Turn-key or value-add?

Question

Greetings BP community.

I've been spending a few weeks analyzing dozens of deals a week in my markets and I was curious how everyone approached their first House Hack or investment rental?  Did you prefer something turn-key [and ready] or did you want to find a value-add to raise some equity after a few weeks/months of rehab?  Granted, not all turn-key properties are without faults that may need improvement within a few years but there should be reasonably less need for maintenance than something needing a rehab.  On the other hand, the rehab/BRRRR gives you equity sooner to refinance or have an exit strategy.

I appreciate any thoughts and feedback you may have.  In other news, if anyone is browsing the NJ market, I'd love to connect and talk about what you're working on.

Thanks in advance.

Joseph Schweizer · Answer

Hi @Larry Chen!

I fit @Cameron Tope's second point of having a decent income from my full time job as an engineer, so I decided to go the turnkey route for my first investment. I made my first investment in October 2020 (see post below) and I learned a lot in purchasing and owning this property.

I also already had a primary residence prior to learning about real estate investments. I wish I knew about the house hacking strategy a lot sooner since it has some great benefits.

Ultimately, you need to look at your own goals and your own situation to determine what strategy will work best. Also, do not get lost in the cycle of thinking you do not know enough to get started. Taking the step and making that first investment will teach you so much.

https://www.biggerpockets.com/forums/850/topics/895660-my-first-investment-property-an-out-of-state-deal

Best Wishes!

Chris Levarek · Answer

@Larry Chen Like mentioned already, depends on your goals and lifestyle.

Consider this, for value-add :

Do you have the time, experience, capital to perform a value-add project. Do you have passion to learn the new skills needed? Are you located in a market where it is possible to find such deals or motivated to build a team(contractors, property managers, lenders, agents, etc) out of state? Do you have the tolerance for risk of making mistakes and all that might come with that?

Consider this, for turn-key :

Do you enjoy a completed asset providing a steady return? Do you like renovations already complete? Are you busy with a full-time job and don't have much time? Are you not interested in learning how to renovate, flip or add value to a property? Do you like lower responsibility or risk of things going wrong? Do you live in an area or reviewing a market with many turn-key opportunities? Do you have capital but not experience or time?

In my opinion, value-add holds many opportunities for high reward. It can be a great way to gain skills and further understand real estate investing. However, it does hold some higher degrees of risk/responsibility as things can go wrong. It is also a big time commitment if completing alone and not for everyone.

At this point in my journey, I enjoy investing into lower risk and lower time commitment projects.  OR partnering with teams that handle the areas I don't necessarily want to work in.

So it just comes down to which side you align with more.

Steve Schulman · Answer

“Everything you’ve ever wanted is sitting on the other side of fear.” - George Addair

Consider that for a moment: to get what you want, you just need to get past your fear. I did it, then did it all over again. And I am not even talking about the fear; I am talking about the 203k full-gut rehab. Put over 100k into the full gut, pushing through the 203k rehab for 7 months during peak COVID and finally I was two weeks out from finishing/closing out the construction loan and renting out the first unit, then I had to hit the reset, gut the place and start over due to soot/severe smoke damage from a neighbor's house fire. Sure the 203k process is rigorous and extensive, and you can bet I went through hell at some points. But not only did it all work out in the end with the investment/project but I got 2-for-1 experience with my first-house hack and learned 10x as much as I did from any podcast, forum/blog or real estate investing book I read prior.

If you have any questions about the 203k process, NJ markets, or just need a little push, feel free to reach out. Best of luck! @Larry Chen

Matthew Brill · Answer

Woah! Don't hate on the house hacking!!

Christian Longacre · Answer

@Larry Chen - Know yourself and set yourself up for success (especially for your first investment).  When I was buying my first property, I decided that getting started was more important than finding the perfect deal.

There's at least one more option, which is turn-key today with value-add opportunities you can address in the future.  This is the approach I took with my first property.

If you decide to take on a rehab, make sure you have extra funds set aside for delays and material costs in today's market.  I agree with @Steve Schulman that value add is great for a variety of reasons if you're up for it.

Steve Schulman · Answer

Hi @Larry Chen – I might be bias when I say this but distressed, value-add fixer upper, all the way. Took a massive bite with my first acquisition and I am so glad I did. House-hacked and full-gut renovated a 1920’s built 2Fam here in Hudson County, which I tackled via an FHA203k loan. Not only did I force some serious equity (with 90% of the bank’s money and only 3.5% down), but most importantly I gained invaluable, first-hand experience which has truly bettered me as an investor and Realtor. The best way to learn is to do, right? Might as well jump in the trenches and learn/fail now, you will be better off later. That’s my philosophy :)

I understand this is not for everyone, as some would prefer the more ‘passive investing’ approach. But IMO, if you are searching for a great deal, you will have to put in the WORK one way or the other. For value-add, well it’s in rehab of course but if you don’t want to take on the full-gut challenge, you better get to it and prospect cold-call send direct mail *insert desired marketing campaign here* etc.

On that note, I do find it easier to land a deal in a market like this through the former, especially in the ‘hot’ markets which I currently invest in and service. From my experience, if you are willing take on the challenges and bigger rehabs, you will be better off as most of the bigger investors/cash players and flippers are not touching those. They want ‘quicker’ rehabs and returns so they can get their money in and out of the deal. Therefore, they tend to stay away from the 1900-1920s built properties, which on top of a complete cosmetic renovations, need new mechanicals upgraded (all new electrical plumbing hvac etc.) which is not worth their time… Andddddd that’s when we come in.

Matthew Brill · Answer

The low stress way to get started would but a property that is more turn key. But also think about what would best fit your goals, time/money status, and your personality.

Cameron Tope · Answer

Hey Larry,

I was value-add all the way, but it was extremely time intensive.

For someone who has a high paying job and long term plan, turnkey may be a better solution.

Lane Kawaoka · Answer

House hack is usually for younger people. Personally I don't want to live near my tenant in a class B or worse area. If you are game good for you.

Larry Chen · Answer

I found this really helpful Steve, thank you. I agree there's huge merit in tackling the full-gut projects and I will certainly take it upon myself to learn everything anyway.  I just have to determine if I can commit the time to a full-gut for my first deal; I have to admit I've tucked 203k properties away at the back of my mind because they've been intimidating.

Turn-key or value-add?

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