By Joe Dyton, WCI Contributor
Physicians typically earn a good living, but a high salary doesn’t necessarily guarantee a well-funded retirement. It’s why workers are encouraged to invest their income over the course of their careers so their money can grow as they work. Retirement funds tied to the stock market, such as 401(k)s and IRAs, are popular ways to grow one’s earnings, but many of these accounts are limited by how much you can contribute each year.
What if you want to invest more than your retirement accounts will allow? Fortunately, there are other ways to earn more money without putting in additional hours at the office. Real estate is one of the more common ones. While real estate investing isn’t as passive as many claim it to be, it can be a great way to generate an additional income stream without a lot of additional day-to-day work.
If you decide to embark on a real estate investing journey, you’ll find that there are a lot of different options available to you. Turnkey real estate and the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method are just two of them. Keep reading to get a better understanding of what these real estate investment methods entail, the advantages and disadvantages of each, and which might be the better option for you.
BRRRR Method Overview
The BRRRR method (aka house flipping) involves buying a distressed property, renting it, and then refinancing it to get money to fund another rental property (and another, and another).
Here’s a simplified version of the BRRRR method (we're not including fees or taxes in this example):
- Buy a $300,000 house ($60,000 down payment; $240,000 loan)
- Spend $60,000 Rehabbing the property ($60,000 down payment + $60,000 rehab costs = $120,000 total investment)
- Rent the property for $1,500 per month.
- Refinance the property. It now has an appraisal of $480,000. You can take out a bank loan for 75% of the appraised value ($480,000 x 0.75 = $360,000).
- Repeat the process. You pay off the original loan of $240,000. That leaves you with $120,000 to find and buy the next property (which happens to be the same total investment you made on the original house).
This method may sound like traditional real estate investing, but there are two key differences:
- First, the properties acquired are distressed and need work.
- Second, the owner refinances their property so they can buy another one and repeat the BRRRR method over again.
There are benefits and downsides of the BRRRR method to consider before getting started.
Pros
- In the right market (where property values consistently increase), you can quickly build equity and cash flow.
- Find good, long-term renters and your mortgage payment will be covered, the property will remain in good shape, and the utility bills will be paid.
- Once you’ve successfully gone through the first four steps of the BRRR method, you should have a down payment and repair capital for the next property.
- You can build a vast real estate portfolio quickly, depending on how soon you refinance.
Cons
- You need some cash on hand. Remember you've got to purchase the property and rehab it before you can refinance it. This is not a “zero-down” technique. Even if you get a steal on the property, you won't get a loan for more than the purchase price.
- It can be tough to find ideal BRRRR method properties when the market is down.
- You might have trouble at the refinance stage if the property doesn’t appraise well.
- There could be a lot of potential work to deal with in the rehab stage; unexpected repairs can quickly deplete your rehab budget.
- Bad renters lead to property damage and additional repairs or more time spent on finding replacements if they don’t stay for long.
- You remain highly leveraged as long as you are actively acquiring new properties since you strip all the old ones of their equity as much as possible. Leverage works both ways.
More information here:
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Turnkey Rentals Overview
The term “turnkey” applies to any product or service that’s ready to be used right away. Essentially, you “turn the key,” and you’re good to go. When it comes to real estate, turnkey properties are ones that are ready to rent with a tenant in it and a fully assembled team on hand to take care of the property. Turnkey real estate properties do not require much upfront effort from investors, allowing them to generate rental income a lot faster than they would with more time-consuming investments.
Pros
You Fully Control the Property
Investing with the turnkey model allows you to still own the whole property. This includes having full control of when you buy or sell it. There’s no reason to worry about selling your investment at a certain time and having to pay high taxes on it because of your high income. You decide when the time is right.
Other examples of your control include having the ability to do a 1031 exchange to another property or a 721 exchange into a REIT, so you can defer paying the taxes on your gains for as long as possible. You can also choose the property you want and solely decide how much you’re willing to buy it and sell it for. It’s yours to leave to your heirs if you wish.
Turnkey Investments Are (Mostly) Hands Off
Another advantage of the turnkey model is that most of your work is selecting the property. You’re not responsible for putting together a team of realtors, lenders, contractors, etc. You don’t have to worry about tenant selection, carpet and paint colors, or late-night maintenance calls. The turnkey model is the most passive way to own a real estate property directly.
