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is it better to buy more expensive higher quality rentals, or less expensive rentals?

10/28/2020

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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 Properties

So what are the pros of each?

Less B Class Properties Pros: 
  • Better area = less risk (higher credit scores, better incomes, less crime, area is better kept and local economy is more attractive). 
  • When there is an economic down fall A class moves to B class usually while C class jobs are affected more. 
  • Having fewer properties ='s less maintenance issues, fewer roofs, fewer furnaces to upkeep or replace. Less work and money for owner. 
  • More desirable area to live = easier to fill vacancy, higher rents. 
More C Class Properties:
  • Cheaper Acquisition price allows you to purchase more properties quicker
  • More properties can reduce risk if one is taken out by damage from a storm or fire you have a higher number of properties to cushion that blow. 
  • Vacancy is felt less when you have a higher number of properties. 

The Numbers

I'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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    Matt Tallent is a Realtor with The How Group. His passions include rental property investing and helping others achieve their real estate goals.

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Matt Tallent is a real estate licensee affiliated with Compass RE. Compass RE is a licensed real estate broker and abides by equal housing opportunity laws. All material presented herein is intended for informational purposes only. Information is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to accuracy of any description. All measurements and square footages are approximate. This is not intended to solicit property already listed. Nothing herein shall be construed as legal, accounting or other professional advice outside the realm of real estate brokerage.

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