Are larger more expensive homes good rentals.
North Lauderdale, FL · Member since 2015 · 25 posts · 1 vote
Are larger, more expensive homes hard to rent.
I am concerned that anyone that would rent such a nice place could afford to purchase their own nice home, so finding a renter that would stay for a while, might be difficult.
Any advice would be appreciated.
@Julie Rogers There is a market at every income level for various reasons. I have a very nice 4 bd + office 2600sf that I rent for $2500/mo. There was so little on the market for that quality of home that I rented it the first weekend I advertised (in February!)
I have an article about the Law & Order actor Christopher Meloni who was paying $20k/month rent for his Beverly Hills rental!
It's not just those who can't afford to own who rent, but those who choose to rent for other reasons.
It completely depends on the neighborhood. I have one rental property that is one of the nicest properties I own, and it's been an absolute headache to rent out. I even had to end up putting a section 8 tenant in, just to get it rented.
Here's more of the story on it-
https://www.biggerpockets.com/renewsblog/2014/04/0...
So yes, it's possible you have too nice of a property, for sure. Just depends on the price point, the rent range, and how many renters are in the area.
The other thing you have to be careful of with the bigger nicer homes is the numbers- oftentimes the really nice homes won't pan out for positive cash flow because the house is too expensive compared to the rents it can bring in.
I like owing rentals in the more expensive neighborhoods, but I do NOT buy larger homes there. For example , I had a 2 Br/2 Ba, 1200 SF single family in a class A neighborhood a block away from a really good elementary school, and it was great! On rare turn overs, if I could get a small, young, upper middle class family in there with a child starting 1st grade ... well, that's a family who will likely stay there for the next 6 years (1st-6th grade) and in fact they would, and pay rent like clockwork, and take great care of the house because it was a home to raise their child in. Often the primary bread winner had a larger W2 income than I did, and I was more than fine with that. From 2009 to 2016 the rent went from $1800 to $3200 and values took a similar trajectory because it was in a neighborhood where people wanted to live and mine was an entry level home there. So, smallest house on the nicest block has been a wining strategy for me.
David I like hearing those points you brought up, it is definitely an advantage to have the stability of a nicer neighborhood with functioning schools nearby. I am currently closing on on buying a 2 Br/2 Ba, 1000 SF condo in a good location in SoCal. From a cash flow perspective, I have a question. I would purchase the property to house hack the first year, in order to qualify it as a primary residence. After the 1st year, I would be renting both bedrooms out and aim to purchase another property. Would you be reluctant to take a hit the first year, cash flow wise, in the SoCal market if it meant gaining a primary residence for more rental deals later on?
My take is vastly different from others on this site, but has been a proven winner for me over the years in SoCal. With that caveat, yes I have repeatedly taken the cash flow hit as a primary residence in nice neighborhoods and it has panned out for me quite well, both long term cash flow (due to rent increases) and appreciation. Looking back, I think a few things I did right (at first by lucky accident, and later by deliberate planning) made this possible:
1)I timed my appreciation plays very well ... not that I nailed the absolute bottom of the market upon purchase (though I have), but like horse-shoes, hand grenades, and nuclear warfare, close is sometimes good enough. Having said that, I'm not super confident that now is closer to the bottom than the top.
2)I bought distressed under market. I've always bought distressed but not always under market for current condition as a newbie, though I made up for my lack of skill and education to do so with "sweat equity" (saving rehab cost via DIY to still come out way ahead). These days I have more experience and money than time and energy, so I do more buying below market and less sweat equity, but in the beginning it is usually the other way around. This is super important because if you miss on point #1 above, you still have a "buffer" to insulate you to some degree from short term market fluctuations.
3)I ALWAYS make sure financially I can easily afford to hold the property through thick and thin. This means putting money down as an extra equity buffer (above and beyond that created by point #1) AND having cash reserves for unexpected emergencies (loss of job, leaky roof, etc.) AND having sufficient income + margin to carry the property. On the income front, this means having a W2 or 1099 income that can easily pay the mortgage + expenses while it is your primary. I then would wait until the rent increased enough to carry the property (often after a cash out refi for my next down payment) and the market dipped (see #1 above) and/or found a smokin' deal (see #2 above) before turning my primary into a rental and purchasing my next place. This means that I waited longer than a year in most cases but less than you might think it would take under these criteria (most underestimate the long term power of appreciation) ... though could be shorter depending on where you buy, how skilled you are, and how financially conservative you are. I prefer SFRs with no HOA too ... higher buy in cost, but generally better appreciation & tenant class, more control, more "value add" possibilities (try doing an addition on a condo :)), and no unpredictable HOA fees or assessments to eat into my cash flow.
So, though some think that all that buy RE in CA for appreciation are crazy gamblers, and many in fact are, I myself am incredibly conservative, because of my multiple exit strategies believe that what I am doing is NOT gambling, and have the consistent long term track record of profits (in BOTH appreciation AND long term cash flow) to back it up. I will also say that REI is local, and I would NOT necessarily prescribe these methods to most other markets without extreme care and due diligence to validate that the market has a long term historic track record (not just last year or the year before, but 30+ years of high average appreciation) ... in fact, in SoCal do yourself a favor and independently validate this rather than take my word for it ... I get ~6% long term average appreciation and a slightly lower clip for rent increases for the coastal and super nice central hoods I look into and invest. This is long term AVERAGE ... there are ups and downs along the way, which is why you need IMO #1-3 above to make sure you make it through any short term downs to realize the long term ups. These methods may not be for all but have worked very well for me over the last decade + I've been investing, and I welcome any counter arguments since different views intelligently debated are what makes this site great and ultimately leads to smart investment decisions IMO.
Man, that was novel more than a short story ... I hope this helps!
David thank you for the in depth response, I appreciate you taking the time to help a newbie out! I am glad you put a lot of emphasis on damage control if there was to be a market downturn, as well as how to specifically insulate yourself to cover any unseen costs or market dips, i.e. sweat equity. I have to say, i'm a fan of healthy debates but I really dont see much that I can argue with. Ha!
After some multiple months of meeting with agents, extensive reading/research, seeing properties, exhausting the BP rental property tools, etc, i've narrowed my purchasing prospects down to a 2/3bdr single family home/condo in the valley. Preferably SFH to avoid the HOA's. I see the value in taking the hit to qualify as a primary residence, and I think it is time within the next few months to finally make a move.
It is a sellers market, but just combing through the MLS there are some glimmers of hope to find a good enough deal. With that being said as long as I have the rental income to supplement the mortgage, with a little extra wiggle room, to me its worth it to stick to your guns in the event of any market dip. I really dont see anything like 2008 happening again, but, its always what you think you know that just aint so. To wrap this response up, I have a question about your SFR's. With regards to a 3 bedroom SFR, do you have experience with these, and if so what are some pros/cons to look out for if I end up closing on one in the valley within the next few months? Thanks so much!