Out-of-State Investors: Rehab vs Turnkey – Which Is Best for You?

Posted Wednesday, April 17th, 2024
Real Estate Investment Podcast - 5 O'Clock Somewhere
Real Estate Investment Podcast - 5 O'Clock Somewhere
Out-of-State Investors: Rehab vs Turnkey - Which Is Best for You?
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Out-of-State Investors: Rehab vs Turnkey – Which Is Best for You? We discuss 2 approaches to real estate investment to help you determine the better investment strategy for you. We explore the significant challenges of rehabbing from out-of-state, such as high contractor costs and logistical complications, versus the relative simplicity and reliability of turnkey properties. Brett, Jeff, Nick, and Jerry provide insights on navigating the market, optimizing investments, and avoiding common pitfalls. Whether you’re a seasoned investor or a newcomer, this discussion offers essential advice and perspectives to guide your decision-making. Tune in to unlock the secrets of successful real estate investing in Memphis.

Brett
0:00:55 – So in this episode, we’re going to talk about rehabbing versus buying turnkey. There’s a mix of that in Memphis. So stick with us and we’ll be talking about that topic in just a second.

Sponsorship
0:03:58 – We are sponsored by Title Assurance and Escrow, a title company here in Cordova that does all of our closings, title work, escrows, and we only use Title Assurance and Escrow. That relationship is very important because we can get things done for our investors quickly and easily. So to speak with Title Assurance and Escrow, call 901-737-3332 and ask for Chris or April.

Brett
0:01:31 – So basically, I want to talk about rehab properties versus turnkey properties because there’s a massive difference, right? Previous episode we had with Tom, he buys, rehabs, rents, and flips, and does hold some of them. One of the disadvantages to an out-of-town investor who’s buying a home that they want to rehab, we have some investors, I know Jeff does, Nick’s got one, Jerry’s about to get one, and they want to buy a home that they can pick up for 60 grand, put 30 in it, and it’s worth about $110,000, put a tenant in it, they’re going to hold it, but they want to build in their own equity through doing the work to the property. So my question is Jeff, Nick, and Jerry, what do you think the biggest problem for that guy in California wanting to do a rehab project here, what do you think his biggest challenge is?

Jeff
0:02:18 – Well, his biggest challenge is going to be finding a contractor, you know, that’s going to treat him fairly. More than likely he’s going to get egregiously overpriced, $15,000, maybe even $20,000.

Brett
0:02:29 – They’re not hiring Nick Gibson. They’re hiring somebody else.

Jeff
0:02:32 – Oh, I hear you.

Jerry
0:02:33 – I was just going to say, that’s why we have them.

Jeff
0:02:34 – A local contractor can get the work done for a lot cheaper.

Brett
0:02:38 – Well, right. I think that, Nick, if you, I’ll pose this to you, because you’re a contractor. If you had a choice to buy a $50,000 house and needed $30,000 worth of work, that’s what your bid is for a guy out of California, $35,000. We all know you can do it for less than that if it’s your home you’re buying to do your own flip, right? So it doesn’t make sense for you to give an investor, we went through this with one of my investors, some breakneck cheap rehab job because you don’t make any money on it, but for yourself you would do that.

Brett
0:03:09 – So what’s happening in Memphis today and the reason why I turned keys I think are a better option for investors currently. Cost of money, number one. Buying a flip and trying to take out a hard money loan to buy the house, do the rehab, is very expensive right now. So when you go to refi conventionally after you’re done, by the time you’re done refiing and paying additional closing costs, you’re eating up most of the equity you’re going to build anyway. So buying a turnkey property that’s got a tenant in place, producing 1% or better, is in my opinion, a smart way to go until interest rates come down. Now if interest rates were 2% and hard money was going to hit you at 8.5%, or maybe 9%, that makes more sense. But right now, hard money is going to hit you anywhere from 14% to 16%.

Jeff
0:03:54 – Well, it’s, Brett, it’s challenging right now. That’s the challenge. I’m working with a young investor that’s doing hard money, and his intent and goal is to borrow, not come out of pocket any money, borrow 85% of the, you know, aftermarket loan value and you can do that but it’s tricky because you got to find the exact right property and they’re just hard to find. I mean, you can’t, they’re not lining up on the street selling $30,000 properties. It requires $30,000 worth of rehab that are selling for 110, 115. And I understand what he’s trying to do. And then he’s going to put a renter in that house and refinance a conventional loan and take all the equity that he just acquired to put down on the new conventional loan, and then he’s just going to rent the property forever. Those are really hard to find. They are hard to find. And I’m guessing the main reason is because everybody and their brothers doing it now.

Brett
0:04:52 – Yeah.

