Luxury SFR rentals vs. Low end SFR rentals

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Luxury SFR rentals vs. Low end SFR rentals

James Park
Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes

This thread is a spin off of "Buy 1 rental home or 3 rental homes" I was wondering if any of you in BP nation own one or multiple higher end SFRs in very nice areas? or even focus on higher end SFRs as your stategy in emerging real estate markets?

In the Atlanta market, any homes in the $350,000 - $600,000 range is considered to be in the luxury market. By higher end rentals I mean rents in the $2000 - $4000/month range. By accident (a home purchased to live in, but became a rental property), I own one SFR rental in a high end neighborhood which rents for $3000 month which has been rented to the same tenant for 7 years now.

This is my opinion between high end SFR rental vs. lower end SFR rentals and I would get some feedback from other BP members. I think the biggest risk of a higher end SFR rental is the vacancy factor, but once you capture that "A" tenant they will most likely stay as your tenant for a very long time. I am assuming with apartments, MF, and lower end SFRs, you will have more turn over, more maintenance cost, but your CAP rate will be higher and you will have more diversification as one empty lower end SFR doesn't sting as bad as a higher end rental. I would think that you have greater appreciation on a higher end SFTs than you would with a lower end SFR.

The areas I target don't have any apartments or Mulit-family so i have no choice but to invest in SFRs. Today, I try to look for the cheapest SFRs in the best high school cluster in Atlanta.

I wanted to get some feedback from other BP members who rent out homes in the luxury neighborhoods vs. lower end SFRs price at $100,000 with $1000/rent. Which have you found to be more profitable. I think that every new rental property you take on can add additional financial risk.

Personally for me, I rather own 10 $300,000 SFRs than own 30 $100,000 SFRs with 30 tenants. I used to think of my tenants as customers before, but now I have a mind set of selecting good tenants like you would when you inteview a employee to hire for your own business. I would like to acheive my SFR investment goals with the least amount of tenants i possible can.

What are your thoughts?

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

A SFR that you buy for $170 and that rents for $1400 will suck money out of your pocket.

A $550K house that rents for $3000 will REALLY suck money out of your pocket.

If these are the best you can do DO NOT BUY RENTALS!

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  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 708 votes
    14y

    I think the ROI numbers and your ability to take down large deals are the key things to consider when starting out. If you can afford 'luxury' apartments, and you can cash flow them at market rate while accounting for vacancy, repair, and management then why not!

    In my 'luxury' areas the rents will not cover the expense of ownership unless you pick up a short sale, foreclosure, or find a good deal from a motivated seller. In those cases it is entirely possible (in my area) to find a 10% ROI, but it is not trivial, and takes time / patience. In the non 'luxury' markets that have MF and SF I can find MUCH better returns, quicker and easier. I focus on localized areas rather than haphazardly and I get to know as many neighborhoods as possible, as well as i can. I always separate geographically in my mind by 'location'

    Since I myself am just starting out as well, I'm taking the approach to maximize ROI. That is my bottom line, I'll evaluate every deal to see how it correlates with my other investments. Given the current lending environment I have had more success financing investments with higher ROIs. These tend to be cheaper houses in solid neighborhoods.

    Cheers,
    Mark

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  • Andy Chu
    Involved In Real Estate · Las Vegas, NV · Member since 2010 · 341 posts · 86 votes
    14y

    This answer is dependent on the geographical location, and local conditions. It is typical for cheaper rents to be able to be rented out faster. Also with multiple homes, there is a smoothing of income.

    From the example above, you have a great renter, but let's say the renters situation changes and stopped making payments or worse yet, uses the property heavily. No longer will you have income, the repair costs are significantly higher, and repair time frame may be longer which cuts into your bottom line. These situations greatly affect your cash flow position.

    When we identify the 3 property strategy, if one moves out, there's still 2000 of income. You can now use the income from the other properties to cover repairs and days on market is usually shorter because a person that can afford 3000 a month can downsize to 1000 but not vice versa.

    Good luck!

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  • Robert AdamsBusiness Member
    Real Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
    14y

    It's all about cash flow and future appreciation. In the Vegas market you get better cash flow with multiple lower priced homes. Also, the prices of the high end homes still have some room to come down in price in my market in my opinion. The lower priced homes are already dirt cheap and there are a lot more buyers that can afford these homes. When you go to sell the demand will be higher for the homes that more people can afford.

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  • James Park
    OP
    Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
    14y

    In markets like LA/OC/SF/NY, it is still cheaper rent than to own, however in markets like Detriot, Altanta, Dallas, Austin, Houston, it is cheaper to buy than to rent.

    I would think that diversifying your SFR rental would be ideal. Do some of you diversify your SFR rental portfolio, by having 2 $100k SFRs, 2 $250k SFR, and 2 luxury SFRs? In the school cluster i target my investments, the cheapest SFRs are priced in the $170,000 range with rents in the $1400/month.

    I guess with this strategy, you have some property that cash flow well and some that will appreciate much faster in very nice neighborhoods. There are certain high end subdivisions in the Atlanta market where home in the $350,000 - $550,000 range move very quickly. Even rents in $3000/month is high in demand as the schools are ranked top 3% in the state.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    A SFR that you buy for $170 and that rents for $1400 will suck money out of your pocket.

