Which Rental Strategy Actually Wins? (Not What You Think)

Tony:
Two investors, same market, same budget. One buys a turnkey property and the other is collecting rent in 30 days. The other buys a fixer upper, forces equity, and walks away with significantly more upside two years later. Who made the right call?

Ashley:
The answer is it depends. And today we’re going to break it down exactly what it depends on so that when you’re standing in front of that decision, you know which path is actually yours.

Tony:
This is The Real Estate Rookie Podcast. I’m Tony J. Robinson.

Ashley:
And I’m Ashley Kehr. Now let’s get into it. Let’s start off talking about the first thing turnkey and what that actually means. We do talk a lot about adding value and doing rehabs and things like that on this podcast, but what about a turnkey property and how this actually can work as an investment for you depending on your situation and what you want out of it? So turnkey, a turnkey property is where the property is ready to go. You put the key in, you turn the door, you open it, and it is ready to be a rental. So oftentimes there are companies out there that specialize in selling turnkey homes where they’re going out and either maybe doing a new build property or they’re going out and buying a dilapidated property, fixing it up, and then selling it to you as a rental. So oftentimes it comes with they have property management service they offer.
They have a tenant that’s placed in the property for you. And so everything turnkey is supposed to be just this all- inclusive package handed to you and you do nothing except collect the rent check. Tony, what are some cons that you’ve seen with this strategy?

Tony:
Yeah. I mean, I think the … I don’t know about the biggest con, but I think just one thing to look out for is the track record of the turnkey provider. And again, it’s maybe a spectrum of turnkey. Some say turnkey and they’re just selling you a renovated property, but then you stops go in, find your own tenant, manage it yourself. And then there’s a full service kind of turnkey provider where they do everything.You’re buying a property that’s already been renovated, tenant’s already placed and management is there. So I think first just understand that distinction. But like most businesses, there’s different qualities of folks who are selling turnkey products. And maybe you buy from a certain turnkey provider who really just put lipstick on a pig and you go out there and you close on this deal and you’ve got tenants coming in and out, and then you realize that everything’s breaking.
So I think that’s probably the biggest con is that you can’t always see what goes into it. And for folks who are maybe newer to the space or maybe just don’t have a strong as a product, as strong of a product, you’re inheriting that work from them.

Ashley:
I think another thing to watch out for too is that turnkey doesn’t mean maintenance free or CapEx free. And you still have to know that repairs and maintenance will need to be done on the property. Even if there are no repairs, upkeeping and doing proactive reoccurring maintenance, like changing out air filters, doing different things like that to keep the property in great condition is still something that will need to be done. And yes, your property management company will probably take care of that, but that’s not something they will do for free. So don’t set this expectation that you’re buying a turnkey property, so you’re not going to have to account for any repairs or maintenance. And then CapEx, when you’re looking at these turnkey properties, see actually what was turned over, what was replaced, what was put in brand new? Because if it was a property that was remodeled, maybe there was an existing HVAC in it and they just kept that.
What is the lifespan of that? What is the lifespan of the roof? Did they replace the roof? Is there a warranty on the roof for how many years? Looking at that and kind of creating a timeline of, okay, I know that in X amount of years, I will still need to spend money on these big purchase items. Another thing to consider is asset management. Even though turnkey property all- inclusive, they sell you the package, you can get all components, so you’re completely passive, you still need to have some component of asset management. And this is your oversight of the property. This is making sure that the rent is being collected. This is making sure that your insurance is quoted out each year to get the best policy, understand what your insurance coverage is. Also, going through your owner statements that is provided by the property manager, making sure all the line items are correct, there are no mistakes, and that can take up a little bit of your time.
Even if it’s an hour a month, still know there’s still something you have to do to look after your property if you want it operating efficiently and properly.

Tony:
Ashley, I think the last thing I’ll add is that I think the biggest benefit of Turnkey is the convenience factor. You don’t have to do all of the work that’s typically associated with buying, especially your first real estate deal because most turnkey providers, they already have markets that they operate in. So once you choose a provider that they’ve already kind of chosen the market for you. And aside from getting approved for the loan and having the funds to cover your down payment, there’s not a whole heck of a lot else that you’ll have to actually do during this process. So I think for the person that wants the lowest friction route into real estate investing, going with the turnkey provider can oftentimes be a good choice for them.

