More properties in cheap markets or fewer in expensive markets?
Denver, CO · Member since 2016 · 15 posts · 3 votes
More properties in cheap markets or fewer in expensive markets?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesEverything being equal quality over quantity every day of the week.
26 Replies
- Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes9yIt's definitely better in my eyes to get one property rather than several. The advantage of multiple properties is that you are less hurt from any one vacancy, though buying a multi in a more expensive market has the same result. The more expensive properties allow you to have fewer loans, which is an advantage because it isn't just the amount you have borrowed that affects your ability to get loans, but also the number of loans you have. Also, fewer tenants results in fewer headaches, and you will spend less time on one expensive property rather than the cheaper ones. The issue is that usually cheaper properties will usually provide better returns, before accounting for your time. If you can get the same return on the more expensive property, do it.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9yAdam Bearup I would probably say "expensive" as it's less hassle than looking after multiple properties. That said, if your money can get you a property in a B+ area of Jacksonville or a D area of Denver that greatly changes things. At least for me it does, your mileage may vary :)
- Real Estate Investor · Miami, FL · Member since 2013 · 474 posts · 214 votes9y
Concern with the one property in Denver is the larger hit from a vacancy and the frightening appreciation in recent years. If supply starts to catch up like I've heard it is, then the appreciation could level off and rent growth will stagnate or even drop. That said I know nothing firsthand about the Denver market so the truth could be far different.
Concern with multiple properties in Jax is the quality of neighborhood could be worse (yes Jax is much cheaper but "several" properties vs "1" sounds like a difference in class as well) and the correspondingly higher capex from multiple SFH.
Honestly though, the deciding factor for me would be your location. Unless you are planning to relo to Jax, definitely stick to your local area since you are able to find the same ROI on paper. There is absolutely no reason to go long distance if you are expecting to get the same returns anyway.
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes9y
@Adam Bearup so with same returns on paper. Local trumps every time for me. If you know a market then that also trumps returns. The last question is, in 30 years where would you rather own property Denver or Jacksonville? Answer that and there is where you put your money IMO.
- Flipper/Rehabber · Golden, CO · Member since 2013 · 590 posts · 319 votes9y
Depends what you're going for. It will be harder to scale and get good deals that cash flow in Denver. You will likely be able to cashflow better in cheaper markets and accumulate more rentals. So how much is your one rental in Denver going to produce for you vs 5 in FL? And how much will they both appreciate over x years? All depends on you and what you want. If you want to retire off cashflow in Denver in 10 years you may have a tough time..
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Everything being equal quality over quantity every day of the week.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Depends on your goals in my opinion, and this may be an impossible situation too. Not sure how the returns end up the same with one in an expensive area vs several in less expensive. Typically the expensive have terrible cash flow, but better appreciation, and vice versa in less expensive areas.
So what's your goal?
Appreciation and net worth? Then probably the one property in a high demand area.
Financial freedom through cash flow? Then many properties in a less expensive area all day long.
I guess you are talking for buy and hold. Imo the one that can offer the most total profits per touch. So not % rather total profits in dollars. Rei can be a bit of a hassle and liabilty so make the most of each investments hassle/liabilty/loan. A building is a building physically speaking so that part is the same mostly. Locations are another investment animal entirely. Generally speaking the better or nicer locations are more expensive and normally have higher overall profits per touch to go right along side the higher values in the first place.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
How about several properties in an expensive area? And that all starts with one well purchased property in an expensive area. The only way I would ever advise otherwise is if you were already living in an inexpensive area and had no plans to move, but it never really happens that way ... people always want to move from an inexpensive area to a more expensive area, and yet assume that their money will be better invested in the inexpensive area where they themselves don't want to live just because it is cheaper ... why is that? Makes zero sense to me ...
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
@David Faulkner - if I could match the cash flow returns in an expensive area, then I would, but that's not reasonable. The CAP rates in expensive areas are typically very low. Since achieving financial freedom was my focus, I invest for cash flow. If I am looking at a larger purchase, say 1mil, I will always buy multiple properties in a cheaper area where high cap rates are the norm as opposed to purchasing a single property with a low cap rate. That is the why.
