Why I only buy 3-bedroom houses (and what I'd pay for a 2BR)

Question

Here's the rule I run everything through: I don't buy anything under 3 bedrooms.

It's not a preference. It's math.

1. Section 8 payment standards favor 3BR+. My 3BRs in Memphis rent for $1,395-$1,950 through Section 8. On a house I bought for under $100K, that clears the 1% rule without breaking a sweat. A 2BR rents for meaningfully less and the payment standards don't keep up, so the cash flow math falls apart fast.

2. Families stay longer. A 3BR rents to a family that needs the space. They don't leave because they outgrew the place. Lower turnover means lower make-ready costs, and that shows up in the numbers year after year.

3. Resale and refinance liquidity. When I refi on a DSCR loan at 70-80% LTV, the appraisal needs to hit. 3BR homes appraise off comps that exist everywhere. A 2BR in a working-class Memphis neighborhood is a thinner market - fewer comps, weaker ARV.

4. The conversion math. If I do buy a 2BR, it's because it can become a 3/1. Converting a 2/1 to a 3/1 or a 3/1 to a 4/2, usually adding 400-650 sq ft or turning a carport or garage into a master bed and bath, is one of the highest-ROI rehabs I know. It jumps the rent into that $1,395+ range and moves ARV toward the $180K-$265K band I target.

So what would I pay for a 2BR that stays a 2BR? A steep discount. Priced like the rent it can actually produce, not like a 3BR. Most of the time the numbers don't work, and I pass. Deal flow is the real bottleneck in this business anyway - I'd rather spend my time chasing another 3BR in 38109 or 38114 than forcing a 2BR to pencil.

Across 236 properties, this is one of the few rules I won't break.

What about you - do you have a hard floor on bedrooms, or have you made the 2BR math work in your market?

David Krulac · Answer

@James Jones We've owned 1 br up to 5 br. We've rented Section 8 to 1 bedroom, 2 bedroom, 3 bedroom, 4 bedroom and 5 bedroom. A 4 bedroom we rented to a family, mother, father and 8 boys. They had a hard time finding housing and stayed for 12 years because they gained 2 more children while they lived there. They moved when some of the older boys graduated and move out, so they could move out. At the 5 bedroom house, we rented to a 3 generational homeless family that the county was putting up at a hotel. Our rent was an economically bargain compared to the hotel and saved the taxpayer a bunch of money. They stayed 8 years. The one bedroom was rented to a senior citizen on a fixed income, Section 8 and stayed 4 years. One of the 3 bedroom units we rented to 3 different tenants all single moms with two children all stayed 3 years each. Another 3 bedroom was rented to a single mom with 2 kids (Section 8 required separate bedrooms for the kinds). They stayed 7 years, then bought a house. All the bedroom units from 1 br to 5 br worked out and we provided housing for a lot of people that needed housing. One time I looked at a house for sale that had 13 bedrooms ( it was a former convent, get thee to a nunnery) but I decided not to buy 5 bedrooms is the max for me.

Didier Bizimungu · Answer

Rent by the room here 3/2 are our bare minimum. 6/4 is about the max unless you're doing Padsplit

Ashish Acharya · Answer

James, I like the way you’re treating bedroom count as an underwriting variable rather than simply a property preference. The conversion point is especially interesting because the question becomes whether the additional bedroom actually creates enough rent and value to justify the full cost of the work. I’d want to include not just the construction cost, but permits, carrying costs, financing, contingency, and any impact on the property’s long-term maintenance.

I’d also look at the tax side when doing a conversion like that. A substantial conversion can create a meaningful amount of capital improvement cost, so keeping the individual project costs well documented matters for depreciation and potentially cost segregation.

The other thing I like about your framework is that you’re tying the bedroom count to the refinance and resale market. A higher rent number doesn't help much if the property becomes harder to finance or there aren't enough comparable sales to support the value.

At 454 properties, you clearly have enough actual data to know whether the 3BR rule is working. That is probably more useful than any generic rule someone could give a new investor. Happy to connect!

Drew Sygit · Answer

We don't recommend buying any rentals with more than 4 bedrooms.

The percentage of tenants that need 5 or more bedrooms is so small, that just like your 2-bed analysis, an investor rarely gets the same ROI as a 3 or 4-bed rental.

• NOTE: with Class C or S8 rentals, we've always had major upkeep and damage issues from tenants with 5+ bedroom rentals.

NOTE: with Class C or S8 rentals, we've always had major upkeep and damage issues from tenants with 5+ bedroom rentals.

Harrison C. · Answer

no hard floor for me, but i count bedrooms different. i rent by the room, each person on their own lease, so every bedroom is its own rent.

my rooms go for $600 to $775. so a 5 bedroom house brings in a lot more than a 3, on about the same roof and the same yard. i have a couple small ones too (2 and 3 rooms) and they work, they just dont have much cushion when a room sits empty.

so your point 4 hits even harder by the room. a carport turned into a real bedroom isnt a bump in rent, its a whole extra rent.

trade off is more people to manage and more turnover than your families. different business really.

Why I only buy 3-bedroom houses (and what I'd pay for a 2BR)

Why I only buy 3-bedroom houses (and what I'd pay for a 2BR)

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