Ashley:
Okay. So let’s go into our opponent today to the turnkey, which is the fixer upper model. So a lot of times we refer to this as the Burr strategy. So you’re going to buy the property, you’re going to rehab it, you’re going to rent it out, you’re going to refinance, and then you’re going to repeat the process with another property. So this obviously takes more time, more energy, more effort to complete this whole cycle and to have you do this. So basically when you look at the turnkey model, they’re doing most of that for you. They’re taking care of the rehab, they’re getting it rented, they’re finding the deal. So with the BER, you’re going to have to put in a lot more sweat equity in a sense. And not that you have to be the one swinging the hammer to replace the toilet, make the repairs, but the fact that you’re going to have to go and source your deal, close on it, line up your contractors to do the renovation.
You’re going to have to find a property management company or rent it out yourself, and then you’re going to have to go and refinance and pull out your funds. So there is a little bit more that goes into it, but if you have the tools, the resources and the knowledge to go through this, there is the opportunity to build up a lot more equity in the property because you went ahead and did this process yourself. Obviously, the turnkey companies, they’re a business. They’re going to be making sure they make some sort of profit on it. So I don’t want to say that you can do this cheaper by doing it yourself because sometimes that’s not the case. Sometimes they can do it better than you can do it and you wasting time by not getting the work done or things like that. Your holding costs are more expensive.
So if you don’t think that you have the skillset or the time or even the money to go ahead and do the rehab, because a lot of times you have to bring the cash to fund the rehab where the turnkey company, you’re buying it already completed and can get the bank mortgage on the purchase for all of that. So those are some things to think about when looking to do a fixer upper value add property.

Tony:
I will say, I think a lot of rookies get somewhat intimidated by the idea of investing in a fixer upper project, like a project that needs some level of rehab. But my very first deal that I’d ever done, it was an out- of-state bur. So I’m in California, the properties in Louisiana. I was working a full-time job, had a family like all the things. And I saw that property once on the day of closing, and I didn’t see it again after that. I was able to manage the renovations remotely, and it all came down to me having a really good crew in place to run those projects for me. So it is definitely more work. It’s definitely more risk as well for all the reasons that Ashley said. But I think the major upside is what you already alluded to is that you get to keep all of that value that you created.
Whereas when you buy a turnkey, it’s the turnkey provider that’s capitalizing on all of that value. So pros and cons to each, but if you’re listening to this and think that, man, the BER, the fixer-upper sounds like a good idea, but I just don’t know if I can do it. I’m here to tell you that with the right people in place, with the right team, with the right education, you definitely can. Coming up, we’re putting both strategies head-to-head on the same property so you can see exactly where the numbers diverge. That’s right after this quick break.

Ashley:
Okay. Welcome back. So we’re actually going to dive into an example for you guys where we compare a turnkey property and we compare a value add property. Okay. So we’re going to look at the numbers on these in this fake scenario here. So the all- in turnkey, and let’s say bulk properties are very comparable, so they both could rent for $1,400. So we’re looking at the turnkey scenario, $180,000. In this scenario, we’re putting 20% down. So that’s a $36,000 down payment. Plus, don’t forget, you need extra capital for closing costs. If this is a turnkey company, they might actually provide some incentives, especially if it’s a new bill, things like that, or maybe we can get seller credits, reduce interest rate. But in this example, we’re going to do a 7% interest rate amortized over 30 years, and that’s going to give us principal and interest payment for the mortgage of $958.
We’re going to say that we have an additional $300 per month of expenses. And honestly, that’s probably kind of low that we’re using just the ballpark here as an example, but that’s going to put us at $1,258 that we need for expenses every single month. So that leaves us $142 in cash flow on this property. Now in the fixer upper scenario, we’re all in 165,000. That’s the purchase price and that’s the rehab. Our after repair value is $190,000. So now with the after repair value of being 190,000, the bank is going to let us do a refinance and pull 80,000 of that out. So that’s like a 152,000 that we will be able to pull back the rest of the money that we put into the deal. We’ll stay in there. But 165,000 minus 152,000 is what, Tony? 13,000? Yeah,

Tony:
Yeah.