I know his question states that assuming ROI are the same, and if that could be the case then maybe I would just go with the one property, but achieving the same ROI in those cases is not a reality.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Austin Fruechting:
@David Faulkner - if I could match the cash flow returns in an expensive area, then I would, but that's not reasonable. The CAP rates in expensive areas are typically very low. Since achieving financial freedom was my focus, I invest for cash flow. If I am looking at a larger purchase, say 1mil, I will always buy multiple properties in a cheaper area where high cap rates are the norm as opposed to purchasing a single property with a low cap rate. That is the why.
I know his question states that assuming ROI are the same, and if that could be the case then maybe I would just go with the one property, but achieving the same ROI in those cases is not a reality.
With higher rent increases in the more desirable areas you can not only match, but BEAT the cash flow returns of the inexpensive areas over the long term. So, if you are investing for cash flow, you are still better off there in the long haul. If you need to retire and need the cash flow immediately, or if you already live in an inexpensive area, don't want to move, then it is better to invest there as a local (as already stated), but otherwise, I stand by my statement. It all comes down to long term supply and demand fundamentals ... expensive areas aren't just arbitrarily expensive, they got that way and tend to stay that way for a reason ... and that reason is that they are nice and have higher demand and more limited supply of housing. Intentionally buying in a market that has lower demand and higher supply, even if the CAP rate and day one cash flow is higher (that is why they are cheaper too, BTW ... investors demand higher cash flow for higher risk) seems very backwards to me, though I know I am in the minority on this. This is based on 15 years of personal investment experience in both kind of markets.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9yDavid Faulkner - Could you share some numbers or timelines? I'd be interested to know (on average) how many years of holding before you are approaching say a 10cap on the original purchase price. I've only been investing for 7 years and in inexpensive areas, but have reached financial freedom within that time (starting with basically nothing). At the higher returns and lower acquisition costs it allowed it me to let feed back onto itself at a pretty fast clip. Curious to know how long before expensive areas catch up to cash returns in the inexpensive areas to know how they really stack up. P.S. This is one of the awesome things about real estate. There are so many different ways that it can be done!
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Austin Fruechting:
David Faulkner - Could you share some numbers or timelines? I'd be interested to know (on average) how many years of holding before you are approaching say a 10cap on the original purchase price.
I've only been investing for 7 years and in inexpensive areas, but have reached financial freedom within that time (starting with basically nothing). At the higher returns and lower acquisition costs it allowed it me to let feed back onto itself at a pretty fast clip. Curious to know how long before expensive areas catch up to cash returns in the inexpensive areas to know how they really stack up.
P.S. This is one of the awesome things about real estate. There are so many different ways that it can be done!
As I said ... local trumps most other things, so it is generally best to stay local regardless of if your market is expensive or inexpensive. My rentals are single families, so CAP rates do not apply. I can say that after 5 years of ownership, my SoCal rentals cash flow more than my Phoenix rentals were, even though SoCal was purchased around 1% rule and Phoenix rentals were purchased around 2% rule ... rent increases in SoCal were at about twice the rate as Phoenix ... they went up ~40% in that timeframe, and that is for not even the higher end SoCal ... higher end SoCal that I owned doubled rents in same time period (and purchase was ~.75% "rule"). Then you have to factor in out of state property management taking away a quarter or more of my cash flow, and the fact that I wasn't able to find as steep a discount or do as large a value add/forced appreciation ...
You are correct ... one great thing about REI is that there is more than one way to make it to Valhalla!
PS. The last 5 years were coming out of the Great Recession, so I would not expect the rate of rent increases to be as high over the next 5 years in any of those markets, however I would still fully expect the rate of rent increases to be higher in the higher end markets mentioned as they will be in the lower end markets, as this trend has held fairly steady for decades ... but nothing is 100% certain, which is why I buy only great deals and force appreciation to maintain multiple profitable exit strategies, regardless of the market I'm operating in ... and if I can't find and/or create that, then I'm not buying, but that's just me.
- Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes9y
My personal house in Denver is valued at $224,000. I can get about $1,450 per month if I were to rent it (though I have no idea where I would move to because the housing market here is nuts).
I own three properties - estimated value is $184,000 and I get $2,050 per month. Basis in those properties (my cost plus improvements) is about $100k. No additional work for me as I use property managers.
For me, more houses in less expensive markets is the way to go.
- Denver, CO · Member since 2016 · 15 posts · 3 votes9y
Hey everyone, great discussion and points of view. It's certainly interesting see the variety of perspectives on this issue, and as @Austin Fruechting mentioned there are so many different ways that it (RE) can be done.
When I originally asked the question, I was mulling over the 4 forms of wealth that RE provides (cash flow, paying down the mortgage, tax write off, and depreciation) as mentioned by @Brando Turner and @Josh Dorkin. I had figured that the initial investment and cash on cash returns could be comparable, but the tax incentives and depreciation would favor one market over another and thus favor one strategy or another. I understand this could be understood much more comprehensively by running the numbers of prospective properties to find out.
Additionally, the thought with Jacksonville (or Tampa for that matter) vs. Denver is that the Florida markets still have sizable appreciate projections to benefit from. So not only was the thought to invest in a cheaper market, but also to capitalize on the upswing of those markets. Thus getting a little extra juice from the out of state play.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Adam Bearup:
Hey everyone, great discussion and points of view. It's certainly interesting see the variety of perspectives on this issue, and as @Austin Fruechting mentioned there are so many different ways that it (RE) can be done.
When I originally asked the question, I was mulling over the 4 forms of wealth that RE provides (cash flow, paying down the mortgage, tax write off, and depreciation) as mentioned by @Brando Turner and @Josh Dorkin. I had figured that the initial investment and cash on cash returns could be comparable, but the tax incentives and depreciation would favor one market over another and thus favor one strategy or another. I understand this could be understood much more comprehensively by running the numbers of prospective properties to find out.
Additionally, the thought with Jacksonville (or Tampa for that matter) vs. Denver is that the Florida markets still have sizable appreciate projections to benefit from. So not only was the thought to invest in a cheaper market, but also to capitalize on the upswing of those markets. Thus getting a little extra juice from the out of state play.
Do NOT forget to factor in all of the added expenses and risk you take in investing out of state in a market you are not as familiar with, do not have as many contacts, and will be far more dependent on others to make or break your investment for you. Many new investors dramatically underestimate the benefits of the home court advantage, and on the other end of the spectrum the disadvantages they incur by investing out of state. I have nothing against Florida (or Denver), but believe and have personally experienced that active local investing usually trumps any perceived or actual benefit to investing remotely out of state.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes9y
@Adam Bearup If the numbers are similar I would go with properties in better areas. Your paper returns will always more closely match your real life returns in better areas.
It really depends on your business model. Do you want lots of properties that provide high cash flow, will probably not appreciate over time and have more problems to handle or do you want less problems, less cash flow and more potential appreciation.
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes9y
@Adam Bearup to "mention" someone. Type the @ symbol followed by at least the first three letters of their name. A drop down menu will appear with all of your colleagues and those who have posted on the post you are responding to. Pick the one you want to "mention" and their name will appear highlighted in blue if you do it right.
- Investor · Key West, FL · Member since 2015 · 10 posts · 3 votes9y
@Adam Bearup thank you for asking this question. I've been debating the same question too, and I appreciate everyone's informative responses and perspectives.
We are a military family and with transfers every few years, we currently don't have ability to put down roots to build a local portfolio. However, we do buy a primary residence each new duty station in "A" areas, then rent them out when we transfer. We own 3 properties in 3 different states, and have been landlords for 7 years.
Some of the benefits of higher-end rental properties that we have experienced are:
1) Rents have always been paid on time if not a week early. It follows that we have not had to experience the headache of fighting our tenants for rent, and/or go through the eviction process....yet.
