Can you BRRRR a turnkey property

Question

Hi BP,

Can you BRRRR a turnkey property? At least pull out a majority of your investment?  Obviously depends on scenario etc but generally speaking.  I know it depends on goals and the goals is keep as much of my capital as I can but also, save some time where I can do more properties faster and turn key may be an option for that. I know smaller returns and more hands in the investment but as we always say in BP, just need to start and get going and I only have 1 other property right now with a very busy life and young kids, sports etc but that is also the reason I need to build it faster as well.

Thanks BP,

Jeremy

Zach Westerfield · Answer

Yes you can. BRRR is just another name for value add strategy. It has been around forever, especially in the commercial world. The basic concept behind value add is you purchase an asset for a certain amount, and at some time in the future the value of that asset is more than your purchase price. In turn you have created equity. In the traditional BRRR, the value is added by improving the property. However, value can be added in other ways as well. Market appreciation, increasing NOI (for commercial properties), repurposing properties, etc. For single family turn-key properties, you have to find a way to add value other than renovations. A few suggestions: look for properties that can be converted to a higher use, and classified commercial. Consider improving the property, such as an addition (this is still a renovation, but less risky than buying a run down property for rehab). Or the other alternative is to buy the property below value, creating instant equity. This is the easiest way to increase equity, but hardest to find.

Remember, a BRRR doesn’t have to be perfect to be a good BRRR. If you could do a standard deal with 20% down payment, any amount of capital you leave in the deal below 20% is still better and will accelerate your growth.

Neil Henderson · Answer

The thing that makes BRRRR possible is the Forced Appreciation of buying a distressed asset and rehabbing it. Classic example: Buy a beaten up house for $50,000, Rehab it for $25,000, it gets appraised for $100,000 (After Repair Value), you Rent it out for $800-1,000/month, you then go to a bank to do a cash-out Refi at 75% LTV loan on the new value, allowing you to pull your original investment of $75,000 out of the deal so you can Repeat that with another property.

With a Turnkey property, the turnkey operator has already done the Rehab, so they are the ones who have forced the appreciation. They then recapture their investment by selling it to an end buyer at retail.

@Whitney Hutten has used a hybrid of this model by investing with a turnkey operator in Kansas City, then she eventually approached the operator about buying some of their stock from them before they rehabbed it. But again, SHE does the rehab and thereby forces the appreciation.

Whitney Hutten · Answer

@Jeremy Karja The very definition of turnkey is that everything is done (rehab, tenancy, etc)... and all you have to do is stick the key in the door, turn it and it starts cashflowing as soon as you close. Think of this as a BRRRR, just not YOUR BRRRR as the turnkey provider will capture most of the equity. I've purchased several turnkeys and do like the strategy for people who are super busy and don't have time to manage a rehab.  You do have to know how to underwrite the operator and team before you purchase.

Realizing I was going to run out of capital, I asked my PM if they would help me find light BRRRRs to purchase (I like keeping my rehabs to $20-25K in cosmetic items and mechanicals). Now, here's the cool part, some PMs will assist in the process and there are BRRRR-key providers out there that will do the whole thing for you for a fee.

Wayne Brooks · Answer

Not likely as you are likely paying full, or above, value....no additional acquired equity at all.

Bryan Noth · Answer

@Jeremy Karja as long as the equity is there, or perhaps more accurately, as long as the appraiser places the equity there, you can BRRRR anything. I would not expect on a turnkey you would be able to pull much out.  Most corporations, investors, or sellers that market a turnkey condition property are tuned into what the ARV should be.

Ali Boone · Answer

With a straight turnkey, no, because everything is already "improved", so there's no way to force the appreciation. The only way to do what you're talking about with a straight turnkey is if you happen to buy in a severely appreciating market, and the market itself drives up the value. This isn't really possible right now though, but it was back in 2011-2014 or so as cities were coming out of the crash.

BUT, there is the "BRRRRkey" or "turnkey lite" method, where the turnkey provider does all their normal work on your behalf but you're funding it, so you end up being the one to capture the forced appreciation on the other end. This is a much riskier model, and you absolutely have to know who you're working with and trust them (so they don't run off with your money), and it requires the full amount in cash upfront before you cash-out refi and pull it all back out, but it is an option if you're wanting the best of both the BRRRR and turnkey worlds.

Jeremy Karja · Answer

Great points by all, thank you.  Neil that makes sense, I was hoping they sell at a discount ahead of the forced appreciation but have not looked into turnkey much so thanks for the heads up.  That makes sense that is how they make their money I suppose.  I was hoping they built their costs in the income on the fix and finding the property taking like a wholesale fee.  I wonder if anyone does that?

Can you BRRRR a turnkey property

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