Jeff
0:04:53 – Well, me being a local contractor, it’s hard enough to manage a job, manage a project with me being here local. Imagine being all the way across the country trying to manage a project. You have to have that team in place. And even then, you’re not there day to day checking in to see what’s going on. I mean, that sounds like a nightmare for most investors to me.

Jeff
0:05:13 – Getting the work done is one thing, but the challenge for me is just finding the properties. And I’ve tried to hem-haw around with Tom and pick his brain about, hey man, where are you getting all these properties at? And he’s just not going to divulge that information.

Brett
0:05:28 – Well let’s dig into that, why it’s so hard. Your guy’s different. He wants to be in this property with no money and a tenant place cash flow. That’s a tough uphill battle.

Jeff
0:05:37 – That’s challenging.

Brett
0:05:38 – The typical way of doing it would be to pick up a house for $30, it needs 40 grand worth of work and it’s going to be worth $95,000, you can rent for $1,000 a month. That’s a perfect scenario for a buy and hold rehabber who wants to create his own equity, build some equity in at the beginning, but that’s really all you’re getting. Cash flow is going to be there whether it’s a turnkey or whether you rehab it. So the only reason to do a rehab job is if you’re going to flip, which number one is really difficult because you take a $100,000 house, if you’re going to flip it, you got to make money on it, so you’re going to have to be all in at 80% of what ARV is going to be after rehab value. And then from that, that 80,000, you got to back off your rehab cost. So let’s say that’s 40,000, now you’re down to $40,000 purchase price. Then you got to back off your hard money cost. That brings you down to, I’m going to say, $35,000. All right, well, let’s say. So a house is worth $100,000 and you’re going to go buy it for $35,000, what’s that seller going to tell you to do? I’m sorry, would you bend over and give me some Vaseline so I can shove this all the way up? Because it’s never going to happen, right? It’s just not going to happen. Now, if you’re a local builder, you’re not building homes right now, it makes sense for him to go buy that house for $50,000 and put $40,000 in it because guess what? That $40,000 is only going to cost him $25,000, maybe $30,000. So he can build in his own profit margin when he does a rehab because he’s a local contractor.

Brett
0:07:04 – He can manage a job. He can do everything at cost. And that’s where Tom’s successful. A lot of these properties he has are kind of tight. The only reason why it works is because Tom’s local, does it himself at cost and builds his own profitability into that project. You can’t do that if you’re out of town.

Jeff
0:07:19 – Our contractor, Michael, you know, he’ll get out there with the bobcat, he’ll get out there with the shovel, he’ll get out there with the paintbrush, and he’ll do a lot of that stuff himself.

Brett
0:07:30 – Right, but the difference between a lot of contractors for out of town investors is simple, cost. That $50,000 bid probably is going to cost the contractor $35,000.

Jeff
0:07:42 – You’ve got to find somebody that you can trust and work with and, as I always say, build a relationship with. Tom hits some home runs every now and then on his flips, but a lot of them he doesn’t make that much money on, but he’s a volume guy. My guy’s not a volume guy. My guy needs it to work right the first time, and we can overcome the hard money hurdle and get his loan for the price of the house and the rehab cost. But then the second challenge is, okay, we’ve rehabbed the house. Now, if I don’t get the $144,000 that I promised him we could based on today’s current market conditions, the kid’s going to be in a real bind and he’s not going to be able to refile because he literally doesn’t have 20% put down on a $140,000 house, which was the reason why he took the hard money loan to begin with.

Brett
0:08:33 – The really sweet slam dunk flips are damn near impossible to find. Regular flips, you can find them, but the numbers have to work, and it’s hard to make those work for an out-of-town investor who doesn’t have a local contractor who isn’t boots on the ground here doing it at a lower cost.

Jeff
0:08:49 – Well, this kid’s local, but he’s not going to get out there and rehab his own house.

Brett
0:08:53 – He’s going to pay retail for the rehab with a contractor.

Jeff
0:08:55 – He’s going to pay retail for the rehab and he’s local. And he doesn’t have any money.

Nick
0:08:57 – And most of these slam dunkers you’re talking about, they never hit the market. They’re snatched up by friends and family before it ever hits the market.

Brett
0:09:06 – We had a deal, buffet, that I had, guy died, family called me from Hawaii, wanted me to sell the house. Probably value of $380,000, $390,000 when done. I put in a remark of $250,000. Jeff ends up getting one of his builders to look at it. Everyone that looked at it said there’s no way they could pay $250,000, too much work, or $220,000, $225,000. Well, his builder went and looked at it and immediately goes, well, I can make this work. The difference is, those other buyers are gonna use contractors from out of town. This guy was gonna go in with his own contracting team at cost and do the work and then flip the property and probably make 40 or 50 grand on the house. Minimum he makes 30. And the same thing applies all the way down to the small rehab projects. If you’re having to hire a contractor from halfway across the country, guess what? You’re not saving money on the rehab. So you’ve got to make the numbers work on the offer, which we all know is not going to happen anyway because no seller is right mind in Memphis will give away a house at $35,000 when he knows in current condition it’s worth $50,000. But you need him to do it at $35,000 because you’re out of town and have to hire a contractor retail. So it just doesn’t work well. It’s a bad formula to use.

