More Units vs Less Units

8 Replies

While doing research for my first REI property I realized that I can generate the same amount of cash flow for a property around $100,000 and for a property around $500,000. Of course the $500,000 property meant better location and equity. However, if I settle for a cheaper property I can purchase a couple more rental properties and thus generate more cash flow.

On the other hand, my first time landlord status cautions me to know right upfront that there will be issues, repairs, other expenses, etc. that not only will cut through my cash flow but could also be stressful for me since I will be dealing with a lot more units. The $500,000 property has two units, one for me to live in and one for my tenant. The three cheaper properties would have a total of 8 units and I most likely would not be living in any of them.

I was told by one of the brokers I am working with that even though my mind is set on a goal of collecting properties for cash flow I would realize that building equity and selling the property after a short period is more profitable. I doubt it that my mind will change but I'd like to keep an open mind since I'm no expert. I also did some research on the threads for this forum section and one member suggested to buy cheap properties on good areas, fix them, and then generate both good rental income and equity. Although that may sound like the perfect route to go a new kid on the block like me would not know how to fix a property and calculate the costs associated with it.

Now my question to the people that were once a newbie like me and had the same exact goal in mind, is the equity route really that attractive that I will end up buying and selling? If so then I will seriously consider location location location on my purchases.

@Alick Patrick  

"One member suggested to buy cheap properties in good areas, fix them, and then generate both good rental income and equity"  

Haha, maybe they should write a book too.  In theory that's perfect.  But in practice it's generally not feasible.  Of course you can buy distressed properties in solid areas, rehab them, turn them around, & then generate solid income and equity.  However it depends on what "good" means for area.  Many areas are extremely hot right now and distressed properties are not selling at discounts.  Many of the areas that still have "cheap" properties are in declining, stagnant, & crime ridden areas with increased operating expenses and intensive management.  However I do think there's a happy medium between buying a high dollar rental and a 25k single family in a bad area.  But it also comes down to your goals.  When you are looking at lower price point properties, where are you looking (I see your in Torrance)?  I think buying a duplex, triplex or 4plex to live in can be a solid investment depending on the parameters.  If you were going to buy a house anyway, it meets your non-financial goals of owning a "home", and can meet some or all of your financial goals of buying a rental property (adjusted for owner occ incentives) then I think it's a potential wise investment.  Don't overpay, understand your rehab costs, operating costs, & exit strategy and you should be fine.  Then expand your portfolio after your first deal (potentially into lower priced properties).  Make sure the metrics are still good and that you're careful of buying in declining and crime ridden areas.  

Also on paper your operating numbers might appear to be the same however it's likely your operating expenses will be different compared to the 100k vs 500k duplex.  Good luck! 

Welcome to Biggerpocket! The only thing we agree on is paying it forward AND investing in Real Estate. Beyond that everyone has a different opinion! 

That being said, I "personally" buy the more expensive properties (single family class A properties). I  have found that while the "cash flow" looks awesome it is important to look at everything. I have met a fellow investor who can't keep all of the units full. So while the numbers look "awesome" full, in reality he runs at 75%. His expenses are ridiculous versus mine at almost nothing. So in the end our number become much closer AND my stress is MUCH lower! My business plan is around smaller margins and self managing, while working full time and having a very busy life. 

When you are evaluating just make sure you look at the "whole" picture!

Originally posted by @Alick Patrick :

While doing research for my first REI property I realized that I can generate the same amount of cash flow for a property around $100,000 and for a property around $500,000. Of course the $500,000 property meant better location and equity. However, if I settle for a cheaper property I can purchase a couple more rental properties and thus generate more cash flow.

I was told by one of the brokers I am working with that even though my mind is set on a goal of collecting properties for cash flow I would realize that building equity and selling the property after a short period is more profitable. I doubt it that my mind will change but I'd like to keep an open mind since I'm no expert. I also did some research on the threads for this forum section and one member suggested to buy cheap properties on good areas, fix them, and then generate both good rental income and equity. Although that may sound like the perfect route to go a new kid on the block like me would not know how to fix a property and calculate the costs associated with it.

 So the $500K property is a duplex?  It really seems to that it is a 250K investment unit and a $250K personal property.  It sounds like a good potential start for investing.  

