6 Buy & Hold or 3 Buy & Hold

Investor · Austin, TX · Member since 2016 · 19 posts · 14 votes

If the cash flow was the same and out of pocket amount the same, what factors would assist you in determining whether or not to buy 6 rentals or 3 rentals?

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Scott Weaner

Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes

10y

What if we rephrase the question as "If I can work for 3 hours and make the same amount of money as I can working for 6 hours, which should I do?"

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Denice S.
Specialist · Buffalo, N · Member since 2013 · 59 posts · 46 votes
10y
Repair/Maintenance Outlook
Neighborhood and Expected Tenant Quality
Anticipated Vacancy
Proven annual increase in market rents
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Jacob Blackett
Specialist · Columbus, OH · Member since 2012 · 176 posts · 98 votes
10y
Hi Jon, are all of the rentals in the area where you live? Is this a first investment for you in rental properties, so you're trying to determine why not to buy 6? There are a lot of different factors that can weigh in here and I'm happy to provide input- I bought 11 rentals last month alone :) Let me know some more details on this decision! Jake
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Watson Hilaire
Melbourne, FL · Member since 2015 · 99 posts · 42 votes
10y
Well assuming the 6 plex and 3 plex are fully rented, I would go with the 3 plex. If they have the same cash flow that suggest to me the 6 plex is in not in a area as good as the 3plex or I am getting a lower cap rate than what the 3 plex is offering.
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Stephen FrancoPro Member
Scranton, PA · Member since 2016 · 201 posts · 44 votes
10y
6 plex and 3 plex in the same area (grade of area) I go 6 plex (less % loss with an empty or a ruined unit)
Neighborhood quality and quality of units vary this.
more info please
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Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Unless you're talking about cash flow AFTER property manager, the 3plex for sure. Half the management time for the same $$. Even if that wasn't the case, I'd still say 3 unit as they're probably much better quality than the 6 plex.
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Scott Weaner
Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes
10y
What if we rephrase the question as "If I can work for 3 hours and make the same amount of money as I can working for 6 hours, which should I do?"
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Jon Horton
OP
Investor · Austin, TX · Member since 2016 · 19 posts · 14 votes
10y
A little but of further clarification.
These are all SFH. 6 cash flow $200 per month. 3 cash flow $400 per month. Less money down per deal on the 6 than on the 3 but total cash in is the same amount. Interest rates on the loans are the same.
Different property management is in place for the 6 vs the 3 but equal quality although 1 Is 1% cheaper per month and that has been accounted for in the cash flow calculation.
What should I or what would you consider when deciding which route to take?
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Jon Horton
OP
Investor · Austin, TX · Member since 2016 · 19 posts · 14 votes
10y
@Jacob Blackett The 3 rentals are about 3.5 hours away. The 6 are out of state about 10 hours away. And yes, these are my first rentals so I am trying to wrap my head around the pluses and minuses, risks vs rewards, etc.
I truly appreciate your offer to help. 11 in a month? I am seriously considering adding you to my top people to watch list :-)
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Jon Horton
OP
Investor · Austin, TX · Member since 2016 · 19 posts · 14 votes
10y
@Scott Weaner That is one of the things I am pondering. With property management in place, would that affect the decision? I make the presumption that a quality property management company exponentially reduces my hours of overseeing effort required thus freeing me up to find where my not yet fully determined best skill set is best utilized.
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Jacob Blackett
Specialist · Columbus, OH · Member since 2012 · 176 posts · 98 votes
10y
@Jon Horton Ok I understand where you're at. There are a ton of factors here, but some important ones to consider here:
1. property values & rent- if the 3 properties have a property value equal to that of the 6 properties, and have higher rent amounts, then I would lean towards the 3. Hopefully with this you are acquiring more dependable tenants, therefore relying less on 3rd party management
2. Cash flow- @Scott Weaner puts it nicely. For the same cash flow it's more attractive to own 3 units than 6 units- assuming all other variables are constant, which they never are, but it's still valid and you should take it into consideration.
3. Accessibility- if something happens with 3rd party management, or you ever need to get more hands on, you're going to like having these properties 3.5hrs away vs. 10hrs.
Aside from the above points, you want to look into: equity, property values, appreciation/neighborhood outlook, city outlook, quality of tenants, exit options
All the best- Jake
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Jacob Sampson
Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
10y
There are so many variables, as you can see. I'm not sure I can add anything that hasn't been said, but I will give a quick morsel for thought. As a beginner, when you are most likely to make mistakes and those mistakes are the most difficult to recover from, make your mistakes small ones.
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Jon Behlke
Accountant · Hopwood, PA · Member since 2015 · 125 posts · 92 votes
10y
I'll take the contrarian position and advocate 6 units over the 3 units if all else is equal. Why? Because a vacancy eats into my revenue stream by 16.7% per month rather than 33.3% per month. If each of my 6 units rents for $1000/mo and each of my 3 units rents for $2000/mo, that's $6000 in revenue either way. But if there's a vacancy one month, then I'm bringing in $5000 that month with the 6 units vs. $4000 with the 3 units.
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Byron Bohlsen
Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
10y
3 units will likely be less maint and capex cost, and is much closer which is good in case you need to get involved.
And as others have said it would appear at first glance the quality of the neighborhood and tenant would be higher for the 3 units, but that is something you need to determine.
Also no/low money down means each house is a much riskier investment unless you have equity built in some other way... which brings up the next question how much equity will you have for one deal vs the other and how do you think you are going to get financing for the low/no money down houses.
Not enough info but would say the 3 units is better and safer.
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Robert Bienes
Kew Gardens, NY · Member since 2015 · 7 posts · 3 votes
10y
Apologize if I missed this, are the units already rented? If not are you more likely to get a better tenant/longer stay with the 3 than the 6?
You mentioned that property managers $'s are about equal, any idea on their reputations?
Being a beginner too, I'd be a bit nervous about being that far away from my investments until I have a bit more experience.
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
I like Scott's approach. You do diversify risk by having more units, but the fact that the two deals have the same cash in and same cash flow means that you are either overpaying for the 6, underpaying for the 3, or that the 3 has better amenities/better neighborhood/etc. Since you will do double the work having 6 - actually, it's just incremental, because there's a baseline of work in owning any rental and extra work is really not compounded, so it's not *really* double - you might as well do less work and have the same money.
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Tom T.
Investor · Cumming, GA · Member since 2015 · 79 posts · 72 votes
10y
Ill add another factor to consider and that is this:
Which properties will appreciate faster (thinking about school districts, demographics, jobs in each area etc) and which properties will you be able to perhaps improve some and increase the rents?

