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Turnkey vs. BRRRR
This morning, I posted a lengthy response in a discussion on Bigger Pockets. (Here is a link to the post…) I thought it would be good to cross post it here.
I have only been studying REI for about 3 months, but I’m pretty sure that MY first purchase (maybe 2-3) will be turnkey. If you’re buying for long term buy and hold cashflow, appreciation is really just gravy. I believe that you CAN find reputable TK providers that might even give you a little bit of equity. And there are even some that will let you go both ways. You can buy post-rehab with a tenant in place (TRUE “turnkey”) which will cost you more and leave you less equity but also less risk; OR you can buy pre-rehab (using the TK as a wholesaler), have them do the rehab (TK as contractor), place the tenant and manage the property which will be a little more risk on your part. Unless you are doing the rehab work yourself, it doesn’t matter who does the rehab, your TK provider or some other contractor. I would argue that it would be better to have the TK provider do the rehab because they have an interest in you doing it again. And again. I’m also a fan of having the contractor who did the rehab also do the ongoing repairs. They would already be familiar with the property and what has been done to it and they would have an incentive to rehab well so that you would continue to buy from them.
A key to ALL of this is building RELATIONSHIPS. If you are buying TK, you want to build a relationship with the TK provider. You want a TK provider who has relationships with realtors/wholesalers, contractors and property managers in your market, whether that relationship is in-house or outside. If you are going DIY, you’re probably/hopefully NOT actually doing it all yourself. So YOU will need to build relationships with realtors/wholesalers, contractors and property managers.
In the end, the bottom line is, do the numbers make sense and meet your criteria, or not? And yes, your time IS valuable, even if you’re unemployed. If you’re in a high $ W-2 job or business, your time can be better spent doing that job (or finding one if you’re unemployed) and paying others to take care of the real estate work. (Under your supervision of course!) ESPECIALLY if you are a newbie. Your team are experts. (At least they BETTER be!) They can SAVE you money. Down the road, as your REI knowledge and experience grows, your REI time will become more valuable and you can begin shifting from full time W-2 to full time REI. But you will still want to have a TEAM doing most of the “real” work.
MY plan is to research and find reputable out of state TK providers and purchase my first properties fully TK. We are in it for the long haul so cashflow is king. Appreciation is gravy. The plan is to shift to a more active role as we get more comfortable and hopefully be able to BRRRR properties using the team that we have built relationships with to do the heavy lifting. We will probably need to do some “flips” using this same team in order to bring in more capital for the buy and hold business. We also plan on keeping our capital working between purchases with short term private money lending. But buy and hold will be our primary business. The goal is $10k/month of PASSIVE income.
My wife and I started building relationships last week with a road trip through the mid-West to tour TK operations and neighborhoods in Indiana and Ohio. We will be a lot more comfortable dealing with people and neighborhoods that we have actually met and seen. We have found 2-3 teams that we feel comfortable with and we will be building relationships with these teams over the next months and years.
I am officially a real estate investor!
OK. So as of yesterday, I am officially a real estate investor! (Well, my IRA is.) I was a little nervous about the whole thing, but Peter and Rosanne at American Wealth Builders made everything really smooth and overcame every “fear” that I had along the way. (OK. Still just a little nervous about wiring $100,000 from my IRA, but…)
Background
The process
Rosanne held my had through the whole thing and put up with all of my newbie questions, concerns and mistakes. The next time should go much more smoothly. Rosanne has worked with my IRA custodian (Equity Trust) before so she knew the whole process and filled out the paperwork. Everything that I asked for to help me feel more comfortable was delivered usually in a matter of minutes. For instance:
- I asked for copies of inspection reports and scopes of work and Sarah provided these on all four properties within 24 hours.
- I asked for copies of the articles of organization and certificate of good standing for the LLC to which we were loaning the money. I received these within MINUTES, no questions asked. From these, I was able to cross reference with the secretary of state Web sites for the states of Florida (where the LLC was incorporated) and Ohio (where the mortgaged properties are located) and and found the identical documents. I also went to the county Web site and found that the LLC already owns the properties.
- I asked for a couple of references and Courtney provided two such references. Both references have held a note with AWB for about 2-3 months and have also purchased turn key rental properties from AWB in the past 6-8 months. Both references were please with their experiences in both transactions. (This is good because I am considering AWB for future turn key rental purchases myself.)
- After having my Ohio attorney review the note and mortgage documents, he provided me with a new note. Rosanne had her team review the new note and we used it without incident.
- When I requested that the funds be wired to the title company rather than the LLC’s bank directly, I was promptly provided with a wire information sheet for the title company.
- Rosanne followed up with everything every step of the way and I expect this will continue through filing of the documents with the county and start of payments.
Peter at AWB teaches and promotes these notes (which start at about $25,000 each) as a vehicle for “parking” cash which is less than the $40,000-60,000 necessary to purchase AWB’s typical turn key rental properties. I think that sounds like a good idea and will probably follow that plan in building my future real estate investing portfolio. This current larger note is being used to deploy cash parked in my self directed IRA until I turn 59 1/2 in July and pull cash from my IRA to invest in buy and hold SFH rental properties.
I’ll post updates as the term of the loan progresses.
Thanks to C. Timothy Murphy for Ohio legal guidance.
Disclaimers: I am offering no legal or professional advice, only comments regarding my experiences with various real estate investing methods and providers. I have no affiliate relationship with any person or business listed here. If you follow any links contained herein, I receive NO compensation of ANY KIND.
Howdy!
My name is Mark Whitted. My wife Tracy and I are budding real estate investors. From my profile on Bigger Pockets:
Experience
We owned our primary residence for 10 years ending 21 years ago. We have rented a lot of homes and apartments over the years. So… none. Yet.
Real Estate Goals
Provide 30-35 families with clean, comfortable, affordable housing. Ultimate Long term goal of revitalizing an entire block in a class D neighborhood. With pets welcome.
I have a new self directed IRA with Equity Trust (no affiliate relationship) that I am currently using to invest in real estate backed notes. Sometime after I turn 59 1/2 in July, the plan is to withdraw money from the IRA to by our first house. That will most likely be an out of state turnkey rental in the mid-west. (Indiana, Ohio, maybe Michigan.)
I have added a resource list here where I will share my research into various aspects of real estate investing.