2) We don't have property managers. It was more of a burden to have property managers to manage than it was to communicate directly with the tenants (and the tenants prefer direct communication as well). Like I said in #1, rents always come in (negating one major reason for having a property manager), so the only other issue a tenant needs my attention for is when they need a repair done. I get calls maybe 2 times per year per property.
3) The tenants take pride in their residence and take awesome care of the property. Being new at this, I don't know what dollar amount to place on this attribute. Hundreds, thousands maybe? Maybe a dollar amount should also be assigned to the amount of stress and worry I don't have to contend with?
4) Vacancy rate has been low. My first tenant move-out is happening for the first time in 7 years. I'll try managing the move-out and replacement tenant move-in myself, but if it goes poorly I'll look into hiring out this process to a management company in the future.
5) Tenants will let me know about every little problem there is in the house, which sounds annoying but I really appreciate that fact. For one, they care enough about their home to notice if something is wrong. And two, I can get repairs done before the damage snowballs and becomes even more costly.
In my experience with higher-end rentals, the one major disadvantage is the cash flow (which several others have mentioned in previous posts on this thread). While the cash flow has been meager, the appreciation we've seen in our properties has been phenomenal.
Prior to discovering BP a year ago, we had no game plan for what we were actually doing with our real estate or where we wanted it to take us. We are now very interested in cash flowing properties that will allow us financial freedom, which consequently is the opposite of what we have been doing with our real estate investing thus far. So shout out to BP for giving an accidental/aimless landlord a roadmap!
After reading the previous posts, it is clear to me that we if we want to achieve financial freedom via cash flow, then we will need to start buying cash flowing properties in "C"-ish areas. I'm sure will have to hire a property manager to handle tenant issues that we've been dodging thus far. I really love the ease of having higher-end rentals, but their cash flows won't help us achieve our goal as quickly as lower-end properties will.
From here, I think we will use the equity we've gained from the higher-end properties to finance the lower-end properties. In the end, it looks like we might dabble on both sides of the "A"/"B" vs. "C"/"D" investment property debate fence.
I hope my long-winded post has provided you some deeper insight into the higher-end rental side of things and helps you make a better REI decision that fits your unique situation. I would also like to echo what several other people have said: decide what your end game is, from there you will be able to create a roadmap of how to get there and it should be clear what decisions you need to make now in order to achieve your end game. Knowing concretely what my end game is now has helped me see clearly that I need to move away from higher-end rentals and into lower-end ones if I want financial freedom in the near future. Now that I have a roadmap and direction, hopefully success will follow! I wish I had more to offer in the way of numbers, ratios, and general experience, but I'm still a novice and learning. One more thing I can offer you though is that one of our properties is in Denver (Highlands Ranch) and I'd be happy to discuss the specific numbers associated with that property if you are interested. Just PM me. Good luck!
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Shannon Gordan:
@Adam Bearup thank you for asking this question. I've been debating the same question too, and I appreciate everyone's informative responses and perspectives.
We are a military family and with transfers every few years, we currently don't have ability to put down roots to build a local portfolio. However, we do buy a primary residence each new duty station in "A" areas, then rent them out when we transfer. We own 3 properties in 3 different states, and have been landlords for 7 years.
Some of the benefits of higher-end rental properties that we have experienced are:
1) Rents have always been paid on time if not a week early. It follows that we have not had to experience the headache of fighting our tenants for rent, and/or go through the eviction process....yet.
2) We don't have property managers. It was more of a burden to have property managers to manage than it was to communicate directly with the tenants (and the tenants prefer direct communication as well). Like I said in #1, rents always come in (negating one major reason for having a property manager), so the only other issue a tenant needs my attention for is when they need a repair done. I get calls maybe 2 times per year per property.
3) The tenants take pride in their residence and take awesome care of the property. Being new at this, I don't know what dollar amount to place on this attribute. Hundreds, thousands maybe? Maybe a dollar amount should also be assigned to the amount of stress and worry I don't have to contend with?
