Should You Invest in Turnkey Properties or Fixer-Uppers?

The ability to quickly analyze a property and determine if it will be a good investment takes practice and depends on factors like your financial position and real estate investing goals. Personally, I’m a long-term real estate investor. I look for slow and steady appreciation. Others might be motivated to flip properties and focus on a more short-term approach.

Factors like price and location will always be important when considering a new investment, but the property’s condition may or may not inhibit your decision. Some investors search for properties ready for immediate tenancy, also considered turnkey, while others prefer to repair, renovate and resell for a profit with the BRRRR method. Here is some advice from a seasoned real estate investor on choosing between a turnkey or fixer-upper investment property.

The Benefits of Turnkey Investing

“Turnkey” means different things to different investors, but generally, the term refers to a property in move-in-ready condition. The property is often fully renovated and may even already be occupied by tenants (or will be ready for occupancy without any work required.) Some of the benefits of investing in a turnkey property include:

• Higher potential for quick cash flow and faster return on investment because there are no upfront costs (or headaches) to renovate the property.
• Allows for portfolio diversification by property type and location, which can be extremely appealing if your local area is in a period of downturn.
• Easy to hand off to a property management company for a completely hands-off, passive investment. 
• Almost always more affordable to invest in a turnkey property than to build from scratch. 

The Challenges of Turnkey Investing

Turnkey investing might sound too good to be true, but it doesn’t come without its own set of pitfalls. 

• Turnkey properties are often a larger upfront investment because they are in premium condition and priced accordingly. 
• Turnkey rental properties often come with tenants included. Depending on the screening practices of the previous landlord, you may or may not end up with high-quality tenants who maintain the property and pay rent on time. 
• Many turnkey properties wind up being long-distance investments, which means you may or may not have the opportunity to do your due diligence and inspect the property for structural, electrical, or other issues. 
• Because the property is already built and designed, you won’t have much control over factors like layout, style, and appearance without incurring additional costs. 

The Benefits of a Fixer-Upper

While the advantages of a rent-ready property are that you will start collecting income right away, repairing and rehabbing a property can be a long-term strategy to improve your return on investment. If you can purchase a property for a cheaper price and increase the value so that you can ask for higher rent, you can see where your investment will pay off down the road. 

• Depending on your market, there may be less competition for fixer-upper properties as some investors may not have the skills, connections, and knowledge to complete necessary renovations. 
• While most investment properties take an average of 10 years to appreciate, fixer-upper properties appreciate as you renovate, repair, and update the home. The more you put in, the more return on investment potential (especially if you got a great deal on the purchase price).

The Challenges of a Fixer-Upper

The biggest pitfall of a fixer-upper property is the time and cost associated with actually “fixing it up.” Who is going to do the work? Investing in fixer-upper properties is a common real estate investment strategy, but there are often greater risks involved.

• If you aren’t qualified to renovate a property yourself, you’ll need to build and hire a team of professionals who can complete all of the work required to get the property rent-ready. This can be a complicated process if you don’t already have a reliable team that you’ve worked with before.
• Always be prepared for the fact that repairs will likely take longer and cost more than you expected. Every day your rental property goes without a tenant is a day that you’re losing money, and vacancies can quickly destroy your profit margins.
• Even if you got a great deal, the future is always uncertain. You can’t be sure what the market will look like when you’re ready to find a tenant or an end-buyer when the property is complete. Don’t get stuck paying the mortgage on a property that isn’t making any rental income in return.

Final Thoughts

There are many different investment strategies in the real estate market, and choosing the right path will come down to your financial position and long-term goals. I typically recommend those new to real estate investing steer toward finding properties that will require minimal repairs in order to be considered rent-ready. If you are experienced in large-scale home improvement projects, have a team of professionals in place, or have flipped properties in the past, buying a fixer-upper can be a great investment. 

All investments come with risks, so take the time and do the research to determine if a property will be a good investment for your unique situation. Be cautious when it comes to cost and time spent on repairs and maintenance. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.