Ashley:
So 13,000 is definitely already, we’re seeing a difference of less money brought to the table. So we have to leave 13,000 into the deal. In the turnkey scenario, we needed that $36,000 down payment that was going to be left in the deal. Same rent, 1,400. And so we’re looking at now, it’s going to be 1,300 is going to be our monthly expenses with the principal and interest payment of being $1,011 per month, taking that new mortgage of 152,000. So that leaves us $89 in cash flow on this property. So looking at these, the fixer-upper scenario, we have $89 in cashflow and the turnkey scenario, we have $142 in cash flow. But in the turnkey scenario, we put in so much more money that’s going to be sitting in the deal, that big down payment where with the fixer-upper scenario, we might’ve put money into the deal to purchase the deal, but then we were able to refinance and pull almost all of our money out.
So in this scenario, we just wanted you to be able to see some of the differences that may occur. And it’s not just bottom line cashflow that you should be looking at because that’s not apples to apples. We needed way more money to leave in the deal with the turnkey scenario. But also during this time, something that we don’t account for is the holding costs during the rehab period. So you have a holding cost, maybe you’re paying a hard money lender interest, you’re still paying insurance, you’re still paying property taxes. So this little example doesn’t even give the whole scenario. So that’s why when you are comparing two properties, just make sure you’re looking at start to finish of these properties, and that’s why you need to even include your exit plan. So with these two properties is the turnkey scenario have better appreciation for some reason that maybe has a bigger backyard or something like that, but just don’t look and get caught up in just the cashflow on the property.

Tony:
Yeah. My very first deal, like I said, was an out- of-state bur and it was very similar to what we just talked about. But gosh, it’s been a while, but I want to say the purchase price I think was $150,000 or maybe $100,000. And then we put 60 or 70 grand into the rehab and then it appraised for, I think it was like $230,000. So my all- in cost was somewhere around 160, 170K. It appraised for 230. I had a lot of equity built into that deal because of the renovation. And because of that, I actually had $0 left in that deal. I had none of my own money into that deal and it didn’t cash flow a ton. It was like a hundred bucks, 150 bucks a month after property management, vacancy, expenses, so on and so forth. But still, to be able to generate or to be able to create an income producing, appreciating asset with zero of my own dollars, it was the biggest unlock for me in terms of what real estate can actually do.
And it is scarier, but the upside I think is pretty strong with the Burr strategy.

Ashley:
Okay. So let’s go into some of the questions that you should be asking yourself to kind of help you decide which path is right. So question number one is, how much time do you realistically have? Do you even have time to manage a rehab project to go and find a deal? If the honest answer is not much that time, then maybe a fixer-upper is not the right way to go unless you find a partner or else you’ve found time by deciding not to scroll on social media for three hours at night, maybe going to a turnkey company or provider and having them bring your deals, having them walk you through the process, having them do the rehab, having them take care of everything is a better route for you to consider. But let’s continue on with the other questions because I think it’s important to ask yourself all of these before making a decision.

Tony:
Yeah. Just one last piece on the time, and you kind of hit on it, Ash, is that it’s how much time are you willing to reallocate? I think it’s a bigger question than how much time do you realistically have? Because so many people who are probably listening to this podcast, they do have the time, but they’re just choosing to allocate it in places like doom scrolling on social media or binge watching Netflix TV shows every single night. So I think it’s the reallocation at the time and how much you’re willing to reallocate it also. But I think the second big question is, do you have contractor relationships, renovation experience, or at least the ability to go out there and build those relationships and the desire to do that? Because without that, having the right budgets becomes, I think, a lot more difficult. And you might think it’s one number when it’s really something else.
And then just the ability to actually manage that project effectively becomes a little bit harder. But again, in my situation, I leveraged the expertise of other people and it was my lender and my agent who gave me a few local general contractor recommendations. And after talking with a few of them, I found the one that actually ended up managing my project and it was a great relationship. And even though I didn’t have all the knowledge and the experience, I had the desire to go out there and build that connection with someone else who did have it.

Ashley:
Now, we need to consider the capital and the cash that you have. What does your cash position actually look like? So fixer uppers are going to demand capital resources upfront. So do you have a way to get a hard money loan, a private money loan? Are you going to be able to go and get conventional financing and put a 20% down payment, do the rehab, cover the rehab costs with maybe a private money, a credit card, a line of credit, your capital, and then be able to wait and make payments on whatever financing you’re using until you can go ahead and refinance and pull all of that money back out and pay people off or pay yourself back. So that’s another question is maybe you need more money in the start of doing a fixer upper, or you have to put in the work to go and find ways to finance this property that may require more capital upfront for the down payment and the rehab compared to if you go to the turnkey, you know you just need money for the down payment on the property.

