 I have been toying with this question in my head lately. Is it better to buy a greater number of cheaper rentals? Or is it better to own a fewer number of high quality rentals. Basically there are a few ways to dissect this it could be either buying in B class areas vs C Class areas or just buying higher yielding more expensive rentals in the same area. I'll start with the B Class vs C Class. More C Class Properties Vs Fewer B Class PropertiesSo what are the pros of each? Less B Class Properties Pros:
The NumbersI'm going to be talking about two properties these are based off real properties that I analyzed in the market. - Property B - is in a nice B class area, with a booming local economy, high rents, stable tenant base, and low crime. 3/1 row home 1200 sqft. -Property C - is in a seedier area, there is less commercial activity, the businesses are not kept up as well, the prices are cheaper. 3/1 row home 1200sqft. Luckily in Philly it's really easy to compare like homes because most of them are 3/1 row homes. I will be writing this as if we are buying it as an investment property so 15% and 10k for closing costs which is pretty close for philly. Property B - 3/1 row home 1200 sqft Price - 200k Down payment of 15% - 30k Closing Costs - 10k Renovations 12k Rent 1800/mo Mortgage Payment - 1061 Cash Flow - 739 Total out of pocket + reno cost = 52k Property C - 3/1 row home 1200 sqft Price - 130k Down Payment of 15% - 19,500 Closing Costs - 10k Renovations - Already Fixed Up Rent - 1300/mo Mortgage Payment - 694 Cash Flow - 606 So the numbers work out to be pretty close for cashflow. So it is really a quality of area and risk choice. Property C was actually a property I tried buying myself but was short on reserves and didn't end up getting it. When riots erupted this summer that area was in the heart of them so the risk is not negligible. Also in B class areas you get more appreciation which can help you when you get HELOC's or Refi and can balance out the high acquisition costs. Buying 5 high rent properties vs 10 lower rent properties in the same area!So in this scenario we will be analyzing whether it's better to own a fewer number of more expensive higher rent properties or a higher number of lower rent properties in the same area.
Property 1: 4 bed 1 bath- 1800 sqft home Price - 237k Down Payment of 15% - 35,550 Renovations -3K Closing Costs - 10k Rent - 2200/mo Mortgage Payment - 1294 Cash Flow - 906 Out of Pocket expenses: 48,500 If we owned 5 of these: Out of pocket expenses: 242,500 Cashflow: $4530 Property 2: 3 Bed/1 bath row home Price - 200k Down payment of 15% - 30k Closing Costs - 10k Renovations 12k Rent 1800/mo Mortgage Payment - 1061 Cash Flow - 739 Out Of Pocket Expenses 52,000 If we owned 10 of these: Out of Pocket Expenses: 520,000 Cashflow: $7390 I'm actually really surprised that when I wrote the numbers out that property two was more expensive that property 1. So in this case I think it's a clear winner that property 1 is the winner. This is not always the case though but you have to weigh your options. I think buying the fewer bigger properties that can yield higher rents and eventually have fewer maintenance issues because you own fewer properties is the way to go.
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 Whenever I read the quote "Don't Wait to Buy Real Estate, Buy Real Estate and Wait.." I always thought it just meant that your home appreciates over time. But what else does that quote mean? What other benefits do you unlock from owning real estate overtime? OptionsWhy I love buy and hold real estate is because it gives you OPTIONS and I try to emphasize that whenever I can. If you do not own any assets and you just have cash in the bank then your option is to purchase something (if you have a ton of cash then you have options).. But if you are like most of us we don't have millions in the bank. Real estate unlocks cash for us. Through OWNING real estate you may forget that your home is appreciating (hopefully barring some event). You may wake up one day and check what prices are going for on your street to find your home has appreciated 70,000 since you bought it (this can happen in a few years depending on where you live). That 70k in equity is now yours to play with. You could do a cash out refinance on your home and pull that cash out up to 80% LTV (Loan to Value). Meaning: Joe bought his property at 200k. It's now worth 270k. He owes 189k 270k x 80% = 216,000 - 189k = 27,000 that Joe can pull out. Joe's new loan would be higher than the original, change his payment, and mortgage closing costs would be charged. This money can be used to buy a new investment property which will create more OPTIONS for Joe. Or a HELOC can be used ... Home Equity Line of Credit. A Heloc lets you use that 27k as a line of credit to borrow against. You can use all 27k and will pay the back bank at generally higher interest rate than a mortgage. This is something that can be used over and over again as long as you keep paying it back. Lowering Your paymentIf you have owned real estate since the height of the high interest rates in the 80's than this applies. Interest rates have generally been falling year over year for the last 30 years. There have been some spikes in some years but the trend has been downward and it benefits people who own real estate! (and can hurt traditional investors). When interest rates lower money is cheaper to borrow. Traditional IRA and Mutual fund investors get less of a return on their investment. Real estate investors can refinance their loan and get a lower payment on their property. 