Author Topic: Big rentals or Small rentals  (Read 5294 times)

mooreprop

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Big rentals or Small rentals
« on: July 26, 2014, 05:49:38 AM »
I am wondering which makes more sense, buying a few rentals that have high values or many rentals with lower values.  If I have the choice of buying many $50,000 rentals that cashflow in my small midwestern town or buying a few $300,000-500,000 homes in more expensive areas, then which would make more financial sense?

 I am currently pursuing the former strategy, but I intrigued by the amount of time it would free up if I just had one or two rentals rather than the 30+ that I currently self-manage.  It seems like it would be less expensive over time to replace maybe 3 roofs every 20 years, rather than 30 roofs every 20 years also.  However, the downside is that I would be in a more risky situation with all of my eggs in one basket if something goes wrong with one of three houses.  It is not as big a deal when something goes wrong with one of thirty houses.

Also, it appears from the posts in this forum that it is more difficult to find houses that cashflow well enough in the markets where $300,000-500,000 houses would be viable rentals and not "luxury" homes.  Does anyone have experience with both cheap midwestern markets and more expensive locations?  If so, what is your advice?

waltworks

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Re: Big rentals or Small rentals
« Reply #1 on: July 26, 2014, 09:25:53 AM »
You won't find cashflow properties at the higher price ranges in general, at least in the US.

-W

escolegrove

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Re: Big rentals or Small rentals
« Reply #2 on: July 26, 2014, 10:31:26 AM »
What's your objective? How much cash-flow are you looking for? We buy the more expensive houses that are aimed at professionals. Our cheapest house was in Charleston at 90k and our most expensive in Virginia Beach at $235k. Some of our houses were personal properties converted to rentals when we left the area. Even though the price is different they are all aimed at the same "demographic".

The problem with your idea of $300-500k houses is they won't cash flow. Often times those houses only make $2200-$3000 a month. Plus depending on the area they can be very difficult to rent if they are too expensive. I personally like our sweat spot. The returns are "okay" but our expenses are low. The house appreciate and the rent prices increase.

mooreprop

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Re: Big rentals or Small rentals
« Reply #3 on: July 27, 2014, 07:31:38 AM »
Looking to replace my $50,000 salary with rental income plus continue to grow my net worth after quitting my job.  On track to do that soon (2 years),  and am considering moving to someplace with less severe winters once I am not tied to the area with my job.  My husband can also build houses if it makes financial sense, but it does not in our current location.  Why spend $100,000 to build a 1000 square foot house when one can be purchased and rehabbed for less than $50,000?  However, the equation changes in an area where a 1000 square foot house sells for more than $100,000. 

I guess my question is that if all other factors are equal (such as cashflow), then would you prefer a few high price rentals with the inherent risk of all your eggs in one basket or many low cost rentals with the higher time requirements?  Also, I guess a second question would be where can I find information about which markets are expected to appreciate most in the next 10-20 years?

escolegrove

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Re: Big rentals or Small rentals
« Reply #4 on: July 27, 2014, 11:00:19 AM »
Our houses costs between 90k to 250k receiving $1250 to $1775 in rent. The thing you have to watch with more "expensive" houses is the number of conventional mortgages one can have. It is 10 mortgages per name. The other issue is leveraging the house needs an income. We have been most successful because my husband has a steady job.

We are starting to buy more expensive houses. Yes they don't produce as much "returns" but the potential is more cash flow. We are aiming at $8,333 a month. So buy buying houses that can produce more cash flow per house we are getting around the 10 house rule.

Are you able to find work in other areas? you might want to work in the new location long enough to move your houses to that area with your income. OR you should start doing it while you have you income.

innkeeper77

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Re: Big rentals or Small rentals
« Reply #5 on: July 27, 2014, 11:05:09 AM »
You mention that one reason more expensive houses appeal to you is that it would simplify your management, and be easier to take care of. However, often these more expensive houses have lower returns. Have you considered trying to find a good property management company, and shifting some of your current rentals over to them? It would lower your returns, but it might be a better deal than going with lower return expensive properties. Plus, you can start them out on one of your current rentals and expand their reach from there. Eventually such a setup could be nearly passive, leaving time for finding additional deals, spending time with family, or what have you.

Johnny Aloha

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Re: Big rentals or Small rentals
« Reply #6 on: July 28, 2014, 01:30:29 PM »
You won't find cashflow properties at the higher price ranges in general, at least in the US.

-W

Don't tell that to the people who are finding cashflow in places like Hawaii, SF, San Diego, Seattle, Chicago, etc!

waltworks

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Re: Big rentals or Small rentals
« Reply #7 on: July 28, 2014, 02:15:43 PM »
How about some examples? I'd love to hear about opportunities anywhere.

