Epic Real Estate Investing - The Pros & Cons of BRRRR and Turnkey Properties? What is best for YOU? | 855

Episode Date: December 3, 2019

Turnkey or buy a property and rehab it by yourself (aka BRRRR method)? Stay tuned because our turnkey girl, Mercedes, shares her pros and cons to each of these strategies so you can really decide what is going to be the best fit for you! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing Show for Turnkey Tuesdays with your host, Mercedes-Torres. Hello and welcome, welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing. My name is Mercedes Torres, the Turnkey Girl, and I help busy professionals acquire passive income through real estate investing so they can retire even sooner and hopefully not work so hard. I get to share tips and advice and real life real estate experiences so that you too can create passive income in your world.

That said, if this is your first time here, glad you made it. make yourself at home. If this is not your first time here, welcome back. So, as I see Turnkey becoming more and more popular these days, I'm seeing more people wonder which route they should go when buying a rental property. Turnkey or buy a property and rehab it themselves. Now, this method is commonly known as the Burr method, where you buy a property, rehab, rented, refinance it, and then repeat the message, hence Burr. Well, that's a great question. And I think the only true answer to that question is it depends. It really depends on you. Now, if you listen to us regularly, you may have guessed that. it depends would likely have been my answer. But the reality is it's true. It depends on how much time you have on your hand, how much knowledge, how much expertise. And truthfully, the answer to all of these questions should come to you rather easily. But if not, I'm going to share some of my pros and cons to each of these strategies.

so that I can dive into the details so that you can really dive into what is going to be the best fit for you. So I'm going to sum up these pros and cons and then hopefully it will clarify for you so that you can say, aha, I really need to go with this method. So let's dive into the nitty gritty. And of course, you know, I'm going to start with, why are you wanting to jump into a real estate investment property that's going to produce passive income? I mean, what are you trying to accomplish with this rental? Are tax deductions more important to you? Or are you seeking cash flow? Are you thinking this property is going to pay for your child's college education? And what skills do you have?

What is your risk tolerance and what's important to you? Now, everyone's going to have a different answer. It's a no-brainer. I love turnkey. In fact, most of the properties I own are turnkey properties. I think this concept is easy and it's brilliant, but I'm also the first person to say that turnkey properties aren't for everyone. So the question is, how do you know which route you should

choose if you're on the fence about which way to go? Well, because I don't know your personal situation. I can't tell you what you should do, but I'm going to share what I believe to be the pros and the cons of each method. And you get to decide for yourself, which route is best suited for you. Now, here's the disclaimer. You'll notice that the pros and cons listed for each of the strategies are literally the reverse of the other. The pros for the burr method happen to be the cons for the turnkey method and vice versa.

I'm going to take a deep dive into each method. Now, I want you to know that I speak from personal experience, having done both methods myself. And I can tell you firsthand, each method works. In fact, I can tell you that I have completely eliminated one of the methods from my life and merely focus on the other. I'll share. So I'll start with the pros of buying and rehab properties. using the Burr method. First and foremost, forcing appreciation. This is the biggest upside of this strategy,

and it is by far the sole reason why many people jump into real estate, period. Here's how it goes. So you buy a distressed property for pennies on the dollar, then you fix it up and boom. You forced appreciation because now the property, hopefully, if you did it right, is worth more than the total you put into it. So the initial cost of the property, any holding costs that you may have had, and the rehab cost. And in many cases, this is, again, as I mentioned, truly the reason why people jump into real estate investing at all. consider it that forcing appreciation is the best of all real estate investing perks.

Many people call this free money. I mean, you can create free equity and you get to decide to either hold the equity in the property, which I'm adamantly against, or do you cash out the equity? Do a cash out refinance? Now, I like the idea that you take the money out of the property and use it to buy other properties, hence the Burr method, where you refinance and repeat it. So if you're going to go this route, this is the route that I absolutely encourage to refinance it and then repeat the process. And then you keep doing it over and over again. Doing so will ultimately will lead to a path of, financial freedom if you do it right. Also, something I often say, anytime you do something yourself, the quality of your work tends to be nicer, if you will. You're probably going to buy a nicer property and chances are you're probably going to do a rehab of slightly hired standards, doing everything yourself tends to create a brighter outcome, nicer locations, a nicer property, prettier rehabs. I mean,