I would start with does living in the duplex appeal to you compare to what you could buy for a $250K personal property?  If you don't really want to live there, you are probably better off skipping it even if it is a decent investment.  Unlike most personal properties, staying long-term(5 to 7 years) isn't a requirement - since it could be converted to a rental.  You will need to stay there a year and 2 or 3 is probably a better plan.

How does the investment property look vs. single investment units available around 250K?  It might be that this price range is a better entry point.

Is the $100K property a single unit?

@Chris Winterhalter

Yes, I originally started looking around the Torrance area but the properties are too expensive. Although I found a couple of fourplex properties that generates good cash flow they are on the $700,000 range already and being that this would be my first I think it would be too risky to go that high of a price. Thanks for the advice!

@Elizabeth Colegrove

You are right about the stress. Although I haven't experienced it myself I know that will happen. I too have a full time job (2 full time jobs, actually) so good point on the lower number of units for less stress.

@Jesse T.

Yes, the $500,000 property is a duplex. It's 3BR/3BA for each unit and was just completed (rebuilt) early this month. The back unit just had a tenant move in a week ago for a year lease. The front unit is appealing enough for me to live in and make better use of the $1,700 monthly rent I am paying for my apartment.

The three other properties I'm considering are a triplex ($200,000), triplex(175,000), and duplex($80,000). Unlike the duplex which is less than 10 miles south of downtown Los Angeles, the three other properties are all over 100 miles from downtown Los Angeles.

The only reason I am considering the three remote properties is because they already have existing tenants and I would generate $900 more positive cash flow than the duplex even if I was to rent the other unit for $2,500 and not live on it. But again, I have no prior experience or idea yet about the expenses involved and the three properties would certainly have more repairs and expenses than the newly rebuilt duplex.

Now that I'm actually writing this down it feels like I should go with the duplex instead.

Originally posted by @Alick Patrick:

@Jesse T.

Yes, the $500,000 property is a duplex. It's 3BR/3BA for each unit and was just completed (rebuilt) early this month. The back unit just had a tenant move in a week ago for a year lease. The front unit is appealing enough for me to live in and make better use of the $1,700 monthly rent I am paying for my apartment.

The three other properties I'm considering are a triplex ($200,000), triplex(175,000), and duplex($80,000). Unlike the duplex which is less than 10 miles south of downtown Los Angeles, the three other properties are all over 100 miles from downtown Los Angeles.

The only reason I am considering the three remote properties is because they already have existing tenants and I would generate $900 more positive cash flow than the duplex even if I was to rent the other unit for $2,500 and not live on it. But again, I have no prior experience or idea yet about the expenses involved and the three properties would certainly have more repairs and expenses than the newly rebuilt duplex.

Now that I'm actually writing this down it feels like I should go with the duplex instead.

So the 8 units could generate $100/door in excess of the duplex as a full rental.  One 200 mile round trip(just gas and car) pretty much negates the advantage for a month.  Would you manage 7 units 100 miles away for $100/unit/month?

Another advantage of the local duplex is you will get owner-occupied vs. investor financing.  Whether you use that to improve the rate or lower the down-payment depends on your risk tolerance.

One caution with the local duplex is I would thoroughly screen the tenant.  Not only are they a tenant, they will also be your next door neighbor.  I would probably put a contingency in the purchase contract that they pass rental screening.  If possible I would want to meet them before putting in a formal offer.  

You also will need the tenant's permission to have an inspection of the unit.  

Even though the work has just been done, you need an inspection.  There are a couple things to look for.  First is issues that were concealed or overlooked.  The other is the quality and safety of the work that was done - was it done with permits and to code.  

You might ask them what work wasn't done before making an offer.  If they disclose before hand I would prorate an expected life in reducing the offer.  If they try to hide it, I would demand repair(or a concession) for the full amount.

Like @Jesse T.  suggested, get the list of work done on paper. Rehabbers like to take shortcuts so you want to make sure they didn't just put a lipstick on a pig.

LA market is very specific. It's always nice to hear different opinions from around the country but you have to do what works for your market and reading about your situation, go with the $700K duplex. No doubt.

Price has nothing to do with risk. I've bought far more risky properties for under $50k than my 12 unit at over $300k.

Find deals that will appeal to a broad range of quality tenants. Picture your end user and make sure you feel comfortable working with them as a customer.

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