For some time now, I’ve been considering becoming a real estate investor (>1 property) once again. Even though real estate prices haven’t found their absolute bottom yet (my non-professional opinion only), I’m thinking that 2010 might be a decent time to test the waters, do some bottom fishing, and see what sort of deals are out there by digging a little deeper than surfing Realtor.com can provide.
For the most part, I’ve been focusing on geographic areas that were overbuilt with “cookie cutter” homes that flooded the local market with new construction, pushing the demand for housing so low that prices won’t appreciate anytime in the near future. Therefore, I’m not concerned with my investment(s) significantly appreciating in value, but I’m entirely focused on cash flow generating potential. If I can return an annual cash flow profit of 10% or more after operating expenses, I’ll consider it a success.
However, as I was screening what seemed like hundreds of beachfront condos today, I found myself shying away from condos that weren’t turnkey ready. Meaning, that if I had to put in more than a weekend’s worth of manual labor, I wasn’t interested.
Is it Worth Paying Extra for a Turnkey Investment?
When I noticed that I wasn’t acting like the normal bargain hunter, DIY, save yourself a few bucks cheapskate that I am, I got a little curious as to why I might be thinking this way.
Pros of a Turnkey Investment
- I get to be lazy. Hey, I’m a mid 30s guy and even though I can still benchpress my weight plus 20% on a good day, it doesn’t mean I want to be busting my hump for two weeks with my limited Home Depot weekend warrior skills. Watching the guy from Holmes on Homes while chilling on my Lazy Boy is a lot easier than actually doing the work.
- The higher costs are rolled into the mortgage. Even if I pay extra for a turnkey project, the extra five to ten thousand dollars will, by in large, be included into the mortgage. Since the tenants are going to pay the mortgage for me, perhaps it’s in my best interests to pay just pay extra up front, and not go through the frustration of breaking out my tool belt.
- It can be rented immediately after closing. If I invest in something that’s been remodeled or well maintained, then I get put a tenant into the unit right away.
- Peace of mind. This hurts a little to admit, but I’m not the world’s best handyman. So if I can find something that’s been lightly used or maybe looks brand new, then maybe that’s worth the extra money versus turning me loose with a wet saw and a few hundred bucks worth of tile.
Cons of a Turnkey Investment
- Not getting the best bang for the buck. Obviously, I like to get the best price possible, so if I overpay by 5% to 10% on a turnkey condo versus a fixer upper, my buyer’s remorse will likely bug me for years.
- Bigger mortgage equals more interest paid. I know all too well how the amortization equation works, so not getting the lowest price possible will result in more of my money going to mortgage lender profits. That might not bother most people, but to a numbers and spreadsheet savvy guy, the idea of paying more interest than I absolutely have to is vaguely similar Edgar Allen Poe’s Tell-Tale Heart, where my guilt might cause me to hear imaginary cries of pain from my checkbook.
- I’m stuck with the design/decor. I’m not a fan of cookie cutter homes, so if I buy a fixer upper, I get an opportunity to make the condo’s interior stand out from my competition. If I do an above average job and use some modern appliances, I’ll have the ability to attract higher paying renters.
So what do you think? Is paying extra worth the time and sweat equity saved?
I honestly don’t have the answer, so I wanted to open up the discussion to the group.
Photo by rioncm