you're definitely adding force appreciation if you do it yourself. Then there's the control of the property, not to out of sync from quality, if you will. You were in control of the property. You are in control of of everything, hence getting better quality. I mean, you make the decisions, all the choices are yours, you have a hand in everything. And that's not always a good thing because sometimes, especially if you're new at this strategy, you can get a little carried away, ultimately dipping into your profit. regardless, you have all the control during this process and you call the shots when you were forcing appreciation yourself. Next, decision making. You're probably thinking this is much like

control, right? Well, not really. I'm using the term decision making slightly different, and I'll dive into this a little more when I get to the cons for turnkey. But what happens is that when you do the work yourself, it forces you to put more effort and by default more due diligence into your decisions. Now, this is costing you time, but we'll dive into time in just a moment. When you are the only person doing something and not listening to the peanut gallery, aka other people, you're more inclined to put more thought into each move that you make. While this can be steep on your timeline, this can also be a bit beneficial in the long run.

Now, here are the cons to the Burr method. time and effort. This method can take a whole lot of time and a whole lot of effort, oftentimes not allowing you to respect the timeline that you should have created when you started. It will take several properties for you to develop the discipline and the experience that you will create over time. until you get a system in place to speed things along, the process, I assure you, will be a lot slower than you initially anticipated. This method is certainly a lot more time-consuming, not to mention effort-intensive strategies you're going to be just diving in with this project. Now, you can lessen the time and the effort by buying something that doesn't need a whole lot of work,

but then you start risking some of that forced appreciation. This strategy will require you to find good distressed properties and rehab them yourself, finding the tenants, and then you're going to have to manage the property. This part, again, takes a lot of time and effort. The more skill that you have, the less the time and effort you will spend on this. But you should plan to be very active and involved in this strategy of the bird method. Now, let's talk about expertise. You have to be an expert to do this method or you'll be subjecting yourself to some serious risk.

If you've never rehabbed a house before, you'll have to rely on contractors' expertise surely. And that sometimes can be a bit much, not to mention having to deal with a contractor to begin with. I'm sure you've heard the nightmares. And if you're not skilled at finding the good distressed properties and the good contractors, you're going to have to do a lot of figuring out of that part of the equation. And how do you know if the property that you're buying is going to be a good candidate for the Burr method and how do you know where to buy it? Well, that's another layer of expertise you may need to know when you're doing this on your own.

You know, finding good distressed properties, then negotiating it or jumping into creative financing of the property, then rehabbing it, then becoming the landlord of that property, you have to have some advanced skills and they're not inherit skills. They don't come to you right off the back. This takes a lot of practice. So let's discuss the risk. This is another big thing to consider. Speaking of skills not being inherit right off the back, any time that you're taking on something new and something that you're just not familiar with, there's a learning curve. And with a learning curve, you're increasing your risk. If you've never rehabbed a house, then you're increasing that risk as well. If you don't know how to tell the difference between a good distress property

or a good rehabber or anything of that nature, your risk is automatically jumping up. That's not even to mention the cost of the rehab and the unexpected cost of things that may occur. And now you're going to have to jump into the risk of tenants. If you're not experienced in that field, you're subjecting yourself. to the risk of poor quality tenants. Your risk will tend to get a little bit higher if you're not an expert in these fields already. You may even be at risk if you don't know exactly

the laws pertaining to property management. And in addition to the skill set, it's your money in this property and your money can be less. lost if you do something wrong. Another con is you may be required to come up with more cash up front. And this one depends on your situation. But unless you get a hold of good hard money or good short-term financing, you're going to need to use your own cash for this rehab and you better make sure that you have a surplus just in case something unexpected happens.

This may require substantially more capital than you would have initially thought. So if this is a relatively new endeavor for you, you need to be not only mentally prepared, but financially prepared. The Burr method, it's not impossible, honestly, but it is a lot. larger learning curve and it tends to be a bit more expensive for newer investors. Okay, so that was the Burr method. So let's talk about the pros and cons of turnkey rental properties. Pros. And this is one of my favorite time and effort. Turnkey properties require very little of your time and effort.

That said, this doesn't mean you are 100% hands off, but it's pretty darn close. The only time and effort you need to put into turnkey properties is really conducting your own due diligence, not only to identify the turnkey provider that you're going to going to choose to work with, but the due diligence on buying the property or choosing the property that you are going to take ownership. And then there's going to be due diligence on the team that is going to serve as your long-term property manager. I'll say some things in a bit that will help you with the cons of the due diligence. But I really do highly encourage you to do your own due diligence

