Do I buy more or buy in higher appreciation markets
Most Popular Reply
Investor · Ellwood City, PA · Member since 2019 · 93 posts · 124 votes
4yOpinions vary wildly on this. I personally own over 100 C Class houses, and I personally enjoy it.
When I had 25 I was struggling.
I had to make the decision to either sell all of them and focus on another type of asset with less issues, or buy so many that the scale absorbed the inevitable issues one generally encounters with older properties in rough neighbourhoods with sometimes problem tenants.
I chose the scale route, and we are well on our way to 300 units. The problems are all still there, but if you do it right (and by right, I mean you'll make less money because you'll spend more money), then it can be a great asset class.
That said, it is definitely not for everyone. I have my own team and back office now, and everything is in-house, from contracting to property management. For me, that was the only way to mitigate the issues of poor contracting work, and poor property management and tenant selection.
So, as an owner of these types of houses who is actively buying more pf them at a rate of 5/month, my advice to you is the same as the advice I gave myself...
...either set a plan to scale significantly, or do as most others will say in this thread and sell them to reinvest in more stable assets in better markets.
I should also point out, we have developed a program to encourage our tenants to purchase their home from us with a sizeable deposit and either a lease option or seller financing, which - while not a perfect solution - has mitigated much of the tenant-based drama that is all too common in this space.
43 Replies
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes4yNot enough info to give you a good specific answer, however, based on what you did supply, I personally would like to see more profits from the investments and as such, a better appreciation play would be in order. It is no secret and well documented that wealth is generated much faster from appreciation, both forced and market. As such, finding those would likely do better. That said, every investor is different and you may be of the goal set to have enough cash flow to live off and appreciation may not be as important to you. There is no right or wrong answer here, only what is right or wrong for you.
Quote from @Al Caan:
Hi Bigger Pockets:
So I have 5 units in a cash flowing market, section 8 and yes I have tenants that don’t pay etc, my question are:
1) the area does not appreciate like San Diego, so shall I buy more of these ~$60k ~$400 net cash flow, or shall I buy in better appreciation markets?
2) With the properties not appreciating much, can I BRRRR and pull my initial investment back out so I can grow?
Thanks
I highly recommend you have a detailed discussion with your CPA (who should be well versed in real estate investments - not all are) and layout your options side by side. - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Neither. Start with getting rid of the current 5 properties that are negative CF's waiting to happen. Then change market so you get both CF (real CF) AND appreciation. One without the other is like trying to play hockey without the sticks or the puck. Sure, you can skate around a lot, but what are you accomplishing?
- Member since 2022 · 11 posts · 5 votes4y
Agreed, we need more information. What are your investment goals. what kind of cashflow are you expecting to receive in addition to appreciation? We can all project cash flow, but none of us can guarantee appreciation. We can tell you how much an area has appreciated and if an area looks like it will continue to appreciate, but never how much.
@Will Barnard
Thank you for your response.
My initial goal was to cash flow $10k a month. But I’m starting to worry about if I’m investing in the right market as appreciation is not common here. Also I was told by another large investor, that I am not thinking big enough with $10k plan in the next 10 years.
I am thinking maybe if I buy a property in CA it won’t cash flow but in a short period it will appreciate a lot. More concern with this is, if there is an issue; tenant not paying I cannot cough up the huge payment out of pocket with my W2.
The 5 units I own are class C, and out of state. I use a PM and for one unit with total of $20k investment (including closing) I cash flow $6k annually.
- Investor · Ellwood City, PA · Member since 2019 · 93 posts · 124 votes4y
Opinions vary wildly on this. I personally own over 100 C Class houses, and I personally enjoy it.
When I had 25 I was struggling.
I had to make the decision to either sell all of them and focus on another type of asset with less issues, or buy so many that the scale absorbed the inevitable issues one generally encounters with older properties in rough neighbourhoods with sometimes problem tenants.
