Does price actually matter? 400k vs 100k

Question

My question revolves around purchasing a duplex as rental income and cash flow. Is there a big difference or no difference at all when purchasing a 400k property vs a 100k property? The thought of making a bigger purchase scares me but does it actually matter? If I can purchase a 400k property with conventional 5% down vs a 100k property with 5% down and they both cash flow say $200 a month. Obviously closing cost would be higher on the 400k. Is there any situation on expenses other than that? is there a difference at all? You would still have the same expense if a furnace broke plumbing issue etc correct? Am I missing anything I want to getting into a better class neighborhood but the number 400 seems so much more scary than 100. I appreciate the feedback if I'm thinking about this correctly or totally out of the loop

Kerlous Tadres · Answer

You're asking all the right questions, and the fear of buying a more expensive property is totally normal, especially when $400K sounds a lot scarier than $100K. But when you break it down, there are some key points to consider:

1. Same Repairs, Bigger Stakes?You're right that both $100K and $400K properties can face the same types of maintenance issues (like furnaces, plumbing, etc.). However, in a $400K property—especially in a better class neighborhood—you're often dealing with newer systems or better build quality, which might mean fewer repairs up front (but not always).

2. Cash Flow and Appreciation PotentialIf both properties cash flow $200/month, you'd think they're equal—but appreciation and tenant quality in that better neighborhood might make the $400K a stronger long-term play. Plus, rent increases over time could be more consistent.

3. Financing & LeverageWith 5% down on $400K, yes, you're using more debt—but you're also leveraging into a better asset class. The key is making sure the numbers still work after reserves, maintenance, and vacancy. Don’t forget things like property taxes and insurance may be higher.

4. Risk vs. RewardThere’s a risk in going bigger, but also potential reward. A better area might mean lower turnover, fewer tenant issues, and less wear and tear.

Allan C. · Answer

I'll take the $200/mo year-1 CF on a $5M property any day over a $200/mo CF on $100k property.

I'm simplifying assumptions here, but making a point that most people are being misled when chasing hypothetical yields on $100k properties.

Harrisen Hagens · Answer

Let's play extremes—let's say you have $5M to invest and the option to spend $5M on a property that cash flows $200/month or $100K on a property that cash flows the same.

The first option ties up all your capital for $200/month. The second option leaves you with 98% of your capital still in the bank—and available to invest elsewhere. Maybe you buy 49 more $100K properties that cash flow $200/month.

You need to also consider the nominal return on your money. Is $200/month from a $100K investment better or worse than $200/month from a $400K investment?

This being said (as has already been discussed here) there's more to consider than just cash flow. $400K is a lot to spend on a property that cash flows $200/month—probably. That deal is likely only attractive if the property will appreciate substantially and if the property and tenants are low maintenance.

Greg Parker · Answer

@Alecia Loveless

Yep, I have found that financial advisors tend to give advice that benefits them, not you. Stick with the low coc return and play the long term appreciation game.

The better the neighborhood, the better the appreciation. And, of course you need some cash flow to save up for the AC, roof, capex.

Randall Alan · Answer

@Zach Logan

You are missing everything… hoping I’m not missing the joke?!?

On the presumption you really want to know, your rate of return on your money is vastly different. First let’s start that a $200 a month return on $400,000 investment is a lousy rate of return and will always be 1/4 of the $100,000 property if comparing 1 unit versus the other individually. $2,400 divided by $400,000 is a .6% return per year. Versus $2400 divided by $100,000 is 2.4%, still crappy in my book but way better than .06!

I would also suggest that the 4 units would perform better because rent versus square footage isn’t always a linear relationship. So if your 400k rental was 4x the size of 4 smaller units you could not usually demand 4x the rent for the bigger one… at least that has been our experience.
Then there is the cash flow of 4 - $100,000 units versus the 1 larger $400,000 unit. Even using your number that is $800 versus $200 / month.
There is also the notion of spreading your risk. If you have your big unit malfunction (think squatter or someone not paying their rent) that is 100% of your rent not covered. If you had 1 unit of 4 smaller units not performing you are in a much better situation.
You are also in a much better position as to exit strategies to your properties with 4 smaller units. Sell one keep 3, etc, etc versus only having one unit to work with.
There can be some downsides… increased maintenance and capex with 4 smaller units. But if that is offset by 4x the rent that might be a wash. Those are a few if the differences.

Randy

Zach Logan · Answer

@Randall Alan yes I understand what your saying but as I somewhat inferred, was the 100k property to put it straight forward is in the hood with lower classes tenants no appreciation when the 400k property would be better appreciated and better quality

Theresa Harris · Answer

I think the others have covered most of it.

Location and quality-if the $100K home is in a bad area and in poor condition, avoid it. On paper it may look great, but it will cost you more with lower quality tenants, more in damages and higher turnover and vacancy. This also assumed the $400K place is in an average area, not a super high end part of the city.

Appreciation is also important though harder to gauge. I know when I was looking at places, I got a less expensive place that was more of a student type rental given its location and the other option I was thinking of what maybe 75% more ($130K vs $225K), fast forward almost 10 years and the $225K is now selling at $325K while the $130K at $150K.

Diversifying-if you can get two good homes instead of one fancy home, get two. It balances the risks better.

Zach Logan · Answer

Thank you everyone I really appreciate all the feedback and different views

Stuart Udis · Answer

@Zach Logan I commend you for recognizing the easier absorption of many cap ex items as well as operational expenses associated with owning real estate. Many who fail as investors purchase lower cost real estate and get drawn in by their spreadsheet cash flow without understanding the true costs associated with keeping those properties running. I am not recommending you purchase a $400K quad that yields $200/m in cash flow, but I do recommend you focus on identifying good real estate acquisitions that are in that price range instead of the entry $100K properties.

The one caveat is the 95% financing. I am generally opposed to financing any real estate at 95% LTC although I will admit, the ability to acquire an FHA property (at even higher leverage) in a neighborhood with strong fundamentals that experiences a significant appreciation event is possibly the greatest return an investor can generate. However, with that comes risk and most who are qualifying to purchase FHA properties are not in the position to run the necessary analysis correctly.

On the flip side of that argument, I would rather have a 95% LTC loan on a $400K property in a historically stable neighborhood than a 95% LTC loan on a $100K lower tier neighborhood. One cap ex event and I am already under water with the $100K property. Again 95% leverage yields greater risk in general but to present this point another way, I would sleep better signing my name on a $7M loan collateralized against a $10M multi-family property with great occupancy history and good reserves in a A/B location than a $95K loan on a C/D property because I am more likely to be called upon to cover a deficiency with the $100K property. I realize debt can be scary as a new investor, but understanding the collateral is incredibly important.

Alecia Loveless · Answer

My first deal with a mortgage was scary at about $160K. Now that I'm more than 10 deals in and over $1.5M in debt adding more no longer scares me as long as the deal makes sense.

Your first debt will always be scary no matter whether it's $100K or $400K.

I'm currently averaging about a 3.5% CoC return and my financial advisor thinks I'm stupid because he's more used to seeing 20% CoC.

I think you can do better than a 0.6% return. My advice is to keep looking for a better deal.

Does price actually matter? 400k vs 100k

Does price actually matter? 400k vs 100k

Most Popular Reply

13 Replies