Risks And Rewards: Turnkey Investing VS House Flipping

Flipping houses and buying Turnkey investment properties are the two most talked about strategies in all of Real Estate Investing.  And while they can both be excellent strategies, they are not only different in execution, but they are vastly different in terms of risk.  

Let’s look at both strategies separately…

House Flipping

The goal when flipping a house, is to make a nice one-time profit, all at once.  With proper execution, this can be a very lucrative venture.

In order to execute correctly, you’ll need to do 3 things properly…

  1. Acquire a property for the right price
  2. Rehab the property correctly
  3. Market the property correctly to get the right buyer

Keep in mind, that you’ll still be reliant on outside parties for all 3 of these efforts.  

When acquiring the property, what strategy will you use to find it?  Will you buy from an agent, or a wholesaler?  Will you do your own marketing to distressed sellers?  How will you know if you’re getting a good deal?

How will you know what condition the property is in?  As an example, when buying wholesale properties, there is rarely an opportunity to have a property inspected prior to purchase.  Most properties are offered “as is.”  And even if you did have that opportunity, it’s likely that the utilities are not on, thereby rendering a home inspection insufficient.

When rehabbing the property, will you do the work yourself, or will you work with a contractor?  Do you have a contractor you can trust to stay on budget, and do the work without cutting corners?  Do you have a way to get discounted materials, rather than paying the typical markup at your local Lowe’s or Home Depot?

How will you determine the level or rehab based on the market that you’re in?  WIll you fix it up to the nines, or will you just do a basic touch up?  Will you go through and upgrade all systems… electrical, plumbing, roof, foundation, etc?  The condition and finish out of the property will determine the marketability of the property.

How will you sell the property?  Will you use an agent?  Will it get listed on the MLS?  How will it get advertised?  

There are a lot of variables to consider when flipping a property.  And, you are taking all of the risk up front.  If you are using a hard money lender to acquire and fix up the property, you are taking on even more risk.  So, while flipping can be lucrative, it has an extremely high risk factor.  If anything goes wrong in the process…even a surprise repair…your profits could disappear, or worse…you could end up losing money.

Turnkey Property Investing

The goal when buying a Turnkey property, is to find a property that makes the most sense for a long term hold.  That means that you are buying based on potential performance.  

Remember, Turnkey by definition, means that you are trusting an outside company to do all the heavy lifting for you.  In other words, they are acquiring the property, rehabbing the property, and integrating with strong property management to get and keep your property performing.  

Keep in mind, the Turnkey company is doing all of this prior to your purchase.

So, in order for you to execute correctly, you need to find a turnkey company who has excellent systems in place.  In your analysis of turnkey companies, it’s very important to look more at systems than actual returns.  

Wait…what?  

Although this seems counter-intuitive, it’s important to separate out marketing from reality. All Turnkey companies have various methods for stating ROI, vacancy rates, CapEx, etc.  And while these are important, they are merely projections.  They are not reality.  There are only two major items that will ensure that a property performs for the long run…

  1. The Property Condition (Quality of Rehab)
  2. The Property Management team (Quality of ongoing processes and oversight)

Overall, it’s more important to spend time vetting the Turnkey company you are buying from than vetting properties.  If the Turnkey company’s systems are tight, you will have a solidly performing property for many years to come.

Assuming you execute correctly, you will have the lowest risk situation of any real estate investing strategy.  Remember, the turnkey company acquired and rehabbed the property on their dime… they took all the risk up front.  And with good systems in place, they are delivering a product that has the highest chance for performance.  In most cases, you are able to walk into a cash-flowing property on the first day of ownership!

Conclusion

There’s an old adage in the investing world that states, “The greater the risk, the greater the reward.”  And while that is generally true, it is important for you as a Real Estate Investor to assess your own skill levels, and the resources that you have available.  Determine where you stand on that spectrum, and what your end goals are.  Once you’ve done a realistic self-assessment, you’re well on your way.

Good luck!

 

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