The Turnkey Real Estate business is one that comes with numerous opportunities and significant potential. There are many different avenues that companies take when putting their clients into hands-off investment properties. The traditional model of the turnkey space is to sell a client a renovated, tenanted, and managed property in which the client immediately begins receiving rent. Most clients will purchase these properties through conventional funding methods. The only problem with this business model is that, for example, a client puts down 30 percent on three ($100,000) properties they will need to save up another $100,000 to repeat the process. On the other hand, if a client purchases just one property paid fully in cash, at a discount-to-market price because the property needs renovation, they will be able to repeat this process and grow their portfolio exponentially.
Many beginner investors read about different strategies that real estate investors use to not only maximize profits but organically grow their portfolios. A popular, yet under-utilized method that people come across is the BRRRR business method: Buy, Renovate, Rent, Refinance, Repeat. The newest trend in the turnkey space is helping clients through this process to grow their portfolios and reap value that the traditional method of turnkey purchasing could not.
How does the BRRRR method work?
Typically, a client will purchase a distressed property in cash and then renovate that property. If intelligently purchased, once that property has undergone its renovation, it should be worth 20 to 30 percent more than the investor put into the project. The investor will then place a tenant and refinance the property. The property can now be refinanced at the higher valuation, which allows the investor to pull out 70 to 80 percent of the ARV (after repair value) of the property based on the comparable sales in the area. Once this refinance is complete, the investor can pull out most — if not all — of their initial capital from the deal, and repeat the process, thus expanding their portfolio. In this scenario, the tenant is now paying the mortgage on the property, while cash flowing positive and the investor is able to reinvest capital into their next property.
To compare these two scenarios, when purchasing an already-tenanted property, the investor is buying at the top of the market. They do not create any value as they would following the BRRR method and thus cannot refinance most of (if not all) of their capital out of the project. These types of deals are most often done in B and C class neighborhoods where it is still affordable for the average investor to deploy capital while being able to cashflow positive.
Many companies show records of “on time” payment and property management statements that entice investors to purchase. However, this may not always be as fruitful and easy as certain companies make it seem. Maintenance issues arise, as well as tenant problems because the investor did not have any say in the renovation and tenant placement process. When a client purchases an already-renovated property, they are not sure of the quality and repairs that the property needs. A new renovated property that a quality turnkey company provides allows an investor a better rental income and a better chance to sell the property for more money as their exit strategy.
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