Turnkey versus DIY Rentals: Which is superior? I own both, and have some thoughts on which is best.
My Experience With Turnkey Rentals
A turnkey rental is a property offered by a company which (generally) caters exclusively to investors. Some turnkey companies are glorified wholesalers: They find off- and on-market houses, rehab services, and property management in many markets, but their only purpose is to line up the deals for investors, and take a cut off the top when the deal closes. Other turnkey companies buy distressed properties, perform the rehab, and offer property management, all in-house. Those companies make their money by finding sufficiently marked-down properties and buying them as cheaply as possible. Neither is necessarily better, it just pays to know where the money is made. The downside of the turnkey arrangement is that generally speaking, because you purchase the properties at full retail value, cash flow is usually lower.
My first property was a turnkey. It was purchased from a company that buys, rehabs, and manages houses themselves. I’ve had a stable tenant since I bought it, and because it had just been rehabbed, I still haven’t paid one cent in repairs. My turnkey property was purchased for $56,700 and cash flows $195 a month. Here’s how that breaks down:
-$69.50 Property Management
-$328.71 Mortgage, Tax, and Insurance
-$101.79 Reserves (Vacancy, Repairs)
$195 “Safe” Cash Flow
One thing I want to point out here is that while most months, there’s an excess of $296.79, I absolutely must preserve a portion of that cash flow for inevitable repairs, vacancies, and capital improvements. No matter how lucky I am with long-term tenants, eventually I will have to evict someone. No matter how good the condition of the property, eventually a hot water heater, toilet, or other item will be broken or will wear out. Do not assume that just because there is extra money for a month (or a year), that it is safe to spend.
The downpayment and closing costs on this property were fairly low, but the cash flow is really very average. The upside there is that I don’t have to spend much time at all in any given month thinking about the property. I basically confirm that the wire transfer hits my account monthly, save a copy of my statement, and move on. Additionally, my turnkey provider provided me with a 1 year warranty on the entire house, which I thankfully didn’t end up needing to use. Still, it set my mind at ease.
Don’t be too quick to discount the value that peace of mind brings. Turnkey rentals can be very good indeed if you cannot or do not want to be bothered by some of the minutiae of getting a rental property purchased, renovated, and running. I like this property a lot, because it has yet to cause me any stress even after a couple of years.
My Experience With DIY Rentals
Though my first rental purchase had gone very well and was busily churning out dollars every month, I considered how many houses I would need to purchase to hit our early retirement income numbers. It would take about 15 houses at that rate, or about 7 years of saving for down payments and buying property. That was pretty great! I just wanted to see if I could do a little better.
Just as I usually advise others to do, I became a lurker on Bigger Pockets and began to read, and read, and read. On the marketplace, I saw that properties in the midwest were regularly available which hit the 2% rule (monthly rents were in excess of 2% of the property price). I began to recognize names and faces of people working in some of those markets. I saw agents who offered their knowledge freely and generously, and decided to contact one of the investor-oriented brokerages. That’s how I found the agents I work with to this day. It’s also how I found investor-friendly loan officers and secured financing for some of the deals.
My non-turnkey properties always need a bit of work to get them into a condition where they’re rentable to quality tenants and good cash flow numbers. I always use the same analysis method, whether it’s a turnkey or DIY rental purchase. Let’s see how the numbers work out on a monthly basis for the second property I purchased for $65,000, a duplex:
-$127.50 Property Management
-$455.19 Mortgage, Tax, and Insurance
-10.83 Annual Maintenance Checkup
-$84 Sewer Service
-$84 Water Service
-$23.33 Lawn Care
-$200.15 Reserves (Vacancy, Repairs)
$290 “Safe” Cash Flow
For a slightly higher purchase price, the property flows almost 50% more cash. Obviously, there’s a lot more going on here. I am responsible for paying the city for water and sewer service, which my tenants do not currently pay. I pay for lawn care and an annual maintenance check. Still, this is a lot more money on a dollar-for-dollar invested basis.
Perhaps even more importantly, I have since learned of options to sub-meter water and sewer in my duplexes, and will be moving to a model where the tenant pays for water and sewer (in exchange for slightly lowering the rents). In 2016 when I renew leases, I expect the cash flow for this property, and the other one just like it that I am under contract on, to increase to somewhere between $368 and $398 a month. At that rate, I will be able to hit my retirement income with between seven and eight properties, or about four years of saving! That’s a huge reduction in time to retirement!
The point I’m trying to illustrate is that DIY rentals give you more knobs to turn, but that’s at the expense of some stress and management, even though I consider it to be small. The primary investment of energy (physical and emotional) is during the purchase process, and the few months afterwards until the property is running more or less without further input. On an older, non-turnkey property, more minor repairs seem to come up (I have had several loose toilets repaired) and I’ve needed to turn over a couple of tenants that I inherited. Still, I love this model because I have the time and energy to focus on them right now, in exchange for a lifetime of higher returns.
What I’m Doing Moving Forward
The truth is that I probably won’t buy any more turnkey properties, but that’s not because I don’t recommend them if your circumstances dictate that they’re the better choice. I just know that I want to buckle down and maximize returns over the next few years. If you are an extremely busy person or you just want a much lower chance of having to deal with repairs up front, turnkeys are an excellent option. You need to take a realistic look at yourself and see which is most compatible with your lifestyle and personality. Or, if you’re like me, maybe the best thing to do is start with turnkey to get the first deal under your belt, and then move on to DIY rentals when you feel you’re ready.
Turnkey Versus DIY Rentals: Pros and Cons
- No initial improvements needed, property in excellent shape
- Purchase and startup processes streamlined and user friendly
- Mint condition properties attract good tenants
- Property purchased at full market value or higher
- Cash flow lower than DIY in general
- Neighborhood property values may lag behind purchase price
- Limited to markets where turnkey providers operate
- Limited to properties presented by turnkey providers
- Cash flow higher than equivalent turnkey in general
- Can outsource or comparison shop services needed to start up property
- Can purchase and operate property in almost any market
- Purchase and rehab process can be very stressful
- Properties may have ongoing maintenance issues not addressed in rehab
- May inherit troublesome tenants and be forced to honor poor leases