I've pretty much come to place where I am having an incredibly difficult time deciding whether it's a better idea to buy more smaller cheaper rentals or go for higher priced rentals that can rent for more and should be in "better" neighborhoods.
1) A $179,900 unit that rents for 1650-1700. After mortgage and not taking Vacancy/Maintenance will net me ~$400. Down payment of $36K
2) Two $82K units that rents for $825. After mortgage and not taking Vacancy/Maintenance will net me ~$400. Down payment of ~$33K.
Pro of Cheaper rentals:
1) Scales much faster
2) Lower vacancy risk
3) Lower vacancy carrying cost.
Cons of Cheaper rentals:
1) Lower quality tenant pool.
2) More maintenance risk.
3) Higher maintenance turnover costs
Pro of Higher priced rentals
1) Higher rents
2) Assumption of Higher quality of tenants
3) Higher probability of appreciation
4) Ideally less worry overall
5) Better use of 20% Fannie mortgage for properties 1-4 (6? Not sure how many number is now for 20%)
Cons of Higher priced Rentals:
1) Higher carrying costs for vacancy
2) SLOW to scale.
3) Appreciation in midwest markets might not be any better than working class neighborhoods
Which is the ideal strategy? A portfolio of mid cost rentals? A portfolio of High cost rentals? A portfolio consisting of both? Please share your experiences.
I would not buy 2 $82k units that rent for $825. I would go for the $179k. Better tenants and more stable property. If it is available in your market I prefer something around $135-150k that rents for $1350-1500.
@Frank Wong That was my initial thinking as well, but after talking to a few property managers, I'm not so sure I feel that way anymore. Honestly I'm just trying to parse out a strategy in my head, and I keep swinging back and forth.
In the markets I'm looking at, an 82K house is a lower middle class house. Not warzone/D level ghetto. They are just as likely to stay long term as the family that stays in a expensive house. When the house goes vacant, less mortgage, lower turnover cost, and less carrying costs to worry about.
Of course with a bigger house the profit is much bigger when the mortgage is finally paid for, but I' m not sure if I ever want to snowball my payments or if I should always just perpetually maximize equity returns.
Your gross rent is similar in above scenarios and total cost is not that much different, then I would go for better neighborhood.
I own combo of A, B, C properties. The quality of tenants makes a huge difference as high quality tenants at least tried to take care of the rental and follow through on rent agreement.
@Edward Liu I want to own a combo of A-B-C as well, but I'm trying to figure out how to sequence my buys to take full advantage of Fannie and Freddie guidelines. I would like to buy my biggest and most expensive properties on my first 8 properties (me and my wife) in order to take advantage of that 20% down but that will slow things down considerably and who knows how much housing values and interest rates will be once we finally completed 8 big buys.
Scenario 1 is the easy winner with the fact patter above...most profit per property.
I would not buy either unless there was value to be added and/or predictable appreciation.
@Mike Dymski Are you able to get Fannie/Freddie financing with value add properties though?
Yes. And there are plenty of good financing sources in addition to Fannie/Freddie residential. I have a 25 year commercial loan on a small value add apartment community (fixed for seven years, floating afterwards).
Focus on buying one property and you will have more clarity on properties 2-8.
@Mike Dymski Good point. I converted my SFH to a duplex almost a decade ago. Did that all in cash though. At the time I was completely ignorant about financing. I guess I still am.
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