Pros and Cons of turn-key and fixer upper rentals?
Rental Property Investor · Abingdon, VA · Member since 2018 · 18 posts · 8 votes
Hello,
I am a certified newbie that has been spending lots of time trying to grow my knowledge and network on all things real estate investing. My spouse and I have targeted that we want our first deal to be a house-hack. Our goal is to find a duplex, triplex, or quad but we are on opposite sides of whether it should be a turnkey place or one that we can fix up ourselves.
Would love some pros and cons for each option! Thank you so much for any help you can provide! Feel free to connect with me, I am located in Abingdon, VA.
-Mack Owens
Mack,
I'm in Abingdon, VA, as well, so feel free to reach out anytime you want to talk shop.
As far as pros & cons, it really depends on your goals, skill sets, time you want to spend on a project, etc., etc. Unfortunately, it's not just a one or two variable answer.
For example, if you're an experienced contractor or have a family who is, it makes a lot of sense to buy foreclosures and house hack your way to sweat equity via DIY skills. Conversely, if you're a busy professional who works 60hrs/wk or you have 3 kids and zero free time, buying turnkey might be the way to go to save your sanity.
Similarly, if you don't like making 5 trips to Home Depot b/c you're learning on the fly via YouTube videos, turnkey is the way to go. But if you have the time to go slow and learn by doing, house hacking is a great way to learn the skills and reap the sweat equity rewards.
Same goes for becoming a landlord, collecting (or trying to collect) those rent checks or getting calls in the middle of the night about a leaky roof or a clogged shower drain. Property Managers aren't exactly cheap, but if you find a good one, they are worth heir weight in gold.
Hope that helps.
Having been there I will say that you must be 100% on the same page when it comes to repositioning (or rehabbing) a property. It can be a very consuming endeavor and if one of you is not going in whole heartedly it is a relationship disaster waiting to happen.
The bottom line is that if you have a good rehab team, then there is enormous profit in repositioning a property. It takes time, cash and a lot of unforeseeable frustration... but that is where the dividends are. We both were 100% on board so there were no "I told you so" type comments after a particularly trying day.
In my state there is absolutely no money in turnkey 2-4's. They are an investment blackhole being picked up by people who will never make a profit and are banking on the dual lies of appreciation and "have the other units payoff your mortgage!"
Mack,
I'm in Abingdon, VA, as well, so feel free to reach out anytime you want to talk shop.
As far as pros & cons, it really depends on your goals, skill sets, time you want to spend on a project, etc., etc. Unfortunately, it's not just a one or two variable answer.
For example, if you're an experienced contractor or have a family who is, it makes a lot of sense to buy foreclosures and house hack your way to sweat equity via DIY skills. Conversely, if you're a busy professional who works 60hrs/wk or you have 3 kids and zero free time, buying turnkey might be the way to go to save your sanity.
Similarly, if you don't like making 5 trips to Home Depot b/c you're learning on the fly via YouTube videos, turnkey is the way to go. But if you have the time to go slow and learn by doing, house hacking is a great way to learn the skills and reap the sweat equity rewards.
Same goes for becoming a landlord, collecting (or trying to collect) those rent checks or getting calls in the middle of the night about a leaky roof or a clogged shower drain. Property Managers aren't exactly cheap, but if you find a good one, they are worth heir weight in gold.
Hope that helps.
@Mack Owens you got the perfect answer from @Matt Castle . There are great pros and cons to both, but it really comes down to your needs and priorities when it comes to time, energy, inclination, and control. We all want the best possible return, so thats not really a question. But if you don't have the time/energy (work/family/commute) or skillset/inclination (can you do this already, do you BOTH really want to learn? Can you afford that learning curve right now?) to something more hands-on, you'll end up pretty unhappy and likely not making as much money as you thought you would. On the other hand, if you like the idea of something turnkey, but don't like the idea of not having had control over rehab choices, etc. you'll end up pulling out your hair when you find things weren't done the way you want. Everything is a time/control/return tradeoff. Get higher potential returns by doing your own rehab, but sacrifice time in a big way. Get a nice passive investment by going turnkey, keep all the time you want, but give up control over the process.
