Out of State RE Newbie: Turnkey or Value Add?

Question

Hi all,

I’m new to real estate. I have 15k to invest, and I’m interested in doing RE for the long term.

I’m priced out of my area, and I’m looking to invest out of state. Particularly Memphis, Indianapolis, or Ohio. First question: how are these markets?

Secondly, as a newcomer without a solid team or “core four,” I’m considering picking up a turnkey for my first property or two.

After learning the “language” of RE, and getting some lessons in, I want to invest in value add properties, especially the BRRRR method. What are your thoughts on this  strategy?

Third and last question: has anyone purchased anything through the BP marketplace? Are those generally trustworthy? What do you look for, or what questions do you ask to ensure you’re not getting screwed?

Thanks I’m advance, BP!!

Stephen Akindona · Answer

Hey @Koleton Daley! I am a local investor in Memphis and know the owners of Crestcore realty, (I do not work for the company in anyway) I am sorry but I have to disagree with your above posting. The owners are honest upstanding guys and although I don’t know the details of your situation I have referred several of my clients to them, I have worked with their company and while no company is perfect the feedback I often receive is that they operate with integrity and go the extra mile to make things right for all their clients. Let’s connect offline and see if I can help in anyway with your particular situation as I have personal relationships with the owners!

Eric Fernwood · Answer

Hello @Albert Chun,

You asked some great questions. Rather than suggesting a location, I will focus on important factors you should consider when selecting a location. While I will not provide detailed answers in this post, I will point out some areas that you should investigate before making any decisions.

Start With A Clear Goal

I always start with a clear definition of the end goal and then work backwards to where I am today. My goal for any investment property is that the location and property must meet the following three criteria.

• Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
• Properties in the location are currently appreciating at or above the rate of inflation and are likely to continue to do so. Properties appreciate in locations that  have strong demand, which is the key driver for sustained profitability.
• In a location where you can make money and you control your property as opposed to the government dictating what you can do. A good indication is cost and time to evict.

Whether you have $15,000 to invest or $15,000,000, the goal does not change. The purpose is to make money today and from now on. With a clear goal defined, I will comment on some of the points you brought up.

Should You Buy Turnkey?

Buying turnkey is only a purchase method. It in no way reduces your time, effort or responsibility to perform a thorough due diligence on the: location, rent, time to rent, probable tenant stay, target tenant pool, condition of the property (based on an inspection report), your options on property management and the turnkey provider themselves. So unless you are willing to gamble with your savings, you do not save much time buying turnkey. Plus, buying turnkey is almost always more expensive. Turnkey providers bundle a lot of services, costs and necessary profit into your purchase price. You will likely pay less and have a higher return if you buy direct through your own team and avoid all the bundling costs.

Importance of the Location

As long as you buy property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. However, the corollary is also true. If you buy in a  bad location, there is little you can do to turn things around after the fact.

There are a lot of factors when it comes to selecting a good investment location, far too many for this post. I will only mention one of the key investment location barometers: appreciation.

Appreciation is one of the best indicators of a desirable investment location. Unless property prices and rents are rising at or above the rate of inflation, the buying power of the rent you are receiving is actually declining over time. Remember that inflation erodes the value of money over time. For example if you assume inflation is 5% (Official inflation is about 3% but this number does not include energy or food.), over a 10 year period the purchasing power of $1,000/Mo. in rent decreases to about $614/Mo.

Assuming you are only considering locations where property prices are increasing at or above the rate of inflation, I would proceed as illustrated below.

I will mention one other consideration since it is critical - in order to have a profitable property, you must keep your property continuously occupied by a good tenant. I define a good tenant as someone who:

• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

Good tenants are not the norm. They are the result of selection from a pool of applicants by a skilled property manager.

Importance of An Investment Team

A good investment team is critical. Even if you buy turnkey, you are still dependent on their investment team. The most important team member is the property manager, followed by the Realtor (If you are interested, I can send you a paper on how to select a good Realtor and property manager.) I put together the following chart showing what you should expect from each of the team members.

Notice that none of the team members (except you) has much, if any, investment selection or evaluation knowledge. Specifically:

• A property manager knows what rents and how much a property will rent for but they cannot determine whether a property will cash flow after all expenses.
• While Realtors know what homes buyers want, they have no knowledge whether any given property will be profitable. I regularly get emails with “Investors Dream” as the subject line. Almost none that I have received would break even let alone generate a significant positive cash flow.
• A handyman knows how much repairs will cost but nothing about investing.

