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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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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