Hello, new member from Toronto, Ontario

17 Replies

I am a construction manager with many years experience. Used to work for multi national real estate developers. Recently became a full time real estate investor myself. I believe in buy and hold strategy, with a balance between cash flow and appreciation. I've been looking at the US markets for a few months, still trying to figure out which markets are best for me. A few questions.

1). Class A vs Class C properties. Some members here prefer Class A while others prefer Class C properties. My understanding is that A properties have bigger potential for price appreciation, less property management headache, but in the same time have lower cash flow ratio; C properties have higher cash flow ratio, but probably have low/no price appreciation and inherent more property management issues. For out of state investors, class A seems make more sense. But again, price appreciation is always PROJECTION, which you may or may not get... Any thoughts?

2). SFH vs Multi Family. I kind of like the multi family better because of the higher return in general. Any thoughts?

3). Concentrating on one market for economic of scale vs Geographically Diversification. With my current financial capacity I can take 5-10 properties, and I plan to buy 20 eventually. Does it make more sense to buy in one market so that I can use the same broker, same property manager, same contractors, etc.. cause it is really hard to find the right people. Or does it make more sense to diversify among different areas to mitigate risk?

Your comments/thoughts would be much appreciated. Have a nice day.

@Wei Peng  

welcome to the site.

There is no 1 right or wrong answer to your question.

You described several ways of investing that if executed property would all make money & if executed poorly would all loose money.

For me personally I look to keep everthing in 1 area to develop economies of scale.

Hello @Wei Peng ,

Welcome to BiggerPockets!

Nice to see another Canadian on the BP site.  My wife and I have many relatives in the Toronto metro.

Here are some QUICK answers to your questions.  I'd be happy to elaborate if you like.

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1). Class A vs Class C properties. Some members here prefer Class A while others prefer Class C properties. My understanding is that A properties have bigger potential for price appreciation, less property management headache, but in the same time have lower cash flow ratio; C properties have higher cash flow ratio, but probably have low/no price appreciation and inherent more property management issues. For out of state investors, class A seems make more sense. But again, price appreciation is always PROJECTION, which you may or may not get... Any thoughts?

In general terms this is true, however real estate is very local and therefore the market and neighborhood of the property will have a major impact on the returns and the type of tenant.  We recommend our clients stick to 'A' or 'B' grade neighborhoods depending on what their investment goals are.  There are other factors of course.

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2). SFH vs Multi Family. I kind of like the multi family better because of the higher return in general. Any thoughts?

Multifamily properties might have higher returns because of the economy of scale, but that's not always true.  For example, we have some new-construction duplexes and tri-plexes in Kansas City, MO that generate about 8% to 9% cap rates, BUT we also have many single family homes there and Indianapolis that produce 10%+ cap rates.   In short, it just depends.

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3). Concentrating on one market for economic of scale vs Geographically Diversification. With my current financial capacity I can take 5-10 properties, and I plan to buy 20 eventually. Does it make more sense to buy in one market so that I can use the same broker, same property manager, same contractors, etc.. cause it is really hard to find the right people. Or does it make more sense to diversify among different areas to mitigate risk?

BOTH:  Sometimes you will benefit from concentration in a single market but there is the law of diminishing returns.  Your 'savings' from staying in one market often disappear from the lost opportunity cost of diversifying into other markets.

As I point out in Rule #7 in my 10 Rules of Successful Real Estate Investing, you should diversify across markets.  Basically, you'll want to focus on one market at a time, accumulating from 3 to 5 income properties per market.  Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one.  Typically that means focusing on another state.

Hope that helps!  :-)

Continued success!

You don't appear to understand cash flow ratio or appreciation.  The higher the cash flow ratio means the market perceives the chance of collecting those rents or operating at a profit riskier.  Cash flow AND appreciation are both projections.  There is no guaranteed cash flow.