You, the investor, will take knowledge from each team member and combine this knowledge so you can decide whether a property is a good investment or not. And, since this is a spreadsheet decision, making this decision is not as hard as it seems.

Summary

Albert, do your homework on investing and your due diligence for any location and property. Always remember that while the path might seem daunting, others who are less capable than you, have already completed the journey and are making money. You can do it.

Best wishes to you and feel free to post questions and I will do my best to answer.

Koleton Daley · Answer

Memphis has low taxes and is very landlord friendly. Plus certain areas are deemed improve the zones and those carry some tax benefits :)

Zeke Liston · Answer

Hey Albert, I have to agree with @Remington Lyman Columbus, OH, is a great market to invest in! With $15K to invest, you might have a harder time finding a place, as most banks will require 20-25% down for a non-owner occupant residential loans, which I'm assuming you won't live there since you are looking to invest out of state. But, there are definitely still deals out there that will work.

As far as the BP marketplace goes, I have never used it.

Ali Boone · Answer

Hey Albert. Here's general things to think about when you're comparing turnkey vs. value-add options-

https://www.biggerpockets.com/...

Unfortunately $15k isn't going to get you much for turnkeys though, or value-add either unless you find hard money or something. But if this is all for out-of-state, consider the risks you're taking on if you get those loans.

For due diligence on any property, Marketplace included, you have to do a lot more than just ask questions. You need to learn how to do thorough due diligence on any property. Definitely don't ever take anyone's word on the internet.

Koleton Daley · Answer

Hey @Albert Chun! Memphis is a great market! I’m currently invested in it with multiple single family homes. I’ve purchased a few out of the market place and some off market. I would strongly encourage you to start networking with wholesalers and get on their lists for off market deals. The best advice I can give you is STAY AWAY FROM CRESTCORE REALTY GROUP. In my opinion, they’re some of the most dishonest people in the Memphis market, we’re currently involved in a civil dispute with them for fraudulent actions/activity. They post really heavily on the marketplace and in the forums but trust me.. they’re very very shady.

Please feel free to reach out if you need any help with anything or have any questions!!

James Wise · Answer

Saw you were interested in Ohio. If you're looking to invest in the Cleveland market you'll want to give The Ultimate Guide to Grading Cleveland Neighborhoods a read.

Remington Lyman · Answer

@Albert Chun Columbus, Ohio is a great market. We are appreciating so it is tough to find cheap properties.

I recommend that all of my out-of-state clients start out with a property that requires little or no work. This allows them to get their feet wet. They then can take on more challenging properties from there.

If you find a nice 2-4 unit it is easy to raise rents and refinance the property. You can even sell it and 1031 exchange into something bigger (disclaimer: I am not a CPA and recommend you reach out to one for more information on this)

I have not purchased anything from the marketplace.

Kiera Underwood · Answer

@Albert Chun You might want to look at Oklahoma as well. It's less flooded, stable and has very approachable price points. You'll have to find the right lender, but you can find a property and be all in at 15k. You'll just have to get specific and move quickly when it becomes available!

You can find a great team that serves you via turnkey and other strategies. Just read reviews!! Ask to talk to current clients. My fear is that people from BP get linked with "investment focused realtors" that don't know too much about investing haha. Go where the experience is! That said I wouldn't start with a big rehab. Without having much experience you're definitely opening yourself up to some risk. A little garage conversion..maybe.

There are so many questions I would ask but most importantly: How many deals has your team done for out of state investors? Can I talk to some of them? Where can I read some reviews? Can I fly out to meet you?

Jonathan Oh · Answer

Tbh if you're planning on going turnkey, 15k is probably going to get you just one property. 20% down will get you at most a 75k property. That's not even including closing costs and reserves you should set aside. Be wary of picking up cheap turnkey properties. Couple years ago, they were solid, but nowadays with margins thin, you have to double check the area the properties are in. I try to buy within 25% of median price/sqft of the market to be as close to the mid tier as possible. Again, I'm more on the conservative side and that is what I would tell my clients. Take my comments as a food for thought and don't let me discourage you because I don't fully know your situation. If you need help don't hesitate to hit me up. Good luck!

Out of State RE Newbie: Turnkey or Value Add?

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