2 things I have done or am doing: One property we refinanced from a 4.75 to a 3.75 heightened the payment around 150 a month but knocked 10 years off of the mortgage. The overall savings were around 170k over the 30 years of the mortgage. Another property I just got approved for a new loan that will allow me to take advantage of the low interest rates. I had a 3.75% and will be dropping to a 2.625% and upping the mortgage from a 27 year back to 30 year. This will drop my payment $198 / mo upping my cashflow $198/mo or $2376/yr. Upping my money I can reinvest in that property!!! Getting Rid of PMIPMI is Private Mortgage Insurance that you pay when you put down less than a 20% down payment on a property. We generally do 5% down payments and add value (fix up) the property which usually brings our equity in the property up to at least 20%. We also live in Philadelphia which has been appreciating really well adding the equity we have in the home. So the one homes we pay $63/mo in PMI on the loan since we didn't have much equity in the property when we refinanced. Since then we have redone the kitchen and bathroom and comps in the area have gone up considerably. Now I can have the property reappraised which will cost $475. The property will most likely (knock on wood) appraise to show we have 20% equity in the property now and we can drop the $63/mo or $756/yr PMI. Over the 18 years left on the loan that's $13,608 in savings! Equity and AppreciationMost of the benefits I mentioned before were side affects of improving the property condition and APPRECIATION! I do not buy for appreciation but it is a great side effect of owning real estate. When I bought a few years back I was told the market was high, but I didn't care because I plan on holding these properties forever. To buy the same properties today I would be paying around 60k more. The Philadelphia market over the past few years along with most of the nation has enjoyed a generous appreciation. This appreciation increases the value of your property and thus how much equity you have in the property. If you bought a property for: 200k and put down 5% your loan is = 190k Your market value was 200k when you bought it and your loan is for 190,000. If that property is worth 270,000 today then you have: 270,000 - 190,000 = 80k in equity. The benefits of buy and hold real estate keep on giving the longer you own it. We have only owned ours for a short period of time however I keep finding new benefits every year. Of course I find new maintenance problems every year too but to me the pros outweigh the cons. Everyones goals are different but for me buy and hold real estate provides the best returns!  What if you did one thing well?
With life today, opportunities seems to pop up everyday. Especially on social media. Stocks, bitcoin, drop shipping businesses, real estate, side hustles. It’s hard to focus on one thing because when the market takes a huge dump and I see stocks drop a huge amount in like "this is the time to get in I could make thousands I will just have to do a little research and some money". Or a side business opportunity comes up and I think of diverting my attention there. The people that I know are successful a few things well and are strict about what they do. The CEO of the How Group: Gary Jonas does builds 50 unit buildings mostly in Philadelphia. He has plenty of opportunities brought to him all the time for other projects but the how group is an expert in that. Which is why they have 750+ units today and are growing! One multifamily investors I have tried to find deals for had a strict criteria and whenever I brought something outside the criteria would just say it’s not in my criteria I’m not going to entertain it. He has 70+ units and manages them well! To the outside it seems short sighted. Why don’t you try new things, are you afraid to expand leave your comfort zone? But to the person on the inside they are clear on their goals and their vision to get there. For me the goal is a clear number of passive income and the vehicle is real estate. However real estate is a large field: commercial, Airbnb, wholesaling, flipping, etc.... should I do the construction myself it saves me money but it dilutes my focus and weakens my visions, drive, and opportunities elsewhere. I decided to focus on long term buy and hold rentals this could be single family or multi-family investments but the premise is the same. I am not doing flipping, wholesaling, etc... I am buy properties I can see myself owning for the rest of my life and pursuing the BRRR strategy next to help add these assets. Buying properties and the BRRR strategy are all driving towards my goal of my monthly passive income number. Not to say the other avenues are not great but they are not for what I am trying to achieve. Losing Focus: My fiancé and I recently renovated my kitchen and bathroom and thought We would do that on a few more houses. We quickly realized while the outcome of the project is awesome It cost us way too much in time. We could have paid a tiler 500$ what took us a week to do. What if we had spent that time networking with people in the multifamily industry about how to scale? I would say that’s worth more than $500. It’s easy to feel the need to do everything but you have to ask yourself the question do I want to be a great tiler or do I want to be great at real estate? So we will be hiring out tile from now on! I will still do little things like painting and landscaping because I know what I'm doing. But the hard stuff that takes a ton of research I am hiring out. Block out the need to do everything DEY Mentality - Do Everything Yourself and do one thing well! Getting Focused In addition to this I use the Bigger Pockets 90 day Intention Journal to help me stay clear on my goals. This has been a game changer for me! As someone who is scattered and has 100 things going on a day using this is key. You write down your three big goals for the quarter everyday, what you are thankful for, and your schedule. I highly recommend using a planner everyday. Another great resource is the book the One Thing by Jay Papasan. This book puts into perspective what is the one thing we need to do each day to get us closer to our goal? The Breakdown: Have a clear goal for me : Have X amount of passive income monthly. The How: I will use long term buy and hold rentals to get there. What are my next steps: I need to network with individuals who have accomplished what I want and ask how I can reach that goal. What is the fastest path? |
AuthorMatt Tallent is a Realtor with The How Group. His passions include rental property investing and helping others achieve their real estate goals. Archives
October 2020
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Financial Independence
Real Estate Philadelphia Real Estate Investing Financial Freedom Rental Rental Properties Long Term Buy and Hold |
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