Quality vs Quantity for buy and hold properties? Thoughts?

Question

I'm thinking about real estate in the Midwest. If I were to buy a home for $200,000 in the Dallas area, I could rent it for somewhere between $1,600-$2,000 a month depending on location. That could generate a net cash flow of somewhere between $200-$500 a month, depending on loan terms and other expenses.

The second scenario is based on quantity (cheap low cost homes) in the Midwest.

I currently have a house in Illinois, purchased for $49,500. I rent it out for $650 a month.

If instead, I bought 4 of those houses around $50,000 (same amount of $200,000 on Dallas home) I would get at least $2,600 a month in rental gross income. A full $600 to, an upwards of $1,000, more income than the first scenario.

Am I thinking logically ? Sometimes a fresh pair of eyes and thoughts on the scenario help.

Roy N. · Answer

@Scott Bean

A word of caution: frequently - but not always - "cheap, low cost homes" mean less stable, lower quality tenants which often means higher maintenance/CapEx and greater economic vacancy .... "poof" goes that extra $600 ;-)

Combine that with lower chance of any appreciation and limited exit strategies, and quantity is not always better the quality.

Brandon Elliott · Answer

@Scott Bean I'd choose the cash flow properties.  All day long.  That's not necessarily right, but its definitely my strategy.

Andreas W. · Answer

@Hattie Dizmond

Got it. Thank you for your explanation. I think that counts the same in my neck of the woods. Inventory is very low now and rehab objects gets absorbed quickly. Sometimes I have the impression it takes regular sales properties on the MLS longer to sell than advertised rehabs of the same class. Often the price difference does not justify more than cosmetic rehab despite the gaping holes in the floors and the decades old electric floor heat.

Hattie Dizmond · Answer

I just mean that sale prices have risen faster than market rents, which makes complete sense, when you think about it.  Tenants have the rent locked in for the duration of their lease.  Therefore, regardless of what the market is doing, the rent can't increase, until it is time for the lease to be renewed.  Add to that the fact that some leases restrict the amount rent can be increased each time, and the leases themselves depress market rent.  Plus, if you try to escalate rent too much on an existing tenant, you stand a good chance of losing that tenant...a good thing if you're trying to get rid of them, but bad if they are a great tenant.

In the last 24-months property prices have done nothing but increase, driven by both a recouping of the lost appreciation from the dark days between 2008 - 2012 and an overall lack of inventory.  It isn't a bubble, but prices have risen much faster than rents can/will rise.  Therefore, if you are having to pay $180k for a house you can only rent for $1500/mo, that's not a good cash flow situation.

Justin Fox · Answer

Also, just because you buy strictly less liquid CF properties now, doesn't mean you will want/have to in the future.  You just need to evaluate the potential maintenance well before you purchase.  To me, if you find a great deal, you buy it if possible.  If there are no good deals, you wait.I know those 4 houses have better gross cashflow, but have you sat down and figured out the hard numbers?  If those 4 houses are in the city limits, you might not be making THAT much more money net.

Andreas W. · Answer

@Hattie Dizmond

Do you mind explaining the inverted rent to value statement? Just for learning purposes.

Brian Beck · Answer

Wow, a paid off property in 4 years.  As long as you can keep it rented it seems like a no brainer.

Hattie Dizmond · Answer

@Scott Bean

Everyone knows I love Texas and DFW in particular.  But, it's not a great buy & hold market right now.  We're still in an inverted rent to value situation, and inventory for homes to purchase is still ridiculously high, so it's difficult to find quality homes for buy & hold.

With that said, why does your equation have to be so black & white?  Is there not a happy place, where you can get better quality properties cheaper than you can in Texas right now, AND get decent cash flow?  I'm thinking OKC, KC and other tier 2 markets.

Just a thought.

Vishal Gadhia · Answer

@Scott Bean

Cashflow is the king at end of the day but you gotta also keep in mind the entry and exit strategies for these investments.

if you can sell the 200K house in Dallas faster and quicker due to the quality then its better deal as the underlying asset is better.

With house in IL, they might be cheap but is the extra CF worth the maintenance headaches  and the risks?

You will always have to choose between CF and asset quality, and you should be able to do it based on what you want to do in your business.

Quality vs Quantity for buy and hold properties? Thoughts?

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