Second thought to consider: Laws and procedures in each area for eviction should it become necessary. Some places are much more difficult and time consuming to evict. Not sure what class props these are but something to consider.

Out of state rentals, without the help of a property management company is a tough nut to crack. IMHO. Especially for someone with little experience.
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Edwin Williams
Investor · Dallas, TX · Member since 2016 · 60 posts · 65 votes
10y
The six units are the way to go...more diversification. If you have to sell you will have more options. If there are issues it more isolated and can be contained. I would always go with the plan that offers more options..
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Jon Horton
The answer should be pretty simple Wats going to be worth more in 5 or 10 years. the six or the three?
RR
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Jon Horton
OP
Investor · Austin, TX · Member since 2016 · 19 posts · 14 votes
10y
BREAKING NEWS - I discovered that the 3 units cash flow is not truly the same as the 6.
Actual numbers, based on financing with the same cumulative amount of cash down needed for both deals (approx $160K):
6 units - cash flow $215 each per month ($1290 total) after PITI, vacancy, maintenance, PM
These come with equity (based on appraisals) from Day 1
3 units - cash flow $265 each per month ($795 total) after PITI, vacancy, maintenance, PM
These come with zero or negative equity from Day 1
hmmmmmm
NEWBIES PLEASE READ THIS CAREFULLY:
Both of these deals are from Turnkey providers.
Both providers did provide me all the data. (Defensive mode here) The difference in the initial perception of the deals stems from the presentation of the data to me. Period. Then my lack of experience to quickly identify the flaws and my eagerness to get going almost cost me.
3 units deal initially presented me with a higher cash flow amount in a bold font based on not accounting for maintenance and vacancy. When I saw that was missing and then found the numbers (further down on the sheet and not bold) with maintenance and vacancy included in the accounting, I let it sink in my head. I was disappointed (thought I had a great one!) but was ok with it. Then I looked even closer and saw the down payment used in the calculations was approx $52K, the light bulb in my head finally started shining brightly. I put on my big boy pants and turned down the deal (I had already told them I wanted it). The back and forth about it with the provider's sales person was not pleasant but the correct decision was made and executed.
Again, all of the above information was provided to me. However, it was not highlighted but was rather placed further down in the presentation and not in bold font like the higher cash flow number was and in my mind, that is deceiving.
There are some positives that the 3 unit deal would have brought - greater potential for appreciation based on the location in the US, longer term for tenants, very mature PM team and process. For some investors, that might work out. For me, it does not.
Now it is time to continue the portfolio building...
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Assuming that both options have been carefully underwritten and with proper independent (by you) due diligence to confirm that the numbers are all correct ...
Risk (tenant quality, vacancy, ability to control your own destiny, credibility and past performance of your team, etc.)
Appreciation potential (both forced and market)
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Trey Read
Newark, OH · Member since 2015 · 28 posts · 7 votes
10y
If the both are calculated to cashflow the same, I would go with the 3-plex, just because managing 3 units for the same income is easier than managing 6....Less work, same income.
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Steven Gesis
Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes
10y
Originally posted by @Jon Horton:

If the cash flow was the same and out of pocket amount the same, what factors would assist you in determining whether or not to buy 6 rentals or 3 rentals?
Hi Jon-
Great question, I think a lot of people are challenged with this question, I was able to read through your posts and I see some of the forum responses, they vary in which direction they would lean, based on my personal experience and following some of the conversation,first of all way t make the leap and it sounds like the leap is possibly with a Turnkey provider, at this point if you are making the leap with TK provider, first and foremost nothing should be done on faith, do your extensive due diligence not just the operator, the asset, the team and the area.
Next ---> If you need (6) properties to make the same cash flow as (3), even though your risk spread is greater, it sounded that the monetary exposure is equal throughout, but I immediately lean t the notion that the (6) are less expensive, that means they may have a higher risk profile, high risk profile if lucky can be a home run, but this is an extremely low case of success. The better properties in the better areas, with he higher individual cash flow will be a more stable and consistent return, at minima this logic should be fairly accurate. With the lower cost properties, you can expect high turnover, low long term financial gain, death due to the tenant cycling.
Also, financially, with the (3) you leave yourself the ability to finance a 4th in the future without paying the 25% down-payment a required for properties 5-10 if you are using some conventional not portfolio financing method.
Just think about it, I have been there, I would not trade the asset quality I require for the past assets that I had before, I personally upgraded to the higher value ones in lieu of those awful other homes I had. Memories............ lessons...... not going to pay 2x :)
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Michael Johnson
Specialist · Marco Island, FL · Member since 2016 · 225 posts · 56 votes
9y
@Jacob Blackett you seem smart and all, but i just wanted to say "Holdfolio" is an awesome name. Marketing done well lol
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