Investing in High-Cost vs Low-Cost Markets, Which Makes You Rich?
Raju BalakrishnanPro Member
Rental Property Investor · Santa Clara, CA · Member since 2016 · 223 posts · 112 votesInvesting in High-Cost vs Low-Cost Markets, Which Makes You Rich?
4 Replies
- 4yRandall AlanPro MemberInvestor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votesI enjoyed your article. Basing part of your argument on the amount of effort does not really go to the title of your post. I expect to put in effort as an investor. The question wasn’t “which was easier,” it was “which will make you rich.” I have run this simulation for the same market… “which is better to buy… 3 houses at 1/3 the high priced house, or just the high priced house?” The answer is definitely the 3 houses, every time in my area. The real question I was trying to answer was, “what is the best house for me to buy to maximize the amount of money I have to spend, and get the greatest return - as we were looking to quit 2 good paying corporate jobs and do real estate full time. To put it simply, it was the house I could pay the least for and rent for the highest dollar amount. It may seem overly simple and obvious… but the higher the cost, the higher the taxes were and the higher property insurance was. Those increased carrying expenses definitely affected the bottom line numbers. There was also a higher rent return per square foot on the lower end it seemed. A 3000sf homes didn’t rent for 3x the 1,000sf homes. So it wasn’t a linear correlation.
Quote from @Raju Balakrishnan:
Just wrote this, this is especially relevant for Californians. Would like to know your opinions.
My path 4 years ago was to buy 25 lower cost homes, versus 5 median priced homes with the same money. Today - perhaps through lucky timing - some of those homes have doubled and tripled in value. We can now sell off our least favorite properties without significantly affecting our monthly net income. We have used the proceeds to go from 19 mortgages to 9. Much of that was through consolidation, but also included taking our older mortgage rates from the mid-5’s to the mid to high 3’s… obviously before rates started jumping back up.
Yes, the cost of acquisition and upkeep of our portfolio is higher than had we went the high road - so it is more effort (more closing costs, tenants, roofs, toilets, plumbers, AC calls, but if you factor in appreciation, flexibility of choices on portfolio, I still think it is the smarter path. And appreciation really is under-valued. We are netting an extra 6 figures over what we paid for houses 3-4 years ago.
I think you do what the numbers tell you to do as to what your plan is. Low rates - buy and refinance. High prices - sell and take some money and profits off the table. We are in our early 50’s and by 60 we want to be portfolio debt free with enough REI income to turn the portfolio over to property management - which currently isn’t necessary for us. It’s really pretty stable and easy. 95% of any regular issues are solved with a phone call.
Randy - 4yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
Nice article, better title might have been,
"Investing in High-Cost vs Low-Cost Markets, Which has Higher Returns?"One thing you didn't appear to analyze is the impact of vacancy & maintenance charges of Class A vs Class B vs Class C properties/tenants on returns.
Logical Property Management4.9469 Reviews - Rental Property Investor · Santa Clara, CA · Member since 2016 · 223 posts · 112 votes4y
Quote from @Randall Alan:
I enjoyed your article. Basing part of your argument on the amount of effort does not really go to the title of your post. I expect to put in effort as an investor. The question wasn’t “which was easier,” it was “which will make you rich.” I have run this simulation for the same market… “which is better to buy… 3 houses at 1/3 the high priced house, or just the high priced house?” The answer is definitely the 3 houses, every time in my area. The real question I was trying to answer was, “what is the best house for me to buy to maximize the amount of money I have to spend, and get the greatest return - as we were looking to quit 2 good paying corporate jobs and do real estate full time. To put it simply, it was the house I could pay the least for and rent for the highest dollar amount. It may seem overly simple and obvious… but the higher the cost, the higher the taxes were and the higher property insurance was. Those increased carrying expenses definitely affected the bottom line numbers. There was also a higher rent return per square foot on the lower end it seemed. A 3000sf homes didn’t rent for 3x the 1,000sf homes. So it wasn’t a linear correlation.Quote from @Raju Balakrishnan:
Just wrote this, this is especially relevant for Californians. Would like to know your opinions.
My path 4 years ago was to buy 25 lower cost homes, versus 5 median priced homes with the same money. Today - perhaps through lucky timing - some of those homes have doubled and tripled in value. We can now sell off our least favorite properties without significantly affecting our monthly net income. We have used the proceeds to go from 19 mortgages to 9. Much of that was through consolidation, but also included taking our older mortgage rates from the mid-5’s to the mid to high 3’s… obviously before rates started jumping back up.
Yes, the cost of acquisition and upkeep of our portfolio is higher than had we went the high road - so it is more effort (more closing costs, tenants, roofs, toilets, plumbers, AC calls, but if you factor in appreciation, flexibility of choices on portfolio, I still think it is the smarter path. And appreciation really is under-valued. We are netting an extra 6 figures over what we paid for houses 3-4 years ago.
I think you do what the numbers tell you to do as to what your plan is. Low rates - buy and refinance. High prices - sell and take some money and profits off the table. We are in our early 50’s and by 60 we want to be portfolio debt free with enough REI income to turn the portfolio over to property management - which currently isn’t necessary for us. It’s really pretty stable and easy. 95% of any regular issues are solved with a phone call.
RandyThank you Randy, great point. Yes, I agree to your analysis that for your scenario, lower cost houses makes sens. Price to rents will be better, and cash flows will be better too. For a different investor for a different goal, a different scenario will work. For example, a busy high-paying professional with a $1000 value for an hour, time will be more valuble
- Rental Property Investor · Santa Clara, CA · Member since 2016 · 223 posts · 112 votes4y
Quote from @Drew Sygit:
Nice article, better title might have been,
"Investing in High-Cost vs Low-Cost Markets, Which has Higher Returns?"One thing you didn't appear to analyze is the impact of vacancy & maintenance charges of Class A vs Class B vs Class C properties/tenants on returns.
Thank you Drew, gald to know that you like the article and valuable points. Yep there are more details we need to consider, may be a followup article.
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