People that buy different classes of property should do so because they have a plan and can implement it.  Don't buy class C properties unless you can manage them or manage the manager.  

Welcome @Wei Peng  !

I lived in Calgary, AB for 5 years and know how expensive properties north of the border can be.

As mentioned above, a class A property is typically "safer" and will have less cash flow.  Yes, it MAY appreciate in the future but you should never use that as an exit strategy [IMHO].

A class C property will defiantly take more management and more risk tolerance but can still produce a nice ROI.

Here in the Mid West, a solid class C/C+ property can be bought for less than $60k with a solid rent of $750-$800.  This coupled with moderate property taxes and the ease to rent them make our market "investor friendly'.

Small mulit unit properties, here in the Mid West, also tend to be older built and lower rent which equals less cash flow and a lot more headaches.

Yes, on paper, they look very sexy...but I know for a fact they are [for the most part] NOT [at least here in Indianapolis].

Hi @Wei Peng  

This is a classic dilemma. It all comes down to what is more important to you. Is it cash flow, appreciation or bottom line ROI. As a rule, an A class property will generally have the highest cash flow because of the lower rent, but lower cash flow return. It should however have the highest appreciation rate so that your overall ROI over time might be higher. You can do quite well on a ROI basis with C class properties but you're cash flow will generally be less because of the lower rent. Personally, I think the sweet spot, at least in Indianapolis and Kansas City (every market is different) is the solid C+ to B- property. Most property managers will tell you that there is not a big difference in the vacancy rates for a B vs C property. The big difference is between C and A. If you're looking for cash flow and ROI. Indy and KC are good markets.

@Wei Peng  

Hi and welcome to BP!  It should be said that your evaluations of property areas that there is no standard for what makes an A area, a B area, etc.  Short of knowing the area first hand, you have to find out how the provider/seller is defining their classifications.  Different areas will have different standards as well.

Thank you everyone for your comments. I am currently narrowing down my market choices. Based on population growth, job growth, fortune 500 headquarters, diversified economy, and housing affordability, I've come up with the following metro cities, Atlanta, Cincinnati, Charlotte, Jacksonville, Indianapolis, and Milwaukee. My strategy is to quick close the property with cash, rehab, rent, and refinance. Would love to hear how folks are doing in these markets.

Originally posted by @Wei Peng :

Thank you everyone for your comments. I am currently narrowing down my market choices. Based on population growth, job growth, fortune 500 headquarters, diversified economy, and housing affordability, I've come up with the following metro cities, Atlanta, Cincinnati, Charlotte, Jacksonville, Indianapolis, and Milwaukee. My strategy is to quick close the property with cash, rehab, rent, and refinance. Would love to hear how folks are doing in these markets.

 Hello Wei....I invest and live here in the Indy market using mainly the same strategy you have laid out.

Let me know if you decide to look here, and need any advice. 

Hey @Wei Peng  welcome to the site! Definitely start jumping into the community here! Be sure to read through The Ultimate Beginner's Guide to Real Estate Investing to help you get started.

You may also enjoy this post, about multifamily properties: How to Buy a Small MultiFamily Property: A Step by Step Case Study

Finally -be sure to setup some keyword alerts - especially for "Toronto" so you can jump into local conversations.

See you around the forums!

Welcome and good luck, @Wei Peng  I have some friends who own condos in Toronto so I know how a good unit can cost ten times what it does here!! Aside from the cost of RE, I'm a big fan of your city and love to chow down in Markham :D

Feel free to ask if you have any questions about Jacksonville. 

Thank you @Ashley Mullin  @Aaron Thivierge @Brandon Turner  @Maxwell Lee  

Brandon, I read your post about multi-family which is a great article. One practical thing I took away from it was how you did your inspection. I think having a contractor instead of "professional inspector" to do the inspection is a great idea, for 1)a good contractor is probably more knowledgeable than an inspector, and 2)you get a detailed quote at the same time. 

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