Small Houses for Rentals

[Billy Rogers]

I had a property manager tell me that he prefers smaller houses for rentals. His theory is that smaller houses have less things to repair so they will have lower repair expenses. Fewer windows, cheaper to roof and paint. It seems to make sense and he has a lot more experience than I do. I was wondering what some of you more experienced landlords think of this approach?

[Stephanie Dupuis]

Shannon Slade When I crunch my numbers, I find that cash flow is slightly higher and CCR is also higher on smaller rentals than with 3B/2B properties.

The CF on smaller props. is higher b/c almost all expenses are lower - mtg., insurance, taxes, maintenance, management, etc. Plus, the properties rent for a decent amount. For example, in my area a 3B/2B property tends to rent for $1100-1300 (CF around $100-$150 max when I crunch numbers - I do not own a 3B/2B). My 3B/1B will rent for $900 (CF is $220). Biggest two reasons for the CF difference is taxes and insurance. Mostly taxes. Taxes run $2000/yr+ on 3B/2B in my area. The 3B/1B I have, taxes are $992/yr. Insurance is about 40% less on the 3B/1B.

CCR is higher on the smaller property b/c your costs to buy in tend to be lower combined with higher CF. Down payment and initial rehab is less on smaller properties. CCR on my smaller properties are in the 10-13% range. I do not own any 3B/2B, but when I calculate the CCR, it comes out to 3-4%. This is one reason I have not purchased any.

This may be a regional issue or situation, but it's an issue here. I'd recommend crunching your own numbers and see what you come up with. Let the numbers tell their story.

Edited: The 3B/1B used as an example here is small. It's a dinky one story, 900 sf. house. Basic footprint. Small, small rooms. Not suited for a family.