OOS Turn Key Property blended with a BRRR!?

Question

I'm a total NOOB when it comes to OOS investment. I'm looking into the midwest (Indy, OH and MI) and also, Chicago and St Louis. Is there any companies that specialize in turn key meets BRRR? It might be too idealistic, but want to see if there is anyone that focuses on both so you can focus on solid cash flow, learn how to rehab a property and look to appreciate to refinance.

Alyssa Dyer · Answer

Something a bit more realistic in this market in Oklahoma City would be adding value through increasing cash flow. A move I've seen done here successfully is converting single car garages to a 4th bedroom and then getting them approved for section 8 which can bump your 800/month rent to 1100/month rent.

You can get a solid C class property for 80k and a single car conversion costs 7k. Pretty decent returns for minimal work!

Mike D'Arrigo · Answer

@Adrian Kar These are two very different things. I don't think what you're talking about exists. A true turn key company acquires the property, renovates it and places a tenant, delivering a fully turn key and cash flowing property to you. There's not enough profit in it for a turn key to do some kind of hybrid like you're suggesting and I don't think you would end up with enough equity if any, to make it worth it. Personally, I think you're better off going full turn key or going full BRRRR and not trying to straddle the fence. I agree with @Jeff Schechter that to make BRRRR work, you need to focus on higher priced properties since you don't have the economies of scale to make the lower priced ones work. There's not enough meat on the bones.

Jay Hinrichs · Answer

this is not different than any other flipper.. these companies that sell rentals all fixed up and ready to go are rental house flippers.. then you have retail flippers.. they buy houses fix them up and sell them to a home owner.. obviously the goal in either business is to make a profit for your efforts and risk

we have pivoted in the last few years to new construction.. and we sell 100% of our homes to homeowners.. can they go buy a lot and build for less.. In some instance maybe.. in many others no.. they cant get the sub pricing we get..

Not to mention remote rehab has its own very real risks.. when your not on the job basically daily.

BRRR is how Turn key companies operated almost exclusively prior to 08..  you had the west coast marketing company you had the in market company that sourced rehabbed then managed the asset.. the difference was Our company we put the west coast investor into title.. so they could do a rate and term refi once rehab was done.. this worked because we did volume and the in market teams did not want to lose us as a source.. also the in market teams did not have to pay holding costs.. so their price points to the west coast investor was lower.. as they had no cost of capital.

In todays market the TK company has a holding cost .. I don't know any that do this with cash out of pocket.. so not only do you have to source you have to rehab and you have to pay a bank or investor holding cost while you get the property ready to go and sold to the end buyer..

this is why many TK companies well maybe not many but some only deal in cash.. the loan process the west coast investors go through will cost the TK company money for a home that is sitting and waiting for financing to come through this eats in to the bottom line.

so one needs to take all these factors into consideration..

Clayton Mobley · Answer

Also, re: price point. I second Schecky again. If you want to get your hands dirty and buy distressed/rehab, stick to props over $50k (distressed price, not after rehab market value). Especially if you're going out of state, you're not going to have the networks or know-how to get the numbers turnkey providers and other pros put up, you won't have the systems in place.  Plenty of folks make good money on lower tier props, but they are practiced pros who have built it into a business (economies of scale, networks) or self-manage in their own market (cutting down expenses). For a new OOS investor, stick to B/B+ props where you have more wiggle room. Once you've got the market knowledge and connections to take things to the next level, you can move into C/C+ props if you think that's the right direction for you.

Clayton Mobley · Answer

@Adrian Kar I'll second the advice you've gotten so far from @Michael Thompson and @Jeff Schechter , while this model is possible, it's often not what you think.

On the worst end of the spectrum, you have a Morris Invest situation, where they sold the idea of buying sub $50k props that the investor then pays to rehab under the direction of Morris. But what happened was....well a nightmare. Read some threads about that whole situation to get an idea of where it can go.

Of course, not everyone is Morris, but both Michael and Schecky made some important points to keep in mind. Firstly, turnkey companies make money by doing the rehab, using economies of scale and great networks to force equity, and then selling at market value. We are almost always able to get a better value and better work done, and make a bigger profit, on a property than the average retail investor, for a lot of reasons. So why would a company want to give you the benefit of that equity?

The answer is that they aren't. We call this 'pay to play', but really you're just paying to take on risk you wouldn't have if you went straight turnkey, and to give up control you would have if you just DIY'd the whole thing. You pay for the rehab, but they control what happens. You don't show up on site everyday and give your two cents, there's not really any hands-on learning.

What you do have is all the vacancy risk of having an extended rehab. You own the prop, but no one can live in it, so where's the benefit to you? The company isn't beholden to you for getting your monthly income flow started from day 1 the way a full-service TK outfit is, so there's plenty of benefit to them in terms of letting you take on the risk of rehab. You're not there to see what's actually being done, so it's easy for a company to do less than stellar work without you knowing, or allow delays to drag (which means more time without cash flow) because it's doesn't much matter to them.

Of course, this makes it sounds like it's all a scam. And while there definitely are some scammers out there, it really comes down to how the turnkey model operates, and that model not really being conducive to individual investors taking the reigns of rehab. Any turnkey company that operates successfully for any length of time has their rehab processes 'dialed in' as Schecky said - we have streamlined processes and wholesale vendors, we get wholesale discounts and we do the same thing for every property, so we can get things done efficiently and maintain a consistently high standard across inventory. A turnkey company that lets you pay to play isn't going to give up those savings to do a custom job on every property, it would be a massive waste of money for everyone involved. So they're going to do the same job they would do anyway, but you get to pay as you go AND shoulder the risk of long-term vacancy, unexpected rehab issues, etc. Even a company that does great work consistently, and you end up with a solid rehabbed property, isn't really giving you any real world rehab experience, they're just letting you come along for a ride they were already taking, you won't even get to choose the music.

If you want to get your hands dirty, you're better off building a team in the market of your choice, flying over to meet and greet, see their work and look them in the eye, then manage that team from afar. If you want to minimize risk and just have a cash flow property that's rehabbed and tenant-ready, start looking into solid full-service turnkey providers in markets with numbers you like, fly out to mee them and see their work/inventory, and then let them do the work.

What you're looking for does exist, but it's not the route I'd recommend.

Jeff Schechter · Answer

I'd also suggest you stick to the more expensive properties with "meat on the bone."  As an example, we operate a very successful TK operation in Indy, and we tend to operate in the C-class arena... $45-70K properties.  We have things very dialed in, and don't put a lot of markup on our properties.  In nearly every case, we've been able to deliver a better product for LESS money (with a warranty) than an investor can do with the best wholesale/contractor/PM team.  In the more expensive properties (say over $100K), there is more opportunity to gain that "forced equity" that you're looking for.

Adrian Kar · Answer

Thank you for the response, As someone living in LA, what would you recommend for a first time investor wanting to get into the market to build wealth? Save more and buy local? Or find a turnkey company out of state? Or go it alone...? Thanks Jay!

Adrian Kar · Answer

Very much appreciate your lengthy response here. Very informative. There's so much information online, it's hard to know where and what to do. Maybe Turnkey is the way, at least at first.

Michael Thompson · Answer

@Adrian Kar - They might exist but you would be better off to build your own team in the city you choose.  A reason for doing a BRRR is to have instant equity for yourself.  Turn key companies make their money selling at near retail and they get the equity but you get a rent ready property.  Start with a local PM and ask them for references for wholesalers, Realtors, and contractors.

OOS Turn Key Property blended with a BRRR!?

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