Also, I want to clarify what you mean when you say turnkey. I'm guessing since you're talking house hacking you just mean tenant-ready, not something purchased from and managed by an actual full-service turnkey company? If so, you'll have more management control than you would with a true 'capital T' Turnkey investment, but as Matt pointed out - do you want that control at the end of the day? Do you want to be a landlord? Do you have the time and inclination to climb that learning curve in exchange for the control and increased potential return (no PM fee to pay)?
Both options can work, it's mostly about having a serious discussion about your goals, needs, and expectations. If you're already on different sides of the issue, it sounds like there some lack of clarity on one or more of these issues. Take the time to get on the exact same page and then make the decision from there.
@Mack Owens - i think its always better to learn / educate yourself first. I started with local rentals doing the work myself and managing while having a full time job. After a year of experience and starting to expand my local portfolio, i bought a few more but then used a property manager. Last in my strategy was to go to turn keys.
I’m now trying AirBnB and commercial...
@Mack Owens It's a great question.
You can safely, passively invest in real estate without giving up your current job, and without spending thousands of dollars and hours on education. You can invest in real estate, but you could passively own the properties themselves.
If you have the time to find a distressed property, hire the contractors to rehab it, lease it up and handle the tenants, by all means go that route.
Hope this helps!
@Mack Owens there are a very few actual Pros and lot of "Cons (namely con-men)" in... turnkey and yes; PUN INTENDED! There's a few good ones and @Jay Hinrichs would be the guy I would chat with first on recommendations.
Be very careful and remember there are no shortcuts to wealth in real estate.
Starting off with a house hack is awesome by the way.
Hey @Mack Owens we've been doing flips here in Cleveland since the late 90's. What I always tell people is that REI requires 4 resources:
There are different strategies or avenues to REI depending on what resources you have from the list above. I agree with @Ivan Barratt that you need to be careful with turnkey providers, but the folks that are happy with turnkey are the ones that usually have money, but don't want to give time, work, and experience to REI. To them their turnkey rentals are the same as a stock or bond.
The best returns will always be if you can handle a flip yourself, but flipping requires the most from all four of the above resources:
All this is to say, there are dozens of different ways to get into REI. House hacking is brilliant. You just need to be honest with yourself as to what you are able to provide from the resources above, and then find your strategy accordingly.
Wow, I just want to thank all of you that have responded so far to this post. Each of you has brought insight to different aspects that will be taken into heavy consideration! Again, I truly appreciate it and will use all the advice to continue learning, growing my network and preparing myself to begin my REI journey. You all have been awesome!
-Mack
@Peter Ledger I respectfully disagree for the most part. I think TK starts off fine but the model breaks down somewhere around year 2 to 5 depending luck. At some point turnover costs happen (different from R&M or Vacancy) and the investor realizes all her cash flow just disappeared and then some.
TK's rarely work in the long term but yes if you have a lot of money and don't mind a negative return and low to no IRR on the back end; go for it! ;)
@Peter Ledger I respectfully disagree for the most part. I think TK starts off fine but the model breaks down somewhere around year 2 to 5 depending luck. At some point turnover costs happen (different from R&M or Vacancy) and the investor realizes all her cash flow just disappeared and then some.
TK's rarely work in the long term but yes if you have a lot of money and don't mind a negative return and low to no IRR on the back end; go for it! ;)
Thats certainly a question to ask a prospective TK provider, and its something I've been inquiring about as I decide whether to invest in TK. I was curious what the average maintenance bill is at the time of tenant turnover. But any reputable TK company should have a pretty clear number on the average length of tenant stay. That way, you can account and plan for it to some extent.
Though I'm not sure it needs to be accounted for as something "different from R&M". Aren't maintenance costs just that, regardless of when they happen to arise? Some periods of time (such as time of move out) will involve higher maintenance costs, while other times (ex. first year of a lease in a well-rehabbed TK property) will involve much less maintenance.
Alex
Originally posted by @Mack Owens:Hello,
I am a certified newbie that has been spending lots of time trying to grow my knowledge and network on all things real estate investing. My spouse and I have targeted that we want our first deal to be a house-hack. Our goal is to find a duplex, triplex, or quad but we are on opposite sides of whether it should be a turnkey place or one that we can fix up ourselves.
Would love some pros and cons for each option! Thank you so much for any help you can provide! Feel free to connect with me, I am located in Abingdon, VA.
-Mack Owens