You Can Invest in Turnkey Properties from Anywhere
You’re also not bound to your local area to invest in real estate. You could buy non-local properties without the turnkey model, of course, but it would not be nearly as easy. You’d be responsible for finding a realtor, attorney, property manager, and repair person. All of that is difficult enough to do in the area where you actually live.
The turnkey model expands your investment opportunities, which can be helpful if you live somewhere where you don’t want to buy real estate. Or maybe you just happen to live in an area that’s the best place in the country to invest in real estate. If not, turnkey investing lets you invest in the best areas and maintain maximum control of your investment.
The Turnkey Model Makes Real Estate Investing Easy
A fourth advantage is you gain some economies of scale. For example, a top-notch turnkey company has streamlined the rental property management process and procedures, particularly for single-family homes. The expertise of these companies is at your disposal, minimizing hassle for you and increasing the chance of getting high returns.
Turnkey investing offers lots of advantages. No wonder so many white coat investors are interested in it.
Cons
Turnkey Investing Is Often a Solo Venture
It’s great that the turnkey model allows you to own an entire property, but at the same time, you own the entire property. That means you need enough money to purchase it—a 25% down payment on a $400,000 property is still $100,000 that you’d have to bring to the table. That’s a substantial amount of money for many people, including doctors and other high earners. A significant down payment like that will also leave you less diversified than you’d like; if that property underperforms, so do you. You’re also at the mercy of how well the city your property is located in performs.
The only way to avoid letting a single real estate investment drag down your portfolio is to acquire more properties. Unfortunately, that will take a lot of time and money that you might not have. You’ll also need to qualify for a property loan and sign for it personally. Suddenly, you have even more than your entire investment on the line if things go south.
Your Success Usually Depends on One Company
Using the turnkey model also means you will be heavily reliant on a single turnkey company for your investment. If it performs poorly, so will your investment property. Bad ROI, lots of stress, and headaches are all results of picking the wrong turnkey company.
It Can Be Difficult to Keep Track of Your Investment(s)
Investing in turnkey properties means you aren’t limited to investing in your local area. The downside to that, however, is you can’t easily keep tabs on your investment property when it’s in another state. Sure, you may have a turnkey company nearby to monitor things, but it likely won’t care about your investment property as much as you do.
Don’t forget about potential tax hassles. If your investment property is in a state with state income taxes, that means more paperwork and more time—and direct property investment reporting is a lot more complicated than filling out a 1099 or a K-1 from a passive investment.
Little Room for Variety, Expenses Can Add Up Quickly
If you were hoping for variety among your investment properties, the turnkey model may not be a good fit. Turnkey companies often use the same carpet, tile, and paint in all of their properties in an effort to save money.
You also need to consider the additional costs that come with using a turnkey company. Every time-saving task it performs will cost you money, and that will lower your ROI.
Turnkey investments have advantages, but they have disadvantages as well. Make sure you are familiar with and OK with the disadvantages before you buy.
More information here:
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Which Approach Is Best — Turnkey Real Estate or the BRRRR Method?
The BRRRR method of real estate investing can be rewarding, but it’s not for everyone. It takes patience. Remember, the idea isn’t just to find a property to rent. You want to find one that’s distressed but one that has the chance to go up in value once it’s rehabilitated. You have to do your homework (or perhaps hire someone to help you), and you’ll also be spending time fixing up the place.
If you’re willing to put in that much time and effort before seeing a return on your investment, then the BRRRR method could be for you. It’s also ideal if you’re comfortable with some risk as an investor and have the funds available to make that first down payment. While it may sound boring, using BRRRR to invest in real estate can actually be quite profitable when done correctly. Real estate investors who want to work hard and grow their portfolio quickly may find BRRRR to be an ideal real estate investing strategy.
Alternatively, turnkey real estate investing could be good for rental property investors as well as seasoned property owners who quickly want to expand their portfolios. If you have available funds and don’t want to spend a lot of time renovating an investment property, the turnkey model is a good option—just don’t forget to weigh the pros and the cons.
Additionally, think about your investment plan. If you’re comfortable with the longer-term, buy-and-hold approach, turnkey might work well for you. However, if you’re more interested in a quick financial return, you might want to consider BRRRR. There will be more upfront work in terms of getting the property ready to sell, but you’ll have a chance to turn a profit sooner than you would by acquiring a turnkey property.
Don't forget to sign up for the free White Coat Investor Real Estate Newsletter that will alert you to opportunities to invest in private real estate syndications and funds while giving you important tips for how to invest in this asset class.
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