Jeff
0:10:13 – The other side of that coin too is I see properties every day, you know, $50,000, $75,000. They’re going to take an average of $30,000 to $40,000 to fix. And they’re only going to be worth $100, $110 at the end of the day. So you go back to the agents and you tell them, look, your property’s worth about $30,000 in the condition it’s in. I mean, that is everywhere. I get emails every day, look at this property, look at this property, and they’re just, you

Jeff
0:10:41 – know, they’re not junk, but they’re just, you can’t buy a $75,000 house, put $30,000 in it, and sell it for $150,000 if it’s only worth 110. Why these agents can’t figure this out, I do not know. And I mean, I even tried to sit down and do the math with one lady. I said, look, you want $100,000 for the house. It’s going to require $40,000 worth of work. So I mean, at best, it’s only worth 60 grand.

Brett
0:11:10 – Yeah. Now, that’s that same house. You know it’s still on the market.

Jeff
0:11:14 – Yeah, Cornstalk. The problem is, and I tried to explain to you as simple as I can, I said, look, you can get a hundred all day long, but what you’re going to have to do is you’re going to have to go to your bank, you’re going to have to withdraw $40,000 of your money, and you’re going to have to fix the house. Then you can get a hundred. But at the end of the day, you’re still only getting 60 for the house because you got your… So why don’t you sell it to me? Let me invest the 60 grand. Let me do all the work and take the headaches and the hits for it. And it just looks at me like I’m crazy. No, I think I can get a hundred for it.

Brett
0:11:50 – Nope.

Brett
0:11:50 – Okay.

Jerry
0:11:52 – So, among the one developer and the two contractors that we have in this room, does it really make any sense for an out of town investor to do a fixer instead of a turnkey?

Jerry
0:12:10 – Only in one scenario.

Brett
0:12:12 – And what would that be?

Brett
0:12:15 – If you’re going to buy and hold, right? Most investors that come out of seminars, the nasty four letter word that I hate.

Nick
0:12:23 – And you brought it up this time. To be fair, not us.

Brett
0:12:26 – I did. I’ve been going to therapy and I’ve been throwing it out there just to make sure I didn’t explode every time I said it. So these guys that go to these seminars come out thinking that, oh wow, I’m going to go buy, I got 30 grand. I’m going to go buy one house, borrow money from my dad, put 40,000 into it, and I’m going to rent for 1,000 a month. So as that happens, I’m going to go to the bank, now I’ve got a real rental profit, I’m going to refi it, I’m going to take the 60 grand out and I’m going to go buy two houses and I’m going to repeat that and in a year and a half I’m going to have 30 homes. That’s literally what they believe in their mind. But buy and hold is the only reason why you’d buy something that needs work because if you’re out of town investor, we’ve already clearly shown that you can’t really do well in Memphis if you’re not a town investor buying to rehab properties. Nick’s dealing with a client right now who’s, I think she’s beginning to

Brett
0:13:16 – realize she’s going to have to, she’s going to have to get really aggressive on her offers because she’s running tight on all of her numbers because she’s paying retail for rehab. So that same investor could come to me and say, I want to buy, I’m doing it with Amish. He’s just about to close on his third one. I want to buy properties and I want to do the work to it, but I want to be all in at 80, 85 cents on the dollar. But that works all day long because you’re going to hold it for rental, right? One particular house he bought, we paid 70, he’s going to put 10 grand into it, it’s going to run for $1,200 a month.

Brett
0:13:45 – He’s going to have $20,000 equity in it. And we paid the seller exactly what he asked for the property. So it’s there and doable.

Jeff
0:13:52 – I mean, I wouldn’t discourage people from rehabbing from out of town. I mean, if they’re using our team.

Brett
0:13:58 – No, no, you rehab from out of town, but I’m talking about strictly flip, buy, rehab and flip versus buy, rehab, rent and hold. Those are two totally end of spectrum opposite scenarios.

Nick
0:14:12 – I think what you’re getting at is most of these houses for the flippers are so tight that by the time they pay retail for the construction work to be done, their margins are gone. But if they’re buying them to hold long term, they can still work.

Brett
0:14:25 – Exactly, because guess what? Every year value is going to go up. So your equity may only start out at $5,000 or $6,000. Next year it’s going to be $12,000, then it’s going to be $13,000, then $18,000, then $20,000 and your rents are going to grow. But if you’re not holding it, I don’t encourage anyone to try to come into the Memphis market, buy, rehab and flip. It’s going to be a very tough strategy to follow.

