Steadfast FinancesPay Extra for Turnkey or Save with Fixer Upper?

Pay Extra for Turnkey Real Estate or Save with Fixer Upper?

Filed in Real Estate 6 comments

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

  1. 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.
  2. 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.
  3. 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.
  4. 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

  1. 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.
  2. 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.
  3. 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.

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Posted by CJ   @   3 March 2010 6 comments
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6 Comments

Comments
Mar 4, 2010
4:39 am
#1 Phil :

It’s an interesting problem. I’ve tended to go for fixer upper places that are a bargain and then renovate them. Note that I only fix/add on things that will increase the rental. Renovation costs offset my rental income for that financial year and so I score in terms of tax (I’m based in South Africa… not sure if this works the same in the US?). Bonus if you can get a greater than 100% loan and use the extra money to renovate. I hire professionals to do the work. From experience this works out cheaper in the long run, but guess it depends on your DIY skills and free time.

Mar 6, 2010
11:44 am
#2 Katherine :

I can relate to the desire to customize the interior decor to make it less “cookie cutter”. When offering it to prospective renters, it would differentiate your “product” and perhaps create more inherent “value” in it … which could lead the prospective renter to choose your unit over an otherwise similar condo in the same development thus giving you competitive advantage.

On another note, you hinted that your real estate search was spanning multiple geographic areas … I’m genuinely curious whether you still anticipate making a decent profit if you must utilize the services of a property management company (assuming the distance to your primary residence is far enough to warrant it) that can charge up to 10% of gross monthly rent collected (along with what I can only assume is a high cost for landlord’s insurance on a beachfront property)? I am fascinated by real estate investing and I would be interested to learn about your experience and research metholody for determining profit potential with best-case, worst-case, and most-likely scenarios.

Mar 6, 2010
9:50 pm
#3 Matt SF :

I’m really not sure about the tax benefits because I usually use an accountant for that sort of thing.

However, in my former real estate investment, I believe that repairs were considered “business expenses” and were tax deductible at that point. The only problem is that you’re not getting fully reimbursed for your expense, but only a small fraction based on your tax bracket.

As you can see, this is why I use an accountant an let them deal with the particulars. I keep every shred of evidence, ask them a million and one questions, and pray it’s deductible!

Mar 6, 2010
10:50 pm
#4 Matt SF :

Nice catch, Katherine! My first choice are condos that are around 8+ hours drive from where I’m currently living.

I know dozens of people that vacation in this area, so I’m hoping I can book the first unit with people I (and my family) know rather well. This way, they won’t trash the place and will clean up after their vacation is over.

Additionally, I have two friends who live in within a 15 minute drive. I’ve persuaded them to help me out in exchange for a few bucks and/or freebie investment advice. Their duties would be minimal: deliver and retrieve keys, ensure the occupants cleaned the room before departure, check the refrigerator for leftover milk, etc.

Of course, if serious repairs were needed, I’d have to call in a professional.

In the past, I’ve used a property manager when I lived out of state from the rental. Back in 2003-05, my property manager was only charging 6% of monthly rent. Perhaps the rates have jumped, but I’ll have to look into this further now that you’ve got me on this train of thought.

Since I’m looking at resort-ish properties, I can also turn the entire condo over to their management teams, but they charge something like 30% of the rental income. Definitely not doable if I want to turn a 10+ percent annual dividend return.

Maybe I can come up with a future post describing the best case, worst case, reality scenarios for you in the near future. This post was more about me thinking out loud, so I’ll have to refine the ideas once I speak to the Realtors, short sale experts, and maybe a few mortgage brokers.

Thanks for the comment, and sorry for the long answer.

Mar 12, 2010
5:49 pm

If you know good contractors in the area who are a good deal, the fixer uppers can be a good deal. Even if you are doing things on your own, you are likely to run into some things that you just can’t do.

The ideal house would be something that is priced low because of some type of damage/wear that you like fixing (or that you know a way to fix for less than the average person). For example, if you like doing sheetrock work and painting, a house with a bunch of banged up walls is probably a good deal. If you hate sheetrock, it isn’t worth it.

I think the trick is matching a house that is a good deal with your particular skill set.

Mar 14, 2010
3:00 pm
#6 Matt SF :

I think the trick is matching a house that is a good deal with your particular skill set.

Excellent point. The more I dig through the “fixer upper” listings, the more I’m cosmetic fixes versus the clean & gut jobs.

The furthest I’m willing to go is sheetrock. Once I get into the electrical and plumbing, I’m out of my element.

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