Buying turn key or fixer upper?

Question

I'm new to the site and new to the real estate investment world. I have 1 investment property that I bought and lived in and now rent it out. I'm looking to get another investment property and make sure I won't get in over my head. Taking baby steps until I can figure out and get comfortable with multiple loans. I'm looking for opinions on if it's better to buy a house and put money into to get it suitable for renters or try and find a good turn key that I can try to rent immediately?

Dan Maciejewski · Answer

There are a few ways to look at this.  I'll add another for you.

Generally, if someone's invested time and/or money to make something turnkey, they expect a profit.  You will be paying the owner's profit in the purchase price.  That leaves money on the table by giving your profit away.

So why would you want to do that?  There are a few reasons:

• You aren't experienced in doing the job to make a house turnkey.
• You don't have the time to invest in overseeing the project.
• You have more money than time and just want cash-flowing assets.
• You are out of state and can't handle the extra load that overseeing the project would take.

Generally, it looks like 18% (in my area) is the profit that a rehab flipper will make on a project (it's hidden when it's a homeowner but still there). That's a big chunk, but sometimes you just pay the fee to play the game. I usually recommend newer and out of state investors try to get more turnkey than not. There are a lot of moving parts in a rental property and you can only learn so much at once. And you can only afford so many mistakes and non-optimal decisions before it loses money.

I do caution about buying "flipped" and advertised "turnkey: houses. There are a ton of stories where people thought they were buying great deals and got burnt. The one thing you can be certain of when you do the work yourself is that you know the quality of the work and what actually got addressed.

Only you know if you are ready to, or want to, learn about forcing appreciation yourself.  I know many investors that only make needed repairs and never update/upgrade/rehab, and others that only buy deferred maintenance and always rehab.

So if you are comfortable with the landlord part and want to capture some of that profit (and are reasonably certain that you can do it without overspending), then maybe you want something that you can force some appreciation on.

Thomas Bidwell · Answer

@Dan Maciejewski thank you for the reply. I do regular maintenance on the house I rent now and we built our house were in now by ourselves. I don't have a lot of time to rehab myself and the prices around me are getting pretty over the top. That's why I'm looking to states near me and I see prices of house I like. I've seen some that need work and some look rent ready. I've been debating about which to invest in. I'd like to rehab but I wouldn't be around to oversee it and just trust the contractor is doing everything up to standard. That's I'm leaning more turn key and have a property manager wake care of the maintenance since I will be a few hours away.

Seth Young · Answer

I would say it depends on the amount of effort you want to put in. If you don't have enough time to deal with residents or don't want to, I would suggest checking out turnkey investment opportunities.

Account Closed · Answer

There is no easy answer to this question, it would all depend on the realized cap rate. You might get a fixer upper that has massive potential and just needs some work. That could become your crown jewel investment property since other investors passed it up and it wasn't a bidding war. On the flip side it can become a major headache and cause you to go under. A turnKey is nice but expect higher prices and lots of competition. Conclusion is that fixer uppers usually are lower price points and would need to be evaluated based on work needed whereas turnkey require little work but higher buy in

Trevor Fleck · Answer

@Thomas Bidwell In my experience, if you're more than a couple hours away, you might as well open your search up nationwide because you aren't going to head out to a property a few hours away if some maintenance issue occurs. Managing rehabs from afar is not easy. The good contractors are often either highly priced or booked out because they are good. If you're new to the market you'll have a harder time finding someone reliable. I've also found through trial and error that a contractor might be good on one job, but then disappear or completely fall off the grid. It's truly hard to establish a consistent team - things change.

I started going the turnkey company route back in 2019 when I had young kids, a demanding job, and just no time to continue vetting new markets and building teams. I started by reading reviews on BiggerPockets, calling turnkey companies to learn about their operations, and eventually visited a couple to see the quality of their builds. You may want to consider a route like this.

Nicole Heasley Beitenman · Answer

I started out with turnkey, but saving for that down payment over and over again slowed my growth. There's no "better" way. If you make big bucks and don't have trouble saving for down payments, turnkey might be the way to go because you won't have to deal with the hassle of rehabs. If you foresee a need at some point to tap into equity or you want to grow fast, you're going to need to find below-market deals, and those will typically require rehab.

Buying turn key or fixer upper?

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