Turnkey Versus DIY Rentals

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.

As in all things, there are good and bad turnkey companies.  Whether it’s turnkey or DIY, you should always perform a detailed analysis on the deal, based on your search criteria.

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:

$695 Rent

-$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:

$1275 Rent

-$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

Turnkey Pros:

  • No initial improvements needed, property in excellent shape
  • Purchase and startup processes streamlined and user friendly
  • Mint condition properties attract good tenants

Turnkey Cons:

  • 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

DIY Pros:

  • 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

DIY Cons:

  • 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

12 thoughts on “Turnkey Versus DIY Rentals

  1. Brian - Rental Mindset

    Excellent comparison! I have purchased all mine turnkey so far, but one day might branch out into other ways. I see it as a trade off – you can use less money and achieve a higher return, but it will take more time and have more risk (because of contractor overruns, less oversight).

    1. The Vagabond Post author

      Yep, you nailed it, Brian. I do see the risk as being mitigated as you become more familiar with a market and build a reliable team, but there is definitely some inherent risk in the property itself each time, too.

  2. SR

    I’m trying to wrap my head around how you get MONTHLY lawn care for 23.33 per month. I own property in the severe MidWest … Wisconsin. How the hell do you have a lawn cut and landscaping maintained for 23.33 per month?! That wouldn’t pay for for ONE visit per month, much less four … average here is weekly cuts/maintenance. Snow removal up here is brutal and time consuming, albeit completely unproductive, ie, you can remove and clear one day and the next day have to do it all over again … and again … and again … etc. Feb ’19 here has been horrible with snow storms hitting on average every three days with ~4″ to ~8″ to clear every time, not including the ice from freezing rains over and over that has had to be eradicated to avoid liability, ie, idiots who don’t know how to put one foot in front of the other but somehow are experts on slip-and-fall law and finding shyster lawyers. Again, am I missing something with your numbers?

    1. The Vagabond Post author

      Not every locale requires weekly lawn care, nor are landlords responsible for snow removal everywhere. I don’t pay for snow removal, and we do biweekly lawn mowing 7 months out of the year. This comes to an average of 23.33 per month when averaged over a year. If the numbers don’t work where you live and you want to invest in property, then invest somewhere besides where you live.

  3. SR

    Again, confused. Landscaping anywheres is more than lawn cutting. Tree, shrub, foliage trimming; leaf cleanup (huge here); bee/wasp nest removals in trees, bushes, ground, eaves that affect tenants; concrete power washing (mold, mildew, and green growth on concrete is huge here); municipalities have local ordinances about lawn cutting frequency and grass length (.gov overreach, yes, bit the criminals here in local governments are always daring you to take them on … they almost always lose in court but they never learn armed with a bottomless pit of taxpayer dollars to defend themselves with … hell, we’ve even sent municipal jackasses to prison, like Bell CA, and they STILL never stop their criminality and overreach); fertilizing and de-bugging lawns (grubs, ants, etc, huge here); many other “lawn maintenance” items. Still trying to understand. Do you have any pictures of any of your properties being cared for for such a cheap price? If I’m screwing myself, I want to correct. But, again, I don’t see how these numbers take care of “complete” maintenance.

    1. The Vagabond Post author

      Power washing, pest control, and other unscheduled maintenance are covered under the general maintenance budget, as they are done only when the need arises. Other than that, yes, the only regular landscaping that is done at my properties is mowing. This is the same level of biweekly lawn care done at all properties covered by my property managers, which amounts to tens of thousands of units. I’ll blow your mind even further: in one market where I own property in the middle south, I do zero landscaping, as it is tenant responsibility. This too is par for the course in that market.

      It feels like you’re looking for some sort of gotcha or admission on my part, but I’m simply sharing my numbers which have been consistent over years. If you spend too much on landscaping for your taste, find a place to invest where you can spend less. If you’re looking to “expose” something here, you’re barking up the wrong tree.

  4. SR

    Just the opposite. No gotcha searching. I’m trying to figure out if, after all these years, I’m the idiot working hard and not smart. However, usually when I peel away the layers of the onion, I find something mid way in between. For instance, at one of my properties, I have evergreens across the front of the house that need severe trimming at least 2x per season. Each trimming can take an hour if not longer. This same property is always sure to have bug and grub problems killing grass every year. This includes eradicating pests, whether ants, grubs, ground bees, etc, EVERY SEASON, and then, of course, repairing the lawn damage, no matter how big or small. This is lawn, and not general, maintenance. This same property has a woods behind it and, every year, we get what I call the “leaf snow” wherein the leaves fall constantly to collect sometimes up to a foot deep. One year it took a total of ~40 man labor hours to clean up those leaves … and, if you don’t, you severely damage and kill your grasses for next season which causes more financial headaches next season. Again, no gotchas here. I’m just still confused … like I’m missing the party. Maybe it is nothing more than I’m buying the wrong properties.

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