5plex: 60k selling price, tax value is 95k, market value is 120k. Private sale. This is in a dieing town which I feel would make this building a high vacancy rate, but if I can keep this place full I see a quick return on investment and nice equity. Also feel it would be a difficult building to sell in the future due to the town. Very small town. Not much going for it and most of the jobs are outside of this town.
3plex: 100k asking price, tax value 110k, market value 120k. In a busy area. Lots of jobs around this area. Right on main street. Great location. Building is in the same condition as the 5plex. More money and less units but the vacancy rate should be a lot better. I feel there wouldn't be a problem filling a unit when a tenant leaves. But almost 3x the price per door as the 5plex...
Which would be the wisest choice? They say you make your money at the time of sale on regards to what you paid for a property but does location outweigh the price on this? Both buildings will bring in roughly the same annual income. 5plex has cheaper rents and more expenses, 3plex has slightly more rent per month and slightly less expenses.
To me, if the triplex numbers fit my criteria, that would no doubt be my option. The 5 plex in my opinion, sounds like a poor option. If it would be hard to keep full now and the town is dying, what will it be like in the future? If you aren't making enough income to maintain the property, it will further deteriorate and become a huge headache.
Also, you mentioned that they will bring in the same income. Does that assessment account for the extra vacancy that you will have at the 5 plex?
Just a couple thoughts.
What is the positive cashflow?
Both properties will bring in 11k per year before considering vacancies or repairs. So insisting that the 5plex has a much higher vacancy rate, the 3plex has the better cash flow in the end, but more expensive purchase and larger loan amount.
Location, location, Location. Ten years from now the 3 plex will rent for more and sell for more you don't want to be in a declining area. Rent do not go up in declining areas and if you always have 1 or 2 vacancies in the 5 plex.
@Andrew Michaud Two things you can't change in real estate, location and purchase price. If they're going to give you the same dollar amount and that's what you care about than go nicer location. However, if the 3-plex is more money your percentage will be lower than the 5-plex. It depends on how bad you think the 5-plex area will be and what your risk appetite is.
@Andrew Michaud One thing that hasn't been talked about here in financing. I'm assuming it's not an all-cash deal for you. Loan terms for a 3-unit aren't the same as a 5-unit. You're in commercial territory so you have a 20-25 year amortization (instead of 30), maybe a 5-7 year fixed-rate with a balloon, and in some cases you'll pay points on the loan. If you're looking to lock in a 30 year fixed rate because you think "money is cheap" right now, there really isn't even a choice. The other thing to think about is valuation methods. If you're in a dying town, you won't be able to raise rents, etc. then that 5-unit property will always maintain it's currently value. The 3-unit property could have value increased by a rising-tide of SFRs, duplexes, etc. increasing the value. Although there is value exposure if prices drop. My final thought would be on rent-as-a-percentage-of-turnover-costs. It's far from an "official" metric but if it costs $200 to get a unit rent ready (touch up paint, locks changed, carpet cleaning, etc.) and your rent is $300 that's a pretty darn high percentage. If your rent is $600 or $800 the percentage changes quite a bit. If your units turnover one every 10 years it's a non-issue, but if it's once a year it can chew away at that cash-flow pretty heavily.
Anyway, just some random food for thought.
Howdy @Andrew Michaud
To me there is only one option. I would never invest in a declining market. If the 3-Plex meets your investing criteria, then, that's your deal.
Go with the better location. You may make less money but you'll be glad for it in 10 yrs.
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