-W

You won't find cashflow properties at the higher price ranges in general, at least in the US.

-W

Don't tell that to the people who are finding cashflow in places like Hawaii, SF, San Diego, Seattle, Chicago, etc!

Johnny Aloha

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Re: Big rentals or Small rentals
« Reply #8 on: July 29, 2014, 11:01:29 AM »
How about some examples? I'd love to hear about opportunities anywhere.

-W

You won't find cashflow properties at the higher price ranges in general, at least in the US.

-W




Don't tell that to the people who are finding cashflow in places like Hawaii, SF, San Diego, Seattle, Chicago, etc!

Sure ... but keep in mind that the typical "rules" don't really fit these markets for a couple reasons: vacancy is 0-2%, limited mechanicals (typically no A/C or heat because you don't need it), high entry price, etc.   

Hawaii:
Purchase $715k (2012), rehab $4k, gross rents $5k per month and increase 6-10% per year (will be $5600/month by Jan 1st), current value $900k
Purchase $260k (2012), rehab $7k, gross rents $3300 per month, current value $350k
Purchase $295k (2013), rehab $12k, gross rents $3700 per month, current value $420k

SF or Cali: the most vocal proponents on BP are Amit M., Minh H, J Martin, Aaron Mazzrillo.  Between them that probably have 30-50 buy and hold properties that cash flow.

Chicago: check out BP podcast 78 with Brie, plenty of opportunity on higher priced Chicago neighborhoods.

I understand that some investors would not do these deals because the cash on cash returns (normally in the 4-10% range with leverage) pale in comparison to other deals you can find in other areas of the country.  But when you look at risk adjusted total returns, these provide a good balance to a pure cash flow portfolio, expecially when considering long term cheap debt, low property taxes compared to value, and rent/price growth. 

Not all of these deals are mine, and are just a couple examples from other buy and hold investors I know who invest locally.  We've discussed 1031 exchange to capture some gains, but at the end of the day it's hard to find a better risk adjusted total return at this point. 

Lots of BP podcasts have said it - you can find deals in any market.  There are several other BP podcasts about investing within a short drive of an expensive market, Lisa Phillips is the first to come to mind.

Blindsquirrel

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Re: Big rentals or Small rentals
« Reply #9 on: July 29, 2014, 08:00:18 PM »
 Cash on cash yield is found at the low end, not the high end of the RE world. Would rather have 20,  25K-50 houses at 700-1100 a month than one 500k prop that kicks off 10K-15K a mo. Just my opinion.

GrayGhost

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Re: Big rentals or Small rentals
« Reply #10 on: July 29, 2014, 09:29:25 PM »
Hawaii:
Purchase $715k (2012), rehab $4k, gross rents $5k per month and increase 6-10% per year (will be $5600/month by Jan 1st), current value $900k
Purchase $260k (2012), rehab $7k, gross rents $3300 per month, current value $350k
Purchase $295k (2013), rehab $12k, gross rents $3700 per month, current value $420k

I know the 1% rule is just a rule of thumb... but I really cannot understand why one would buy lower-yield investments when higher yield opportunities out there.

Yes, I understand that single family rentals tend to be less trouble than multifams, especially if the tenant is responsible for utilities, but at some point, you bend the 1% rule to the breaking point.

waltworks

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Re: Big rentals or Small rentals
« Reply #11 on: July 29, 2014, 10:23:48 PM »
I don't know, those sound pretty decent to me assuming they are actually year-lease sort of deals. If they are vacation rentals (the only way I can really imagine getting those kind of rents - but who knows) then no way, Jose.

In my experience folks who can afford $3k+ a month in rent are generally just going to buy a house unless they are on vacation or living somewhere short term. So I don't even look at houses above about $200k in general for rentals.

Then again, with the gains in the RE market in the last few years, it looks like I'll be selling my 2 remaining rentals soon. There's nothing left around here (SLC) that can touch the 1% rule with a 10 foot pole.

-W

Hawaii:
Purchase $715k (2012), rehab $4k, gross rents $5k per month and increase 6-10% per year (will be $5600/month by Jan 1st), current value $900k
Purchase $260k (2012), rehab $7k, gross rents $3300 per month, current value $350k
Purchase $295k (2013), rehab $12k, gross rents $3700 per month, current value $420k

I know the 1% rule is just a rule of thumb... but I really cannot understand why one would buy lower-yield investments when higher yield opportunities out there.

Yes, I understand that single family rentals tend to be less trouble than multifams, especially if the tenant is responsible for utilities, but at some point, you bend the 1% rule to the breaking point.

