Is it better to own 3 expensive units or 10 cheaper ones?

[andysandp]

Is it better to own ten $100,000 units, or three $333,333 units?  Let's assume all these units are the same size, they just have different locations.  Let's assume the % of gross rent is the same relative to the purchase price, but I think the Expenses will be different.

With 10 units, you would have to prepare future funds to replace 10 kitchens and 10 baths.  A kitchen right now costs around $20,000 and a bathroom $10,000.  That means you have to prepare a fund of $300,000 for 10 future kitchen and baths.  Keep in mind with inflation you probably need $600,000 to replace 10 kitchen and baths if you plan to replace them 20 years later. 

Wth 3 units, you only need to prepare  3 kitchens and 3 baths.  That would cost $90,000 now, or perhaps $180,000 in 20 years.

I think 3 units would also have lower Insurance costs, repair costs, less management hassles, etc.

So if you do have 10 units, isn't it better to exchange them for 3 units (assuming the 3 units are equal value to 10 units)?

Also I'm curious, do you actually prepare funds for new kitchens and baths?  For early retirement, you will be holding these units for 30-60 years.

Any thoughts?

[daverobev]

As asked, you've answered it yourself.

In real life, I'd take 10 over 3. One or two will always be vacant/broken/whatever. But that should be a smoother graph over time. And, if one blows up, no big deal. If one of your three blows up, that's huge.

Three is better than one; ten are better than three. *In theory* your tax and maintenance would be equivalent between them, because a cheaper house rents for more 'per dollar invested' let's say, for exactly that reason - maintenance is calculated per sq ft as well as by luxury level. So yeah, 10 kitchens will cost more than 3, but over time that should all be recouped from the tenants.

[andysandp]

When you say 1 unit blowing up, do you mean 1 unit sales price dropping?

I thought historically rental prices don't drop even during a crash.  So even if one unit "blows up" out of the three, it doesn't affect the rental prices for the three.

Are you sure cheaper apartments get much higher rent percentage wise?  Since the size of all the units are the same, tenants will pay rent based simply on location and condition, not on wether they have to pay more to replace the landlord's kitchen and bathrooms in the future.

I mean a $30,000 kitchen and bathroom is almost 1/3 of the cost of a $100,000 Apartment.  While $30,000 is only 9 percent of a $333,333 apartment.  You need a MUCH higher rent to get the funds to replace the 10 kitchen and bathrooms of the $100,000 apt. compared to replacing just 3 bathrooms and kitchens for the $333,333 apt.

Am I calculating wrong?

Thanks for the thoughts!

[daverobev]

I meant uninsured losses like sink holes, tenants that won't pay and you have to take to court, etc. Big things that drastically reduce the actual value of the investment.

I just sold my last rental. Say $40k, $600 rent. Pretty good numbers, right? A kitchen would be a lot less than in a $300k house. Or even a $100k one.

You are unlikely to let a $300k house for $4500 a month.

I'm not saying the one I sold was 'better'; after expenses I'm saying at a guess, the stuff that is investable - ie not the stuff silly people buy in Toronto that has negative cash flow - will probably work out about the same; the upside of cheaper is spreading out risk and higher percentages, but downside being higher administration and insurance and maintenance costs.

The fewer properties or 'doors' for apartment buildings, the smoother your income is likely to be. There will always be issues, but by virtue of being 'always' they are also more manageable.

[andysandp]

I see, Ok I understand your point for tenant/court issues.

Lets take your $40,000 rental property as an example.  You get $600 a month after all expenses? or before expenses?




 

[daverobev]

I see, Ok I understand your point for tenant/court issues.

Lets take your $40,000 rental property as an example.  You get $600 a month after all expenses? or before expenses?

Rented for $600, less 10% property management, less insurance, less, less, less... Still do 'ok'. With 10 of them, or 20, it'd be pretty smooth I think. Of course you wouldn't want them all in one city, and that's part of the problem - spreading risk. It's tricky.

[Landslave]

Yes, you have 10 vs 3 of everything.  But, in the real world, doors = dollars.  Very rarely would 3 doors yield what 10 doors of the same value will yield. 

In the real world, return is always skewed to the lower-end properties, as is risk increased to the lower end properties.  But expectation of fit and finish is lower, too, so the rehab would be cheaper for rent earned in a cheaper home (barring tenants playing rugby in the living room). 

In praxis it would likely be about 15% more ROI to have 10 vs 3 doors, and in some markets it could be a lot more than 15%. 

It would be hard to meet costs leasing a $1M house in Los Angeles, but it would be a bonanza to lease 20 $50K houses in Columbus or Sauk Village, or Kansas City.  Or to lease 40 $25K double wide mobile homes, each on their own land, in Texas or Florida.

  Landslave.

[arebelspy]

Is it better to own ten $100,000 units, or three $333,333 units?  Let's assume all these units are the same size, they just have different locations.  Let's assume the % of gross rent is the same relative to the purchase price, but I think the Expenses will be different.

Why would you assume the rent is the same, but the expenses are different?

The rent and the expenses will be different.

So you have to do real analysis.

I think in the real world, the 10 units will pencil out as more profitable, though with more hassle/work.  Whether or not that's worth it will depend on both you and the numbers.

[Metric Mouse]

So if you do have 10 units, isn't it better to exchange them for 3 units (assuming the 3 units are equal value to 10 units)?

Also I'm curious, do you actually prepare funds for new kitchens and baths?  For early retirement, you will be holding these units for 30-60 years.

Any thoughts?

If the numbers work out for this, I would say yes, 3 units cash flowing the same as ten units is probably better.