Tony:
And then the fourth question to ask yourself is, what is your real goal with this first deal? Is it monthly cash flow like money in your pocket now today, or is it equity that you’ll access later through a refinance or a sale or a line of credit? The answers to those questions changes which strategy makes the most sense. If you just want equity and you want a super easy path, then maybe turnkey makes more sense if you’re buying and markets at appreciating. If you want to maximize cashflow, reduce the amount of capital needs to get started, then maybe Brewing makes more sense. So it’s the combination of all four of these questions that you’ll put together to help you decide which strategy makes the most sense for your situation.

Ashley:
Okay. So stick around. We’re going to close this out with a simple decision checklist as to which way should you go with this? We’ll be right back. All

Tony:
Righ guys, last piece here. Here’s the checklist we want you to run through the next time you’re looking at a deal and trying to figure out which camp it actually falls into. So the first thing to help you decide between turnkey versus fixer upper is to run both scenarios through the bigger pockets rental property calculators. Model both the turnkey price and projections as well as the BER process. And we have a calculator for both of those. If it’s just like a regular rental with very little renovation, you can use a regular rental calculator. If it’s a BER, there’s a BER specific calculator as well. And look at the costs side by side, look at the profits side by side, and that’ll help you decide which one actually makes the most sense.

Ashley:
Before you decide to take on the fixer upper, before you offer on the property, you should understand the rehab process and if you can get a contractor. I love inspections on properties having an inspector come out, but that is only the first layer of the house. You can go into so much more depth on a property. So yes, an inspector will probably tell you that the furnace is running, but an inspector is not going to open up the … An inspector is not going to open up the furnace and tell you, “Oh yeah, I’m looking at all of the elements and the mechanics of the HVAC and it looks good or it needs a tuneup or it needs this or it needs that. ” Same with plumbing, doing a sewer scope of the property. Yes, the inspector can flush the toilet and know that it’s working, the water is going down and nothing is coming back up, but you’re not going to be able to see everything inside of it.
Does the sewer go out to the road and is there a crack in the pipe? Are there roots trying to grow through it? Things like that. So having a contractor and as skilled as possible and some of these different elements come out and walk the property is going to be a huge advantage. And I’m actually negotiating a deal right now where we’re not under contract yet. It’s actually tenants that are buying my property and they ask that we’ve agreed on a price, but they just want to have some professionals come in and quote them on what replacement costs would be so that they can plan for the future. And of course, that’s no problem at all. And they specifically said, “We’re not asking you to replace these things.” If they say it’s going to have a shorter lifespan, they just want to be able to prepare and make sure that they know down the road.
So they’re bringing in an HVAC guide to look at the HVAC. They’re bringing in a roofer to estimate what the roof replacement would be and things like that. So especially in markets right now, not all the way. In Buffalo, it’s still really competitive on a lot of single family homes in different areas, but in a lot of areas, the market has kind of slowed down where you do have the room to do this better due diligence of getting contractors to walk through the property with you and provide you a really good estimate.

Tony:
Yeah. You bring up a really good point about the inspectors, Ash, is that they are, in a lot of times, they’re generalists where they know a little about a lot of things, but they oftentimes don’t have a super deep expertise in one area. And they’ll even say in their inspection reports, when they flag something, hire a qualified professional to inspect the foundation, hire a qualified professional to inspect the roof because they know that there are limitations to what they know as well. So I love that call out. I think the other piece too, especially if you want to go down the route of doing a bird, doing a fixer upper, chances are your project is going to take longer and cost more than what you originally budgeted for. So I think ask yourself this question like, if you go 30% over budget and it takes twice as long, does the deal still make sense?
And if the answer is no, then it may not be the right deal for where you are right now, because again, it takes time to really know how to massage and accurately project what your costs on a renovation might be. The last renovation we did, we were pretty spot on with our rehab budget, but it’s because we’ve done plenty of those with the same exact crew, same exact kind of scope of work so we know what it costs. Whereas the first ones that we did, we were off by a lot. So with more experience, you’ll start to dial those costs and those timelines in. And

Ashley:
Just to emphasize too, is that if you are doing the fixer upper, knowing your quote, but when you buy turnkey too, you should also do a home inspection. You should also have a contractor walk through because just because the property looks really beautiful, really nice, and someone telling you is turnkey, you should still do your due diligence on the property also. Well, thank you guys so much for joining us today on this episode of Real Estate Rookie. I’m Ashley, he’s Tony, and we’ll see you guys on the next episode.