Buy and hold in mid-west, versus buying for equity appr elsewhere

7 Replies

Relatively new to BP, and want to get your thoughts on this. 

Which scenario makes more sense, with $75K cash available:

1) put $25K down on three separate SFR (in the mid-west) all priced at approx $100K each, that generate net cash flow of about $300 each = $900 total cash flow per month, or,

2) put the $75K down on one, nice $300K home, in a rapidly expanding market (LV, for example), in order to take advantage of the projected growth in the housing market over the next decade, even though there would be minimal, if any, cash flow while renting it out in the meantime. 

I have two separate real estate agents, in those two different markets above, telling me that their option is the best choice. So I wanted to get some other opinions, on what all to consider. 

What do your numbers say.... you'll probably want to define how long you want to hold the property. Then look at exit costs .... If it's long time appreciation might not be a good fit.

@Matt K. Thanks, I see what you're saying. If you can get $900 a month cash flow, which is over $10K a year, then over a five year period, you've received over $50K. Therefore, under scenario #2, there would need to be at least $50K in equity appreciation over that same five year period. Plus, as you mentioned, the exit costs would need to be considered. 

If something gains say 40% in 3 yrs but your play is long term buy and hold then that 40% doesn't do you much good. Again assuming you contribute to the cost of operating the busniess.  Now once you sell it you have commisons, taxes, depreciation recapture etc etc. You won't walk away with 40% more then you started. Couple that with the money you spent to get to that point maybe it's less than you expected at the end.

Now you could do a 1031, reduce some of those costs and taxes but again that assumes you can find something as the replacement.

Or maybe you find something that cash flows and goes up 5% yr or stays flat.... But you're keeping it for generations. The appreciation is more or less meaningless because you're not getting rid of the property.

These are examples on either end...but figure out your goals and adjust. You can balance the two ideas as they aren't mutually exclusive.

Personally I’d do the 3 in the Midwest more cash flow and 3 times the chances of appreciation. And yes appreciation can happen in the Midwest.

Thanks @Caleb Heimsoth . Quick follow-up question: deciding then to do the Midwest direction, and to buy and hold for the long-term, is it better to take $75K and split it up as the down payments for two or three properties, and get loans on them, or, take that same $75K, and just buy one single property with it? 

In other words, buy just one property for cash, or, use that cash as down payments on a couple properties, and finance the remaining balances? I guess my question is, isn't it better to leverage what you have (to obtain more properties), instead of having all the cash tied up in just one property, even though you own it free and clear? The cash flow on that property would be more, since you don't have any debt service, but your cash on cash return wouldn't be very good.   

@Chris Nelson  I grew up in the Midwest (WI) and now invest in Cleveland.  The big markets from state to state are largely very similar.  Just wanted to give some general insight 

To your actual question, here’s what I would do:  take your 75k divide it 3 ways and account for closing costs (roughly 5k per closing) and then I would go buy single or residential multifamily with each portion.  That could easily get you 6-9ish total units in B and C type neighborhoods.  Total cash flow would probably be 100-150 a door. 

Buy one with 25% down, save rest of cash. Wait a bit to understand how your property performs and readjust your strargey for next one. 

Learn from each transaction vs being one and done