My article about Affordable Single Family Home Rentals, “A Terrible, Horrible, Very Bad Idea” generated many questions and what-ifs.  In particular, people were curious about turnkey services that seem to eliminate the hassles of the asset class.  To answer that question, I wrote this article, which as you’ll notice, changed the words “Very Bad Idea” to “Simply Bad Idea”.  Yes, it’s better – but still unlikely to be worth it.  Below I’ll review why it’s only “Bad” and present some alternatives worth considering.

To summarize the negatives of Affordable Single Family Home investing again:

  • Your hassle per dollar invested is significant. An investment of $150,000 of equity, on which you might earn $15,000, might have you dealing with 5-10 difficult individuals all the time…because
  • Affordable often means bad credit = tenants who will make you spend time, energy, and money trying to get paid properly. They can also damage your property far beyond whatever you get in rent.
  • Affordable often means investing areas far from where you live. You lose any advantage you have from local knowledge and are required to rely on someone else to manage the situation.
  • SFH rentals are difficult to finance.
  • Scale becomes a problem very quickly since the administration load per dollar is very high.

Turnkey: There are two different types , Direct and Brokerage.

Direct turnkey providers typically focus on a very specific local market where they buy properties, fix them, and flip them to investors with a tenant.  Examples include https://trueturnkey.com/, and https://ohiocashflow.com/.  I in fact bought several properties from True Turnkey in 2018.  The benefits of going with a direct dealer:

  • They have deep knowledge of local markets and know the kinds of deals that “work”.  Note that this is the same advantage I discussed in my article on Private Real Estate Deals.
  • They typically have very good property management in place. The kind that knows how to collect rents from people trying not to pay them.
  • They can do work efficiently since they have already identified reliable crews.

The primary disadvantage is that they are taking a profit for doing this – although in my experience, they absolutely cover this cost by reducing the hassle of dealing with the improvement of a beat-up home in a town far from where you live.Unfortunately, direct turnkey providers tend not to solve the problem of financing.If you insist, my main lesson is: GET YOUR OWN INSPECTION.  When you only spend $50,000 on a home, a $5,000 mold problem can destroy your returns.

Turnkey Brokerages (Like Roofstock and HomeUnion) Don’t Have Enough Local Knowledge

During my SFH experiment, I also bought and sold many properties through Roofstock.I commend them on their efforts to make buying and selling rental homes seamless.  In particular,

  • They have the most thorough inspections I’ve encountered
  • They have rigid rules regarding what they will put on their site to protect investors
  • They make it easier to finance than other turnkey options
  • They provide great research on neighborhood quality

However, by making their process so systematic, they have lost the benefit of being local:  specifically, great property managers and local contractors.  In other words, you might get a home that looks good on paper but get stuck with a bad tenant that costs you endless hassle and money.In my personal experience, I got higher rent returns from the direct dealers than from Roofstock.

Some alternatives

Higher end SFH rentals, local to you

  1. Your local knowledge and contacts can give you an advantage
  2. Because they are higher end, tenant hassles are smaller and you have far fewer tenants per dollar
  3. No travel or reliance on others
  4. The main disadvantage is that it concentrates your risk in one region
  5. The rent yield tends to be lower

Short term vacation rentals

  1. If there is a vacation spot near you, there are often profitable opportunities to do short term rentals. The bottom line is: get as many beds as possible for as little money as possible in a location people want to stay in
  2. Bonus points if there is not a hotel nearby
  3. The main disadvantage is that short term rental managers charge high fees so it can be difficult if you are remote

Roofstock ONE – experimental product from Roofstock

  1. Gets you access to SFH rental market but they do all the management and work. In other words, it becomes truly passive
  2. Not clear that the returns are competitive
  3. Not clear how liquid the investments are

Flipping SFH (buying, fixing, and reselling)

  1. Proven model with available financing
  2. Can be done locally
  3. Especially appropriate for those with a good sense of design, or who can do their own improvements
  4. No tenants!
  5. The primary disadvantage is that it can be hard to find good deals
  6. In some cases, you can use various tax credits to protect some of your gains

At this point, I don’t really do much residential investing but the above might be of interest if that’s still how you want to start.Learn more about my investing journey and get more insights like this by signing up for my newsletter.