I chose the scale route, and we are well on our way to 300 units. The problems are all still there, but if you do it right (and by right, I mean you'll make less money because you'll spend more money), then it can be a great asset class.
That said, it is definitely not for everyone. I have my own team and back office now, and everything is in-house, from contracting to property management. For me, that was the only way to mitigate the issues of poor contracting work, and poor property management and tenant selection.
So, as an owner of these types of houses who is actively buying more pf them at a rate of 5/month, my advice to you is the same as the advice I gave myself...
...either set a plan to scale significantly, or do as most others will say in this thread and sell them to reinvest in more stable assets in better markets.I should also point out, we have developed a program to encourage our tenants to purchase their home from us with a sizeable deposit and either a lease option or seller financing, which - while not a perfect solution - has mitigated much of the tenant-based drama that is all too common in this space.
Quote from @Al Caan:
@Will Barnard
Thank you for your response.
My initial goal was to cash flow $10k a month. But I’m starting to worry about if I’m investing in the right market as appreciation is not common here. Also I was told by another large investor, that I am not thinking big enough with $10k plan in the next 10 years.
I am thinking maybe if I buy a property in CA it won’t cash flow but in a short period it will appreciate a lot. More concern with this is, if there is an issue; tenant not paying I cannot cough up the huge payment out of pocket with my W2.
The 5 units I own are class C, and out of state. I use a PM and for one unit with total of $20k investment (including closing) I cash flow $6k annually.
San Diego has historically had great cash flow for the long term buy and hold residential RE investor.
Do not confuse initial cash flow with the long term hold cash flow because there is a poor relationship between initial cash flow and long term cash flow (as you are experiencing). This poor relationship is because the RE market is efficient and reflects expected appreciation and expected risk. Low price markets are low priced either because they are perceived to have low appreciation outlook or are perceived to be high risk.
You did not indicate when you purchased the OOS 5 units, but I suspect if it was at least 5 years ago that the San Diego RE cost to current rent ratio would be better than your OOS property implying likely better cash flow for the San Diego property.
Good luck
- Lender · NJ · Member since 2018 · 22 posts · 8 votes4y
Thats a question only you can answer, are you looking for capital appreciation or cash flow? I know both are ideal, but in some urban areas your not going to get the same appreciation as you would get in large cities/suburbs. For example here in NJ, the last 24 months, due to the Covid restrictions you had in NYC, you saw a HUGE inflow of people moving from the city down here to the shore. Houses I own personally down here are up about 45% on avg the last 24 months. While I bought them for cash flow (summer airbnb rents at the beach) prices have far exceeded what I thought I was buying into 5 years ago. However you have areas like Essex county in NJ where you saw about a 12% increase the last 2 years, but there are large pockets in Essex that investors buy for cash flow (specifically section 8 housing)
- 4yJoshua JanusBusiness MemberRealtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
@Al Get into
@Al Caan Get into a market like Columbus, Ohio where you can take advantage of the cash flow and appreciation. There is cash flow due to the relatively low price/sqft midwest and the appreciation comes from the growing population and job market. The population has been growing here year over year over the last decade, it is home to The Ohio State University which has over 50,000 students that live here along with those that visit, and it also holds a diverse range of young professionals and traveling nurses to fill the demand of the multiple business corporations and hospitals stationed here. Tech companies are continuously moving here and establishing a footprint in Columbus as well. Intel is a great example, who is building the largest chip manufacturing plant in the US right here, and it will be a $20 billion dollar investment that brings a few new thousand jobs.