and to find a good provider that is going to allow you full access to the property that you are going to acquire. Now, managing the property manager is really going to require minimal effort on your part, but I still want you to dive into the due diligence of the property manager. Because at the end of the day, once you've done your due diligence on your property management team, you're now going to have to manage your property manager. I mean, even when I've had bad moments with my properties and bad tenants or, you know, bad situations with property managers, and that's not to say it's not going to happen to you. But I still have not spent more than a few hours a month dealing with these

fiascos. Honestly, the only properties I've only spent like weeks on are my non-turn key properties that I personally purchased and I personally repaired myself. I can't even begin to explain the amount of time I've spent on rehabs and more money than I had initially anticipated when I've done it myself. But the beauty of Turnkey is that the properties are already rehabbed for you. And even the worst property managers, the time and the effort involved is minimal compared to you doing it yourself. If you have a good property manager, you might spend, I would say, 30 minutes a month on your property. I mean, it's a beautiful thing.

So that is a massive pro to turnkey. Now, let's discuss expertise when you jump into a turnkey property. There are turnkey providers and there are turnkey providers. Some focus on production. Other turnkey providers focus on customer service. I happen to like the turnkey providers that focus on educating you and then educating you while you were in the process of purchasing that turnkey property for your own portfolio. Now, most turnkey providers tend to be great experts on the important stuff that matter the most. That is, assuming you're working with a turnkey provider that you've fully vetted,

you are really getting a lot of expertise on the property because think about it. They're experts in finding the good distressed properties and then they'll negotiate it for you because let's just face it, turnkey providers, that's what they specialize in. They specialize on finding those good distress properties doing a great job at negotiating them. Then they jump into the rehab that they've done time and time and time again. So a good turnkey provider is not only familiar with the acquisition aspect of the property, but then they know how to rehab the property, they know how to screen and place the tenants,

and more importantly, they know how to manage the tenants that manage the property, then manage the properties. Most turnkey providers are incentivized by collecting tenant rents. So if the turnkey provider does not collect the rents, of your property, then nobody gets paid. Not them, not you. So for the most part, a good turnkey provider has a good property management team on their side that are experts at not only catering to the tenant, because at the end of the day, a happy tenant is going to mean rent in your

pocket, but they also cater to the investor because they understand the investor mindset. Now, if you don't have the skills or the interest in all of the things that I just mentioned, like finding the property, rehabbing it, finding tenants, screening the tenants, placing the tenants, then be smart. And more important, be on. missed with yourself. Let somebody else who does this on a regular basis do all of that for you so that your risk factor can be dramatically lowered. Leverage is an important aspect in creating your financial freedom. So leverage that as much as possible. So what are your risk with turnkey properties? I'm sure you're thinking that.

So Mercedes, what are the risk? Well, the risk level with either method depends on your own skill set. And in most cases, risk is dramatically lowered with turnkey than with the Burr method. Because for the most part, the average person does not know how to find the best properties or let alone how to rehab them. So if you let the experts do the work for you, your risk will be much lower than if you were to do it yourself. If you know how to do all of these things yourself, then turn key is not even going to be a thought in your mind. So let's be honest here. And it's relative. I do believe that when someone can contribute expertise in all of the necessary areas related to, a successful rental property, your risk will be lowered. I mean, hands down. But there is one aspect of

risk that isn't dependent and is lower with turnkey. The turnkey provider is the one who has their money invested in the property before you ever acquire it. So for the most part, You don't buy the property until it's proven to be rehabbed and performing. So if the rehab takes longer than initially planned or it ends up being more expensive or anything goes wrong along the way, you are not responsible. And that is a major risk mitigation. You're allowed the opportunity to verify everything before you sign on the dotted line, and that is fantastic for minimizing risk. For anyone that will argue that turnkey properties are not good quality and the risk is higher, know this.

You do not have to close on a turnkey property that does not meet your standards. Now, keep in mind, most turnkey properties will be distressed properties that are bought to be made rent ready. So they're bought distressed and then are brought up to standards. So please don't go into turnkey thinking you're going to buy a brand. new property and that is going to be flawless when you get the inspection report. That's not being realistic. As long as the main components of the rental property are operable and in good shape, then you are good to go. But if the property is below par, you're not obligated to buy it. It's simple as that. Move on to the next one and try again. Don't get all brokenhearted about it. Turnkey is a proven

system that has worked time and time again. And if it doesn't work the first time, try it again a second or a third time. Just set your expectations straight when you're jumping into a turnkey property. But really most important, for the most part, if you cancel because the property does not meet your expectations. That is no money out of your pocket. Right? All right. So let's talk about the cons for turnkey. Forcing appreciation. That is kind of the downfall of turnkey. Turnkey properties typically sell around market value and because they're already fully turnkeyed or furly rehabbed, there isn't usually a way to improve or force appreciation, because remember, most of these properties are made to be rent-ready.