4) Vacancy rate has been low. My first tenant move-out is happening for the first time in 7 years. I'll try managing the move-out and replacement tenant move-in myself, but if it goes poorly I'll look into hiring out this process to a management company in the future.
5) Tenants will let me know about every little problem there is in the house, which sounds annoying but I really appreciate that fact. For one, they care enough about their home to notice if something is wrong. And two, I can get repairs done before the damage snowballs and becomes even more costly.
In my experience with higher-end rentals, the one major disadvantage is the cash flow (which several others have mentioned in previous posts on this thread). While the cash flow has been meager, the appreciation we've seen in our properties has been phenomenal.
Prior to discovering BP a year ago, we had no game plan for what we were actually doing with our real estate or where we wanted it to take us. We are now very interested in cash flowing properties that will allow us financial freedom, which consequently is the opposite of what we have been doing with our real estate investing thus far. So shout out to BP for giving an accidental/aimless landlord a roadmap!
After reading the previous posts, it is clear to me that we if we want to achieve financial freedom via cash flow, then we will need to start buying cash flowing properties in "C"-ish areas. I'm sure will have to hire a property manager to handle tenant issues that we've been dodging thus far. I really love the ease of having higher-end rentals, but their cash flows won't help us achieve our goal as quickly as lower-end properties will.
From here, I think we will use the equity we've gained from the higher-end properties to finance the lower-end properties. In the end, it looks like we might dabble on both sides of the "A"/"B" vs. "C"/"D" investment property debate fence.
I hope my long-winded post has provided you some deeper insight into the higher-end rental side of things and helps you make a better REI decision that fits your unique situation. I would also like to echo what several other people have said: decide what your end game is, from there you will be able to create a roadmap of how to get there and it should be clear what decisions you need to make now in order to achieve your end game. Knowing concretely what my end game is now has helped me see clearly that I need to move away from higher-end rentals and into lower-end ones if I want financial freedom in the near future. Now that I have a roadmap and direction, hopefully success will follow! I wish I had more to offer in the way of numbers, ratios, and general experience, but I'm still a novice and learning. One more thing I can offer you though is that one of our properties is in Denver (Highlands Ranch) and I'd be happy to discuss the specific numbers associated with that property if you are interested. Just PM me. Good luck!
I don't get it Shannon, you just laid out a beautiful argument based on your personal experience for why fewer more expensive properties has been very good for you, and then you turn around and say that you are planning on leveraging those up to buy more C/D properties because somebody on BP told you that's where the profits are?!? What you are doing seems to be working well ... if it ain't broke, I wouldn't go trying to fix it. And the cash flow on higher end properties does come in time along with appreciation and rent increases ... most times they end up in the long haul cash flowing more than the C/D stuff because of this, and certainly with more consistency and fewer headaches as you've already seen. It is your investment dollars to do with whatever you choose, but I hate to see you depart from a successful strategy to pursue another that will likely be less profitable in the long run and way less passive for you IMO. If you want to "juice" your returns in the short term, then I would recommend buying distressed homes at a discount in these same type of quality neighborhoods and forcing some appreciation ... this will lower your cost basis and help your cash flow too ...
- 9yCharles A.Pro MemberRental Property Investor · Jacksonville, FL · Member since 2015 · 208 posts · 282 votesJacksonville is a diverse market. And seeing how everyone and their grandma on BP these days seem to proclaim Jacksonville as a "cheap market",I felt the need to drop this here. I've been investing in Jacksonville for 6 years. I've had high end "expensive rentals" and multiple less expensive rentals. When I say high end,I mean $380k. Cash flow was horrendous and appreciation was as you'd expect in high end "Denver" rentals:impressive. Still,I saw enough similar impressive appreciation in my less expensive rentals that I started selling my high end properties to buy more of the less expensive ones.Solely to spread my risk and diversify my portfolio. Yes,you need to diversify your RE portfolio too. If a major government policy in 2020 ruins the future prospects of your single expensive rental,it's time to retire.Poor as a church rat.😅🤒 This is a real life Jacksonville experience. Beware of getting all your advise from out of town "Jacksonville experts" on BP. 😃
- Real Estate Agent · Jacksonville, FL · Member since 2017 · 43 posts · 19 votes9y
@Charles A. lol lol so true. I haven't made my first investment purchase yet but I've gotten contacted on several occassions from people who end up in a "deal" and don't know exactly what they're getting in to. It's been my experience that most out-of-town investors don't understand how different each Jacksonville section is from the other. Jacksonville is the only market I've worked in but I learned quickly that we're not quite like other towns in the real estate department. lol
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Charles A.:
Jacksonville is a diverse market.