Here are a few more recent investments https://www.10tv.com/article/money/business/hydrogen-power-company-hyperion-bringing-700-jobs-to-columbus/530-25907aab-5517-4661-a9f3-d2ed2d5be6b0
https://news.wosu.org/news/2022-02-08/rumpke-to-build-50-million-recycling-facility-in-columbus
- 4yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Quote from @Joshua Janus:
@Al Get into
@Al Caan Get into a market like Columbus, Ohio where you can take advantage of the cash flow and appreciation. There is cash flow due to the relatively low price/sqft midwest and the appreciation comes from the growing population and job market. The population has been growing here year over year over the last decade, it is home to The Ohio State University which has over 50,000 students that live here along with those that visit, and it also holds a diverse range of young professionals and traveling nurses to fill the demand of the multiple business corporations and hospitals stationed here. Tech companies are continuously moving here and establishing a footprint in Columbus as well. Intel is a great example, who is building the largest chip manufacturing plant in the US right here, and it will be a $20 billion dollar investment that brings a few new thousand jobs.
Here are a few more recent investments https://www.10tv.com/article/money/business/hydrogen-power-company-hyperion-bringing-700-jobs-to-columbus/530-25907aab-5517-4661-a9f3-d2ed2d5be6b0
https://news.wosu.org/news/2022-02-08/rumpke-to-build-50-million-recycling-facility-in-columbus
I second Columbus, Ohio
- 4yBrandon GoldsmithBusiness MemberReal Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
I agree with @Joshua Janus. Columbus, OH has a lot of big things in store @Al Caan
- Specialist · Member since 2021 · 322 posts · 273 votes4y
100% am going to echo the Columbus sentiment. Huge stuff going on there, we love it quite a bit for our passive investors :)
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes4y
Funny how so many are pushing OH, all of them from OH, a bit bias I might say.
None the less, @Al Caan - you should get a CPA near you or you can also check out @Amanda Han
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes4y
Quote from @Al Caan:
@Will Barnard
I asked about your CPA recommendation as I am close to you lol
Connect with @Amanda Han then. She is local.
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes4y
Quote from @David Garner:
Opinions vary wildly on this. I personally own over 100 C Class houses, and I personally enjoy it.
When I had 25 I was struggling.
I had to make the decision to either sell all of them and focus on another type of asset with less issues, or buy so many that the scale absorbed the inevitable issues one generally encounters with older properties in rough neighbourhoods with sometimes problem tenants.
I chose the scale route, and we are well on our way to 300 units. The problems are all still there, but if you do it right (and by right, I mean you'll make less money because you'll spend more money), then it can be a great asset class.
That said, it is definitely not for everyone. I have my own team and back office now, and everything is in-house, from contracting to property management. For me, that was the only way to mitigate the issues of poor contracting work, and poor property management and tenant selection.
So, as an owner of these types of houses who is actively buying more pf them at a rate of 5/month, my advice to you is the same as the advice I gave myself...
...either set a plan to scale significantly, or do as most others will say in this thread and sell them to reinvest in more stable assets in better markets.I should also point out, we have developed a program to encourage our tenants to purchase their home from us with a sizeable deposit and either a lease option or seller financing, which - while not a perfect solution - has mitigated much of the tenant-based drama that is all too common in this space.
What's the magic number of doors needed (approx)
- Investor · Ellwood City, PA · Member since 2019 · 93 posts · 124 votes4y
Quote from @Al Caan:
@David Garner
Wow 100 units, amazing.
- Why did you struggle when you had 25 units?
- Have you left your initial investment in the property or pulled it out?
- how did you grow, use own money or HM? Over what period?
Thanks
Thank you. I'll try and answer your questions here...
With 25, there was always some big capex, or expensive turnover that would clear out a good portion of the income. If you're making 400/month clear, and you need to put a new roof on, or furnace, or HVAC, or spend 10k because the tenant trashed the place, or it gets robbed and they steal all the plumbing (all these things happened), it can really screw you.
If you're also using leverage its even worse.
Now we have triple figured we still have all the same problems, but we've learned a lot, so we're better at buying, we're better at rehabbing, we're better at management, and we have more cashlfow topping up reserves every month.
so with buying more we got better at it, and also created the kind of scale that absorbs a lot of the issues.
I have some money left in about half the houses, the rest are zero in. They will all be zero in at some point.