That's not to say natural appreciation is not going to happen because, as we say, every week, history tends to repeat itself, but it may take a couple of years for that to happen. Now, let's discuss the quality of a turnkey property and the good thing about the quality of turnkey. Because somebody else is doing all the work on these properties, they're doing turnkeys generally in large numbers, so no emotion is involved. And your probably not going to end up with the cutest property in the nicest area. But a good turnkey provider won't buy and sell a property in a neighborhood that they know will not perform. Because generally speaking, number one, they're familiar with the neighborhoods

that they're purchasing in. Chances are they regularly buy in that area. And number, two, they really want to take care of you and the tenant so that you're happy, so that the tenant is happy, meaning that the turnkey provider is going to earn your business again. Remember, turnkey providers work hard and fast to cater to advance investors and they care about the numbers. So your property may not be the prettiest, but it's going to be in areas where you are going to get the best combination of cash flow, stability, and potential growth. A good turnkey provider also will do a really good job at the rehab despite the fact that it probably won't be the prettiest carpet or It might not be the best kitchen cabinets that you may have chosen for your house.

Chances are they're going to use the best rental grade carpet. And at the end of the day, that's important to you. Because remember, these are rental properties and things like carpet and paint are often going to be changed out. So it doesn't make sense to use the most prettiest and most expensive materials if you know that a typical tenant is probably going to be there on an average of two to three years. But if you're into higher quality, then be honest with yourself and know that maybe a turnkey is not going to be your best fit. Turnkey providers will make a property nice and safe and rent ready, but it will not have all the amenities that you're going to put in your home or potentially the home that you buy and rehab yourself. So let's move on and talk about control of the turnkey property. And here's the beauty of turnkey.

Somebody else is doing all the heavy lifting for your property. You aren't doing it. And that's what turnkey is all about. Now, some people just can't stomach the idea that they have no control. But that's not to say that you don't have any control with turnkey. properties because you do. You control who manages the property and you can hire and fire property management whenever you please. If property management is not performing for you, then heck, you call that shot and you control and fire the property manager that is not

performing for you or you keep them if they're doing wonders. And you can approve and disapprove of anything you want. You aren't just controlling the day-by-day operations that happen on turkeys. And honestly, if you're full-time something else like most of my clients, turnkey is perfect for you. You get to control the things that matter the most. And let's talk about decision-making because that's an important one. People do have a tendency to go into turnkey properties thinking that the whole

point of them is for someone else to do everything. And while that's true, for the most part, you have to get comfortable with trusting other people to run your investment. So that's kind of hard for some people. And until you get to know your team, especially at first, you still need to do your due diligence, just if you were doing everything yourself, like in the Burr method. Turnkey tempts people to think they need to do nothing. But I don't agree with that. Again, a lot is done for you. Like 90% of the work is done when you jump into a turn.

key property. You just need to do that extra 10% and do your due diligence. Now, knowing everything that I've told you all the pros and cons of the burr method and all the pros and cons of the turnkey method, it's time for you to decide which method is a better fit for your lifestyle and your skill set and your interest. If you have skills that match what's required for you to buy and hold the property yourself, using the Burr method by doing the research of the area to buy the property, then to rehab it, then to rent it and refinancing and repeating the process. And if you live in an area where the numbers make sense, then I am.

absolutely think you should go with the Burr method. And buying turnkey properties is not going to be a good fit for you. But if you aren't in a cash flowing area and you work however many hours a week and you have a family and you love to travel or whatever else is going on in your world, that swinging a hammer or doing the due diligence to find an area where the property is going to make sense for you, well, then I would urge you to highly consider churn key properties. I mean, I do. In fact, that's all I buy these days because let's face it, I love when my teams do all the work for me. And I have no issue paying full market value for these turnkey properties. After all, at the end of the day, all I care about is cash flow and my turnkey properties cash flow.

I truly hope, as I say every week, that this episode served as food for thought for you. I hope that your wheels are spinning in the direction that cash flow is knocking at your door. That's it for this week. Until next week on the next turnkey episode of Turnkey Tuesdays where cash flow is key. Does your money work for you as hard as you do for it? If not, no worries. You do not have a money problem. You merely have an idea problem. We're cashflow savvy.com. And we like to share a new idea with you around income real estate that can transform your financial future and accelerate its arrival. Go to cashflow savvy.com and download a free investors package. Cashflowsavvy.com. You do not have a money problem. merely an idea problem.

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