BRRRR vs. Turnkey: Which Rental Strategy Actually Wins? (Not What You Think)

0:00Tony Robinson: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?

0:14Ashley Kehr: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.

0:29Tony Robinson:This is the Real Estate Rookie Podcast. I'm Tony J. Robinson.

0:33Ashley Kehr:And I'm Ashley Kerr. 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, 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.

1:23Ashley Kehr: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?

1:45Tony Robinson: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. Um, you know, and again, there there's, it's like a, maybe like a spectrum of turnkey, like some say turnkey and they're just selling you a, a renovated property, but then you stop to go in, find your own tenant, you know, manage it yourself. And then there's a full service kind of turnkey provider where they do everything, right? Like you're buying a property that's already been renovated, tenants already placed and management is there. So I think first, I understand that distinction, But, you know, like most businesses, there's different qualities of folks who are selling turnkey products.

2:24Tony Robinson:And maybe you buy from a certain turnkey provider who really just put lipstick on a pig and you got there and you close in 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 of a product, you're inheriting that work from them.

2:49Ashley Kehr: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 you know set this expectation that you're buying a turnkey property so you're not going to have to account for any repairs or maintenance.

3:32Ashley Kehr:And then CapEx, when you're looking at these turnkey properties, see actually what was turned over, like 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.

4:07Ashley Kehr: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 components 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, you know, going through your owner statements that is provided by the property manager, making sure all the line items are cracked, there are no stakes, and that can take up a little bit of your time.

4:45Ashley Kehr:Even if it's an hour a month, like still know there's still something you have to do to look after your property if you want it operating efficiently and properly.

4:54Tony Robinson:Ash, I think the last thing I'll add is that I think the biggest benefit of turnkey is the convenience factor. Like you don't have to do all of the work that's typically associated with buying your – especially your first real estate deal because most turnkey providers, they already have markets that they operate in. So once you choose a provider, 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 him.

5:34Ashley Kehr: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 BRRRR 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.

6:13Ashley Kehr:So with the BRRRR, 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, you know, equity in the property because you went ahead and did this process yourself.

6:56Ashley Kehr: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 are buying it already completed and can get the bank mortgage on the purchase for all of that.

7:37Ashley Kehr:So those are some things to think about when looking to do a fixer-upper value-add property.

7:44Tony Robinson: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 BRRR. So I'm in California. The property's in Louisiana. Indiana. I was working a full-time job, had a family, like all the things, right? 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.

8:22Tony Robinson: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 bird, 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.

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11:42Ashley Kehr:Okay. Welcome back. So we're actually going to dive in to 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, okay? So the all-in turnkey, and let's say both properties are very comparable, so they both could rent for$1 ,400, okay? 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 you can get seller credit, reduce interest rate.

12:28Ashley Kehr: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. OK, we're going to say that we have an additional$300 per month of expenses. OK, and honestly, that's probably kind of low that we're using just the ball park 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. Okay. Our after repair value is$190 ,000.

13:16Ashley Kehr:Okay. 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 152 ,000. Okay. 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?

13:40Tony Robinson:Yeah, yeah.

13:41Ashley Kehr:So$13 ,000 is definitely already, we're seeing a difference of less money brought to the table, okay? So we have to leave$13 ,000 into the deal. In the turnkey scenario, we needed that$36 ,000 down payment that's going to be left in the deal. Okay, 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, okay? So that leaves us$89 in cashflow on this property, okay? So looking at these, the fixer-upper scenario, we have$89 in cash flow. And the turnkey scenario, we have$142 in cash flow.

14:30Ashley Kehr: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 have 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 cash flow 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 cost during the rehab period.

15:12Ashley Kehr:So, you know, 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 doesn't even, 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, the turnkey scenario, you know, 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 cash flow on the property.

15:50Tony Robinson:Yeah. My very first deal, like I said, was an out-of-state burn. 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 like 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 ,000, $170 ,000. It appraised for$230 ,000. 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. Like I had none of my own money into that deal. And it didn't cashflow a ton.

16:31Tony Robinson:It was like$100,$150 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 BRRRR strategy.

16:54Ashley Kehr: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 you 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.

17:41Ashley Kehr: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.

17:47Tony Robinson: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 of 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?

18:25Tony Robinson: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.

18:58Ashley Kehr: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 up front, okay? 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 that money back out and pay people off or pay yourself back?

19:38Ashley Kehr: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 up front 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.

20:02Tony Robinson: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 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 that are appreciating. If you want to maximize cash flow, reduce the amount of capital needed to get started, then maybe burying 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.

20:43Ashley Kehr: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.