I grew it (and still do) with private money.
I bought my first house in 2017. I had invested in notes before that, and brokered some PML deals.
- Investor · Ellwood City, PA · Member since 2019 · 93 posts · 124 votes4yFor me, in my markets, I think its about where we're at (104 to be precise) as a minimum. I'm shooting for 300.
Quote from @Account Closed:
Quote from @David Garner:
Opinions vary wildly on this. I personally own over 100 C Class houses, and I personally enjoy it.
When I had 25 I was struggling.
I had to make the decision to either sell all of them and focus on another type of asset with less issues, or buy so many that the scale absorbed the inevitable issues one generally encounters with older properties in rough neighbourhoods with sometimes problem tenants.
I chose the scale route, and we are well on our way to 300 units. The problems are all still there, but if you do it right (and by right, I mean you'll make less money because you'll spend more money), then it can be a great asset class.
That said, it is definitely not for everyone. I have my own team and back office now, and everything is in-house, from contracting to property management. For me, that was the only way to mitigate the issues of poor contracting work, and poor property management and tenant selection.
So, as an owner of these types of houses who is actively buying more pf them at a rate of 5/month, my advice to you is the same as the advice I gave myself...
...either set a plan to scale significantly, or do as most others will say in this thread and sell them to reinvest in more stable assets in better markets.I should also point out, we have developed a program to encourage our tenants to purchase their home from us with a sizeable deposit and either a lease option or seller financing, which - while not a perfect solution - has mitigated much of the tenant-based drama that is all too common in this space.
What's the magic number of doors needed (approx)
- Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes4y
Quote from @Al Caan:
Hi Bigger Pockets:
So I have 5 units in a cash flowing market, section 8 and yes I have tenants that don’t pay etc, my question are:
1) the area does not appreciate like San Diego, so shall I buy more of these ~$60k ~$400 net cash flow, or shall I buy in better appreciation markets?
2) With the properties not appreciating much, can I BRRRR and pull my initial investment back out so I can grow?
Thanks
Why not take the hybrid approach and do both? Can you keep you cash flowing properties and still buy something in an area more likely to catch some appreciation? This will help you keep a more diversified portfolio. - 4yJoe HammelBusiness MemberReal Estate Agent · Metro Detroit, MI · Member since 2018 · 614 posts · 666 votes
@Al Caan
1) I plan on a portfolio of 25-30 “cash flowing” houses first. Will be a nice 6 digit passive income to sit in. Then I’ll play around in the “non cash flowing” markets and just buy straight location of the hottest US markets
2) it’s probably not that your houses aren’t appreciating. More “cash flow” markets DO appreciate and at a similar rate…it’s more that the low price point it’s not as big if an impact. 5% on a $100k house is $5k. Whereas 5% on a $1m house is $50. So it FEELS like it’s appreciating more but it’s actually not. So it’s the rate of appreciation that matters.
You could actually just buy 10, of the $100k houses to get your $50k appreciation.
The point I’m getting at, is it’ll just depend on the purchase price and current market value of your properties if you can pull money out.
In this current market, if you’ve owned the properties for 2 or more years, it’s VERY likely you could pull a nice chunk of equity out of them.
FIRE Realty Team - Keller Williams5380 Reviews - Lititz, PA · Member since 2013 · 595 posts · 272 votes4y
Quote from @Joe Villeneuve:
Neither. Start with getting rid of the current 5 properties that are negative CF's waiting to happen. Then change market so you get both CF (real CF) AND appreciation. One without the other is like trying to play hockey without the sticks or the puck. Sure, you can skate around a lot, but what are you accomplishing?
Great points as always. Do you mind sharing examples of markets that meet both requirements? - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesExamples? Sure. Anywhere, but not everywhere...and I'm not trying to be a "$marta$$" (although..., LOL). What I mean is there are so many places to find examples of this, and yet not every property in those locations will work. What you're asking is kind of like asking "what are some examples of great music"? That would depend on what the person you asked likes, and what the person "who" asked likes, and if they match. It all depends on what strategy you are using for that particular market,...actually the micro-market(s) within those Markets, and how they match the "specific" financial criteria (dollars,...not percentages) that comes from the REI plan you develop.
