an ongoing basis.

The problem as I see it is this:  Maximize returns through BRRRing or go the simpler (but certainly not passive) strategy of turnkey.

BRRR strategy:

BRRRing means building a  team and managing a rehab project.  I have done many home improvement projects in my own house and know first hand how squirrely contractors can be even when you live in the property that's being renovated.  The thought of trusting others to manage a contractor out of state and get a good product sounds a bit like a pipe dream.  I keep hearing about how important it is to have good feet on the street.  Absolutely.  That sounds like a no-brainer.  But trust is earned, not given, and how do you build trust when large funds are at stake and all the players are out of state and you are starting from scratch?  Please note, I plan to meet the players in person and see the property firsthand before I close a deal regardless of which strategy I use, however, that wont solve all my trust-based issues.

Enter the turnkey strategy:  

It could solve a big part, though certaintly not all, of my time constraint issues and fears about managing a rehab project.  The returns are certainly going to be lower but I could live with that if value is brought to the table in other ways.  The issue with this strategy I am finding is..once again...who to trust?  It appears almost everyone involved in the turnkey game on BP has a vested interest in you going with this outfit or that provider.  Everyone is incredibly nice, mind you, but there is likely a vested financial interest in it for them when they make their recommendation, even when they are not "disclosed turnkey sellers."  I have no doubt some, possibly many, of the people making turnkey recommendations are truly good people with recommendations that could very well help my personal interests, however, I am struggling with who to trust.

The 3rd option:

Get a good deal on a good property off the MLS with little to no need for rehab and then hire a property manager. This may seem like the best of both worlds until you realize that the money you saved from not paying full market to a turnkey provider on a 120K property is maybe 5-7K. Now I am not scoffing at that kind of money, but from a time saving perspective, is it even worth the headache of doing even a minor rehab to maybe start off with 5K in equity when I could have saved that time and headache if I started off with a solid turnkey provider who delivered on a good product and looked after me?

So here I am, head spinning about issues with investment strategy, trust, and which direction to go.  I would love to hear feedback from busy investors (who are not full-time real estate professionals) and are investing successfully out of state.  What strategies are you using?  What worked and what didnt?  What did your journey look like? 

Please note, I am not a passive person, I am realistic about needing to be active in my investments and holding my team to account for their actions and performance.  I plan to visit my properties at least once per year and I have no false hopes that someone is going to take care of me and make it all perfect.  However, getting into a wholesale deal and starting from scratch on a big rehab project while hoping that I can trust my contractor, property manager, and anyone else to do things the right way when I have no contacts or existing relationships whatsoever is likely a recipe for disaster.  

[Ali Boone]

Hey Eran! Great questions and I really appreciate your self-awareness, and the awareness of the pros and cons of the different strategies. I also really appreciate that you plan to keep your head in the game after you buy and check on the properties and keep an eye on the players involved, etc. Especially if you go the turnkey route, a huge misnomer is that someone can be 100% hands-off and everything 'should' be done and that's really not the way to do it. You should always still have an eyeball on the property and the players and be willing to manage any challenges that pop up.

You and I are already chatting offline so we can chat more there, but I wanted to throw out a couple things for you and anyone else reading who might have the same conundrum.

First thing, here's just general information comparing BRRRRs and turnkeys:

https://www.biggerpockets.com/renewsblog/buy-rehab...

The other thing I want to note is that there are options to combine BRRRRing and turnkey. I'm working with a turnkey provider now who does exactly that. You, as the investor, fund the purchase of the distressed property and the rehab, the provider does all the work of the rehab and everything they'd normally do to create a turnkey property, and then you cash-out refi it afterwards at a value greater than what you paid for it.

Now to clarify, a number of turnkey providers over the years have offered this to investors and I stayed away from it because there is a major shift in risk with that model. Regular turnkeys- the turnkey provider carries all the risk and you don't have to put a dime in until you've verified everything. BRRRR turnkeys- you're funding it so if anything goes haywire, it's your money on the line. The only reason I am working with this particular company doing this model is because a) I worked with them for years on regular turnkeys so I knew their track record, and me and my crews also watched them doing this BRRRR model of it for about 1.5 years before we agreed to trust it, and b) they offer guarantees for all the major risk factors involved. (I just wrote an article for BP on those exact risks but it's not been published yet...I'll link to it when it comes out).

Anyway, just wanted to throw those thoughts out as you continue to ponder!