Quantity vs Quality for First Time Investor?

Question

Hi All,

I've been reading various articles regarding renting but wanted to ask from experience what people think regarding buying rental property in a medium/low vs medium income location?

Say for instance if you had to choose between buying a quadplex in a lower income neighborhood or 2 separate homes in a well off medium income neighborhood, which would you choose? (with both options being practically the same price).

Tips/thoughts and recommendations are extremely appreciated!

Thanks,

Mike

Theresa W. · Answer

Hi Michael Mourey,

It depends on your goals as an investor and the numbers on each of the deals.  What are the average rents in both areas?  What is the maintenance needed on each structure - has it been deferred for a long time?  What kind of tenants are you prepared to deal with, aka, who are your personal preferences for a target demographic?  Will you live in a unit and take advantage of the lower interest loan.  If not, how far will you have to drive every time the toilet is clogged?

This decision needs more details than you've provided, but once you get into the ROI and considering all expenses related to renting to each of these scenarios, one may rise to the top.  Best of luck and let us know more details if we can help.

David Faulkner · Answer

If you want cashflow (but less appreciation) and don't mind being more hands-on, active, and local, go with the quadplex. If you want more appreciation (but less cash flow), less headaches, and/or it is further away, go with the 2 houses.

Also depends on where the market is in the RE cycle. The quad in a lesser neighborhood will likely get hammered harder in a downturn. So in a hot market (i.e. closer to a downturn), the 2 houses is a better choice. In or slightly after a downturn, the quadplex is likely on sale to a larger extent so may be a better buy. I know you said the price was the same, but I'm talking value, not necessarily price; which is also an important thing to keep in mind ... price means nothing, value means everything. Just because something is cheap doesn't make it a good investment, the opposite is also true.

JD Martin · Answer

Return is always reflected in risk. The reason you can buy 4 units in a lower income area vs. 2 units in a better area is that the 4 unit is a riskier investment. The answer depends on what level of return you require and how hard you are willing to work.

Now, asking me that question, I take the 2 homes in good neighborhoods. I like low levels of aggravation and am willing to accept a lesser return in exchange. I also like having a stronger exit strategy should I want/need to get out.

Anthony Micklus · Answer

It does depend on your personal preferences and what you want to deal with. The lower income areas are going to require more time on your part. You will likely have more evictions, more turnover, and more damage to the property but as @Michele Fischer says you can make good money if you know what you are doing.

Michele Fischer · Answer

I chose the quantity over quality option, but almost everyone will counsel to go the other way. Buy and Hold Forever is a great book arguing to buy in the best areas for the long term.   Low income has worked well for us, but it is grueling.  Depends on how much time, energy, and compassion you have to devote to it.  You may want to read some of my BP personal blog posts.