Quote from @William Coet:
Quote from @Joe Villeneuve:
Neither. Start with getting rid of the current 5 properties that are negative CF's waiting to happen. Then change market so you get both CF (real CF) AND appreciation. One without the other is like trying to play hockey without the sticks or the puck. Sure, you can skate around a lot, but what are you accomplishing?
Great points as always. Do you mind sharing examples of markets that meet both requirements? Personally I always go with better markets, high demand areas with expected future equity increases. On the other hand, I buy in cash or pay at least 50-60% of what I'm buying and pay it off that year or the next.
So far I have 10 properties free and clear and bring in around 14K in rents per month (168K annually). I'm in talks right now for number 11, which I submitted an offer on. If a deal is reached, I'll be putting down at least 130-140K upfront and paying it off fully next year.
I have a high paying day job. One day I won't - and when that day comes I don't want to have numerous mortgages hanging over my head. That's why I buy the way I buy. It's more of a nest egg when I don't want to work any longer - and a cash-out when the times comes to retire.
Also, my equity has skyrocketed with the crazy market. I mean, I have condos I bought at 140 going now for 250+, townhouses that I got for 250-270, going for 350-450. My equity growth has been as mesmerizing as the cash flow. And I only started buying in mid-2018.
- Developer · Youngstown, OH · Member since 2019 · 129 posts · 121 votes4y
You need to focus on your return. You're not getting a big cash flow because you're not in a market that will support the higher rents with a lower price purchase (maybe if you did a class B rehab you could get more?)
I did a comparison to my stepson's LA triplex that he paid 1.2M for (and put like 250k down on in cash), where he nets about 1k a month, hoping it will appreciate huge in about 5 years bc of a stadium nearby (he bought at a speculative price to begin with so overpaid, but that's LA)
VS
our purchases, where we buy super low, rehab high and rent high (about 130k in each), and they are appreciating at about 20%/year (revitalization in the neighborhood). Each of our duplexes have about 25k cash in them (the rest financed), and net about 1300.00/mo. If he bought 10 like ours, he'd have 250k in cash into them, but be netting 12,500.00 - 13k per month.
Let's say at the end of 5 years, all the properties would double in value. His would be worth 2.4M, ours would be worth 2.6M
At the end of 5 years, he would have made 60k in net profit in rents. We would make 750k.
But let's say ours only gained 30% over 5 years - that would be 1.7M + 750k in rents = 2.45M
So even if he doubles and we only gain 30%, we'll have made literally about the same amount of money (assuming rents do not increase for either of us). If our properties did double their value (and they have about doubled in the last 4 years and we're in the early stages of revitalization), we'd have made 750k more than he did. This is all with the same amount of cash out of pocket.
BUT... we would have made 750k on the front end via rents. So that portion of our profit would not be subject to realtor fees or closing costs, nor would it be subject to a chance of capital gains. So by the time we sold the properties, he would be down about 60k in realtor and closing fees.
He is in LA, we are in Youngstown.
I don't think it's being necessarily in a high appreciating market like California. You have to look at the percentage of appreciation, rather than the dollar amount. And it seems it is more difficult to get those minimum 1% of purchase/rehab rents when your properties are 500k - 1M or more.
I'd say the key is being in an area that's coming up, whether new builds or revitalization, so you get that good appreciation, but to be in a market where the costs are low enough to be bringing in rents that are 1.5 - 2% of purchase/rehab (which also probably means a bit higher end housing rather than section 8)
At the end of the day, it's all what you get back for your investment or cash on cash return. In the right market, even a much lower value market, you can be making 10k per month on 8-12 properties with less than 250k out of pocket.
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