And seeing how everyone and their grandma on BP these days seem to proclaim Jacksonville as a "cheap market",I felt the need to drop this here.I've been investing in Jacksonville for 6 years.
I've had high end "expensive rentals" and multiple less expensive rentals.When I say high end,I mean $380k.
Cash flow was horrendous and appreciation was as you'd expect in high end "Denver" rentals.
Still,I saw enough similar impressive appreciation in my less expensive rentals that I started selling my high end properties to buy more of the less expensive ones.Solely to spread my risk and diversify my portfolio.
Yes,you need to diversify your RE portfolio too.
If a major government policy in 2020 ruins the future prospects of your single expensive rental,it's time to retire.Poor as a church rat.😅🤒This is a real life Jacksonville experience.
Beware of getting all your advise from out of town "Jacksonville experts" on BP.
😃Some good points made here ... however, I would also caution against getting all your advise on BP from inexperienced investors who have not yet made it through a complete RE cycle and have only ever known "green pastures" with no drought. In my experience (admittedly not in Jacksonville), the inexpensive stuff tends to be more volatile and therefore performs better in certain parts of the cycle and worse in others, but the more expensive stuff (not luxury, but nice modest homes in solid B+ hoods) out performs in the long run with lower risk and lower volatility over multiple cycles. This is on total returns. You can make good money with either if you play it right, but one is more consistent and a whole lot more passive in my experience. Personally, I like to load up on the cheap stuff right after a crash (because it crashes hard) but focus on quality all other times ... but then again, I'm getting too old to put up with all the baggage on the cheap stuff so I may very well stick with quality even after the market dumps this next time around. Don't mean to pick on you, Charles, as you have some good points, but wanted to emphasize the long term over short term more cycle dependent aspects of each.
- Investor · Key West, FL · Member since 2015 · 10 posts · 3 votes9y
@David Faulkner, thank you for responding to my post. I appreciate your support of our current real estate investing. As a newbie, it builds my confidence to keep going with REI. So thank you.
A few things that you mentioned in your post that I hadn't addressed in my original post are rent increases, and buying distressed properties. We regularly make increases in rents, but those increases are then eaten up by increasing property taxes so we haven't been able increase our cash flow much. And each property we purchase has to be a distress sale purchased well below market value or else we won't even come close to breaking even when we place a tenant in the property (2 of our 3 properties were short sales purchases). I have found it very challenging to find the right house, in the right neighborhood, and get the bank to sell it to me at the right price. Although I do enjoy the challenge and I know the long-term profits are there, the solid cash flow is still elusive.
I am very pleased with the less-is-more strategy we've been executing for the past few years. It's comfortable and it's easy (outside of getting the property purchased). But our goal is to retire early and live off of cash flow from our real estate holdings....but that cash flow hasn't happened for us with our current REI strategy.
You have definitely made me rethink buying C/D properties though. Perhaps since I'm already comfortable in A area investments, I should look to use the equity to put $100k down on A houses rather than $100k down on 5 C/D houses. I'd just have to find an area where the cash flow from 1 A house is equal to or greater than the cash flow from 5 C/D houses. I just haven't heard people talk about great cash flow from A properties so I just assumed I had to go with C/D's. The other option I've considered in the past is to work on paying off the mortgages we currently have. Thoughts on these strategies?
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