Which investment makes more sense?

20 Replies

We can't decide which option is more beneficial.

I have $300k to invest in a rental property. I would like to buy a single family home in either East Long Beach (3 bed, 2 bath) or in Rossmoor (Orange County - 3 bed, 2 bath).

Option 1: Purchase a 3 bed, 2 bath in East Long Beach for approximately $600k - $650k that would rent for $3000-$3200 mo.

or

Option 2: Purchase a 3 bed, 2 bath in Rossmoor for approximately $800k - $850k that would rent for $4000-$4200mo.

Our goal would be to pay of the property and use the rent as an income source for retirement or before if we can pay it off sooner. We want to buy and hold -- not flip or sell within a few years. We are having a hard time deciding which is a better route. Any input would be appreciated.

My thought process is like this. First, determine the total cash flow after PITI and maintenance. If one is much larger than the other I'd consider going for the greater cash flow. However, the more expensive house will be a greater liability if you end up with tenants who don't pay you. If you dont think you could swing the mortgage if the tenants skipped rent payments I'd be wary. If you can swing those payments then the more expensive house will provide more income when you have the mortgage paid off and retire. So, it's a matter of initial cash flow, ability to carry the debt unsupported, and long term investment goals. You'll have to decide the right balance for you.

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I would strictly look at net cash flow.  The two locations my have different local tax rates and insurance costs. One house may be in better condition, especially high cost items like the roof, air conditioner, etc. Other than that, it's all about which one commands a higher return on my investment, not necessarily the most rent. Percentage, not dollar amount. Good luck with it.

Wow. I love to visit the west coast but glad that isn't my territory. Have you considered becoming a HML? What do you expect your returns to be on these (discounting appreciation). Prices are sky high and rents are low compared to purchase price. Prices CAN AND HAVE FALLEN in CA..and will do so sometime in the future. If you do HML, you may be able to pull steady returns of 16%+ and to me, that could be a lower risk higher return scenario.

@Ronin Crimmons

I would heavily consider location (I don't know your area). Rental rates and home values are very location based. You have a big chunk to invest, I would go for the best location you can afford. It will make keeping it rented easier, attract better tenants, appreciate the most and be the easiest to sell should that need arise.

You must consider your exit strategy, even tho you plan to be in it for the long haul. You never know when life will throw a curve ball at you and change your life's entire direction

Originally posted by @Ronin Crimmons :

@Scott Weaner Yes, after all expenses (PITI, landscaping, etc), the Rossmoor home will be positive to the tune of $840 and the Long Beach home at $949.

For a SFR?? Numbers are so amazing, I fear you've left something out. Use one of the Tools as a guide to estimating expenses and PLEASE share with us your result.s

@John Kesner @Jeff B.   Both areas are with 4 miles of each other but the main difference is that one is in LA County and the other Orange County.  The Rossmoor location has some of the best schools in CA -- thus the increase in purchase price (200K wow).  The below is assuming I manage the properties.

Option 1: (300K down)

Purchase Price: $825K

Principle/Int at 3.75%: $2431

Insurance: $67

Taxes: $688

Landscaping: $75

Total: $3260

Rent: $4100

Positive Cash Flow: $840

Option 2: (300K Down)

Purchase Price: $625K

Principle/Int at 3.75%: $1505

Insurance: $50

Taxes: $521

Landscaping: $75

Total: $2151

Rent: $3100

Positive Cash Flow: $949

@Ronin Crimmons , I think that you are missing MANY expenses...maintenance and CapEX for example. If I calculate using the 50% rule, I come up with a cash flow of $45/month for example 2. 

Even if I use your numbers, the Cash-On-Cash return is about 3%! That does not seem good at all IMO.

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@Scott Weaner I am new at this. What is CapEx? I am putting 300K down -- is that the same as CapEx? I have owned one other property in East Long Beach and I have been pretty lucky in that it has only been vacant for 1 week in 3 years. Probably not the norm but properties in the area are in such high demand that when one comes on the market, it is rented immediately.

You are correct in that I did not include maintenance so I definitely should add that.  But could you help me identify the MANY other expenses you refer to.  I appreciate your insight.

@Ronin Crimmons In response to your earlier questions about the "MANY" other expenses and what CapEx refers to: CapEx is short for "Capital Expenditures," which are the larger improvements you may need to make to the property, like a new roof, HVAC, replacing the water heater, appliances, components (garage doors, circuit breakers, etc.), structural issues, etc. Depending on the age of the home and its condition, you may be facing some serious CapEx costs.

As far as other maintenance expenses, as a landlord you're typically expected to fix whatever breaks on the property (e.g. sliding glass doors, screens, ceiling fans, light switches, faucets, leaky plumbing, garbage disposal rusts out, leaky toilet, garage door doesn't open, electrical issues, etc.) These items seem small, but can really add up, especially if you have a leak and need to do mold remediation, drywall repair (or, worse, if it gets into the foundation), painting, and floor repair. I think some people on BP have recommended setting aside 15% of your rental income after vacancy to put toward maintenance and repairs, but to get a better idea, try calling some local property  management companies to find out what maintenance on SFRs typically runs them. 

Some specific things to consider are whether you'll be providing appliances and, if so, whether you'll provide a warranty (if it breaks, you pay to fix it); what type of AC each house has (window and wall units tend to crap out during the summer months and not many AC vendors are willing to work on them); whether the homes have sprinkler systems (tenants tend to not water the lawn of their own accord); whether either home has a patio and what condition the patio is in (is it dry-rotted and falling down? That's a safety hazard and could put you at risk if a tenant is injured); condition of the fences; whether the water lines running from the main to the house have been updated (a break in the water line can set you back quite a bit); condition of the roof; the water heater (they need to be replaced every 6-8 years); and termite damage, among others. 

Lastly, do you want to manage the homes during your retirement years? If not, you really should plan to spend 8-12% of your rental income on property management at some point. I understand you're able and willing to manage on your own now, but since you're planning on keeping the homes to fund your retirement, seriously think about whether you want to be tied to that responsibility.

You have been very lucky with the other property you own in East LB - as you grow your portfolio, you will be more likely to run into the issues discussed here. There is a plethora of information here in the forums regarding planning for CapEx and maintenance costs but, if you don't have the time to dig around, check out "The Book on Managing Rental Properties" by Brandon Turner.