Hello, this is my first post on BP!!. I've been educating myself on REI for over a year now & am ready to take action. My plan is to rent out my current primary SFR as I should cash flow $600+/mth after all expenses and then purchase another property to live in that has separate guest quarters to also rent out to cut down on my expenses & help pay down the new mortgage. I have found a property that is in an OK neighborhood (probably B-/C+) where the numbers are great for my particular situation. I live in the east valley of Phoenix, AZ area where the market is hot & prices are high! The estimated rental income from the guest house on the B- property would cover at least half of my mortgage payment (incl. taxes & insurance) & overall net effect would be a savings of about $800/mth for my personal housing expenses. I plan to live in this new property for approx 3-5 years then sell or rent it depending on market conditions. Current home values in this neighborhood are $250-$310K range. My other option is to purchase a more expensive ($420-470K) "A" class home in a nicer, rapidly growing neighborhood with a much higher mortgage payment & approx $300-400/mth more in rental income than the first option but my net savings on my housing expenses would only be about $300/month.

From a longer term perspective, am I better off buying the higher priced property in the nicer neighborhood - assuming better appreciation, better tenant pool, higher probability of resale, etc? Is LOCATION, LOCATION, LOCATION worth it vs the $400-500 month difference in savings I'd be giving up going with the lower class property?

I'd greatly appreciate your thoughts and opinions from the seasoned investors out there. 

When it comes to residential income properties I look at rent ratios in a minimum B- area. A Class might be a better area but not necessarily a better investment. 

Your going to be living there is that may play a role 

@Stephanie Foust Since you are house hacking, I think quality of life must have a higher consideration than just numbers.  If you are able to qualify for a half million dollar mortgage, then you probably are used to a certain standard of living.  I would lean towards the better neighborhood.  The thing is with better neighborhoods you have other options for revenue.  Short tern rentals or renting out by the room now become more plausible.  If you have a 4 bedroom house and you rent out each room at 650, the total each month is 2500 and may be considerably higher than the 1800-1900 you planned to rent it for unfurnished.  Similar numbers with Airbnb.

@Stone Jin

Does rooming a house make it more difficult to refinance and find a lender for 2nd investment property?

@Xavier Marcial not if you have leases in place. Financing is all about dti and reserves.

Originally posted by @Stephanie Foust :

From a longer term perspective, am I better off buying the higher priced property in the nicer neighborhood 

Yes.   I would take price appreciation (a.k.a. capital gains) over cashflow (a.k.a. dividends) any time.

Hard to say without knowing the specifics, but I'd be very careful with my appreciation projections. Just because a property is in an "A" neighborhood over a "B" neighborhood doesn't necessarily mean it will appreciate enough to cover the added expenses. 

@ Stone Jin, yes, that’s probably my biggest dilemma is my personal lifestyle that I’m used to! Ultimate goal is to reduce my living (mortgage) expenses & increasing cash flow so I can save for more rental properties to buy. To accomplish that, looks like I will have to sacrifice my current level of living. Renting out rooms isn’t a feasible option for me as we have dogs who are not so stranger friendly so we’re looking for a property with a separate casita/guest house to rent out. It’s been an interesting search in this market! 

@Pamela Sandberg Thank you for your insight! Very good point... think I’ve found a happy medium with more of a middle road price point @$350k which looks decent numbers wise!