Nords

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Re: Big rentals or Small rentals
« Reply #12 on: July 29, 2014, 11:10:17 PM »
I am wondering which makes more sense, buying a few rentals that have high values or many rentals with lower values.  If I have the choice of buying many $50,000 rentals that cashflow in my small midwestern town or buying a few $300,000-500,000 homes in more expensive areas, then which would make more financial sense?

 I am currently pursuing the former strategy, but I intrigued by the amount of time it would free up if I just had one or two rentals rather than the 30+ that I currently self-manage.  It seems like it would be less expensive over time to replace maybe 3 roofs every 20 years, rather than 30 roofs every 20 years also.  However, the downside is that I would be in a more risky situation with all of my eggs in one basket if something goes wrong with one of three houses.  It is not as big a deal when something goes wrong with one of thirty houses.

Also, it appears from the posts in this forum that it is more difficult to find houses that cashflow well enough in the markets where $300,000-500,000 houses would be viable rentals and not "luxury" homes.  Does anyone have experience with both cheap midwestern markets and more expensive locations?  If so, what is your advice?
This makes as much sense as asking whether you should buy the stocks that have big share prices (like Berkshire Hathaway "A" shares) or the stocks that have little share prices (like the legendary CYNK).

I think you should buy the properties with the best ratios & percentages of return on your investment.  Whether that's one big home (with a conservative assumption on the vacancy rate) or 30 little homes (with perhaps a property-management company balancing some of the labor), the price of the home is only part of the equation.

I think it's difficult to find bargains on a small island whose single-family homes have median prices over $600K and condos over $300K.  (It certainly ties up a lot of capital.)  When you're buying homes with lower prices, the cost of tuition & experience is also lower.

Johnny Aloha

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Re: Big rentals or Small rentals
« Reply #13 on: July 30, 2014, 11:36:56 AM »
If they are vacation rentals (the only way I can really imagine getting those kind of rents - but who knows) then no way, Jose. 

The bottom two are condo vacation rentals, both on another island.  Lots of people take this strategy and the returns are generally pretty great ... until SHTF.  When there is a market downturn and tourism suffers, these investors will be hit hard.  Plus, its a lot of work.  One friends estimates it takes him 200 hours to manage rehab and get his marketing up to speed.  No thanks, not my style.

In my experience folks who can afford $3k+ a month in rent are generally just going to buy a house unless they are on vacation or living somewhere short term. So I don't even look at houses above about $200k in general for rentals.

I agree, and actually this is happening to me right now.  (Great chance to renovate and raise rent!)  But the market is so tight that most can't find a decent house unless they pay cash over asking.  Plus, we have a lot of transient people here that stay for 2-4 years and decide it's too far from family, so they don't commit to a house.


S0VERE1GN

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Re: Big rentals or Small rentals
« Reply #14 on: July 30, 2014, 12:59:30 PM »
based on the few books that arblespy recommends in the sticky on this forum, its more about finding good DEALS then it is about size.

theres a lot more wiggle room with big expensive multi units, because they're usually built for profitability. The issue is the size of the down payment, though, which can ruin your cash on cash return.

with single family homes, or small units, its more important to forge a deal that will keep you in the black every month, with a good margin for error (75% vacancy per year is a good rule of thumb I  believe? but this depends on your area) 

I would read a few of the recommended books on the forum, and then use some of the worksheets to give you a good idea of where to look.

mooreprop

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Re: Big rentals or Small rentals
« Reply #15 on: August 01, 2014, 11:05:21 AM »
Thanks for the recommendation to hire a property manager.  I am entertaining all options for what to do with our rental business after I retire.  I have one high end vacation rental property that rents for $3000 per week, and it is managed by someone else.  It requires very little of my time, so I can see the appeal of having all of the properties managed to free up all of my time:)

arebelspy

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Re: Big rentals or Small rentals
« Reply #16 on: August 26, 2014, 08:10:25 AM »
Some good answers here.  I like Nords joking framing of it (buy a cheap stock or expensive one).

It really comes down to goals. Why are you investing in real estate, and what are you hoping to get out of it?

There's always tradeoffs, and you may get a higher return with more properties, but also more work.  What is a priority to you?
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lakemom

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Re: Big rentals or Small rentals
« Reply #17 on: August 29, 2014, 05:52:13 AM »
Have you thought about cashing in all the SFR and purchasing a (or a couple) apartment complex?  Less maintenance overall, and all in one (or two) location thereby reducing travel time.  A large enough complex and you can hire a manager to be onsite and you'd have all your free time back.