Jeff
0:14:47 – Well, it’s a volume game for me anyway in the flipping deal too, because I mean the average house is 10, 15, 20 thousand dollars. Back in the day when we were doing 100 plus a year, we had the same attitude. I’d make $2,500 on a house, but I’d close four more the next week, make 15, 20, 30 thousand a pop on them.

Brett
0:15:08 – Well, if you’ve got the financing to go do five or six at a time, that’s different, because if you’re making five grand a pop in the next 60 days and you do five of them and put 30 grand in your pocket, that makes sense. But to do one and make five to six thousand dollars doesn’t make sense because keep in mind when you go to sell that house, you’ve got your hard money cost, your refinance cost, your purchase price, your rehab comes out of that. Then you’re going to pay a commission. Please don’t tell me you’re going to do FSBO and sell on your own because you’ll never do that. You’re going to end up having to hire an agent to sell it for you or put it through their investor network. You’ve got to pull that 3% to 5% out of there. I mean, your cost adds up.

Jeff
0:15:45 – Well, like you said, at the end of the day, the turnkey properties are the way to go.

Brett
0:15:49 – Exactly.

Jeff
0:15:50 – Local, out of state, whatever. I mean, and to be honest with you, it’s easier for me, the broker, too. I mean, it’s just easier to have someone like Tom just hand you turnkey properties on a silver platter. I didn’t even have to go find the properties for him. We didn’t have to negotiate the properties for him. He bought them. We sold them. Investor’s happy. One to seven year warranty on the components.

Brett
0:16:20 – That’s why I wanted really to give a difference in what the two scenarios are. At the end of the day, let’s take a house, let’s do an example. So we got Tom’s corn stalk house over here, $110,000. Rent it for $1,200 a month. Turnkey, one year warranty, investor can buy it tomorrow, producing cash flow. That same investor can, granted you’re going to put down $20,000 on that property. Tenant in place, paying all your expenses. Option two is you’re going to go put 20 grand of your own money out, and you’re going to buy a $40,000 house. You’re going to take out a hard money loan, rehab that house, then you’re going to pay closing costs and points to flip it into conventional, then get a tenant in place, the exact same house. But let’s say you end up being all in at 100,000, 103. So you got $8,000 equity starting out. The exact same house, exact same scenario other than the fact you bought it, rehabbed it and refinanced it. What do you consider would be the best investment? Because the rehab you’re going to buy, rehab, try to rent it, all that process is probably going to take 90 days, three, maybe four months total from start to finish. Or you can walk into the same scenario with a one-year warranty without any headaches because who’s to say that you don’t rehab the property and as soon as you put a tenant in, the hot water heater blows up? Oh yeah. Well, guess what? If it’s under warranty, it’s not your problem.

Jeff
0:17:44 – I mean, like I said, it’s challenging with the young investor that I’m working with that’s using a hard money loan, has no, I mean, he basically has no exit strategy. That’s right. I mean, you’re always pre-to-exit strategy. Your guy can buy these, season, cash flow, money’s not an issue for your guy. He can buy these properties, he can hold them, and he can build equity. You know, you could go to closing and all of a sudden, you know, we’re only going to fund $90,000 instead of $80,000. I need you to come up with $10,000. Amish can do that, and he can still see the value in it. My young guy that wants to get into this, he can’t do that because he’s got $3,000 in the bank and he’s getting a 100% hard money loan.

Brett
0:18:30 – And that’s a very important point to make is that the difference between Amish, so when I call Amish, Siri says, calling Amish. It sounds like a reality TV show, right? So compare that to what Jeff, like what your guy is dealing with. Like you said, Amish can handle the oh no moments. He can deal with it and weather it and survive it. Your guy can’t. So young investors listening to this podcast need to pay attention to what we are telling you because if you want to give me two grand and come sit down with me for a day, I’ll tell you whatever the hell you want to hear. Most of it is going to be BS, but understand the difference between what you’re being told and what the reality on the ground is. We love helping investors grow portfolios. We love helping investors prosper. I have several investors that started with me that are growing portfolios now. I’ve been with them for five years and they’re slowly adding and they’re taking their time. So that’s how it works. So just pick up the phone and call us, 901-692-7401. We’ll be glad to talk to you. We’ll be glad to let you pick our brain. Go to our website, mymemphisinvestmentproperties.com. We’ve got a for sale page on there. We deal with everything from start to finish, from finding the property, line up contractors, line up inspectors, line up title, help you with lenders, help you with management, help you with tenants. We do it all for you. So we would be the team you want to reach out to if you want to get into that turnkey or rehab process. If you want to get into rehab, don’t call Jeff. Apparently he sucks at it.

Jeff
0:20:03 – I’m your turnkey guy from this day forward.

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