    A $550K house that rents for $3000 will REALLY suck money out of your pocket.

    If these are the best you can do DO NOT BUY RENTALS!

    3Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    I'm trying to understand the point of the question. Excuse my ignorance, but this has been beaten to death. C areas cash flow better than A or B... D areas better than C. A and B will appreciate faster than C which is faster than D.

    But at the end of the day, all you need to do is run the numbers. What is your exit strategy? What is the time frame? What do "you" believe your market will do in that time frame? Add all the numbers up... rents, appreciations, mortgage paydown, etc etc etc... which ever number is bigger is "financially" better.

    No rocket science, no secret sauce, no crystal ball we have which you don't.

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  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 708 votes
    14y

    appreciation is speculation and should not be considered as part of the return on investment, unless you're being conservative and making it negative!

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y
    Originally posted by Mark Updegraff:
    appreciation is speculation and should not be considered as part of the return on investment, unless you're being conservative and making it negative!

    I agree 100% but I know others have a different view. They may be right, they may even do better... my belief is simply if I buy cash flow I have a much safer and more secure path to long term wealth.

    0Reply
  • Ryan B.
    Investor · -, IL · Member since 2010 · 409 posts · 616 votes
    14y

    In my area $500 is a low income house and $1500 is high end (gotta love the Midwest). So while the rent amounts are not the same, the idea as a whole is.

    I have several low income houses that I use strictly for cashflow (think 2%/50%). They are never going to appreciate much, but I am fine with that. They were cheap houses that I was able to buy with little to no money down. I consider these houses my "work horses". They get rode hard, but are easy to rent and have good cashflow.

    Now on the other hand, I have a house in an upper class suburb that has the best school district in Central Illinois. This house does not cashflow at all. Using the 50% rule it literally breaks even. Am I fine with this house not really cashflowing? You bet, because it has a great chance for appreciation. I have been lucky where I get great tenants I hear from once or twice a year, take great care of the property and cause no problems.

    My plan is to try to have a couple low income work horses for each upper class property. This way when I get to retire 35 years down the road, I have a group of excellent rental houses that will be paid off and I will then sell off my low income houses.

    I use the above plan since I have a regular job and do not make a living off of my real estate investments. If I was a full time landlord, then I would be looking strictly for cashflow and would consider any appreciation as icing on the cake.

    1Reply
  • Account Closed
    SFR Investor · Member since 2011 · 198 posts · 61 votes
    14y

    This is my experiance, I buy homes from 50K to 100K. The 50K homes rent for around 650.00 a month with taxes insurance and mortgage costing me about 300.00 per month. On the other end 100K homes rent for 1,050.00 per month with taxes insurance and mortgage costing me around 450.00.

    This formula is the same for every home I have purchased in my area, they are cheap to buy, they rent out fast and my tenants are happy because I give them a top notch place to live at below market rents.

    I usually go through and replace most everything inside and repaint inside and out. I use granite for counters because it's almost as cheap as linoleum and it lasts forever, I have been doing tile and 50 year laminate floors everywhere but the bedrooms, they get carpet. Cabinets come cheap from several importers at near the port of Oakland CA.

    To make sure your tenants keep your home up inspect it with a checklist every three months. You tell them it's to make sure everything in the home is working properly. I only give these tenants a month to month lease that way if they don't meet my expectations I can ask them to leave in 30 days. So far not one tenants has commented about the fact they don't have a year lease.

    I won't say where my market is but similar markets can be found in Dixon CA, Vacalille CA and Elk Grove CA.

    I have been doing very well making a profit monthly and most of all renters are buying me free houses for my retirement.

    0Reply
  • James Park
    OP
    Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
    13y

    Jon,
    About a year has gone by since the last post. I did end up buying the new construction 4 bed / 2.5 bath in an "A" School district & neighbor hood in Atlanta.

    From a high level my numbers look like this. I closed on this deal last year November.

    The purchase price was $177,900 and I put down about

    $177,900.00 Purchase Price
    $35,580.00 Down Payment (estimate)
    $142,320.00 Mortgage

    $1,595.00 Rent
    $875.00 PITI+TAX+INS
    $50.00 HOA
    $925.00

    $670.00 Month Profit
    $8,040.00 Year Profit
    22.6% Cash on Cash Return

    Annual Debt Pay Down $2,430.07 6.8%
    Annual Cash Flow $8,040.00 22.6%
    Appreciation (4.4% of $177,900) $7,827.60 22.0%
    Annual Return $18,297.67 51.4%

    I really don't have any maintenance cost at moment and the appreciate I calculated above was a conservative 4.4%. This same home on the same lot size and sq/ft are now selling for $212k and closing at this price. Just from appreciation alone, didn't I just make almost 100% on my investment?

    I didn't follow your 2% / 50% rule, but isn't this considered a good investment if i hold it for 5-7 years?

    I just closed on the last 4 bedroom new construction in the Johns Creek area today under $200k. As of today, there are no 4 bed/2.5 SFR under $200k in Johns Creek today.

    Originally posted by Jon Holdman:
    A SFR that you buy for $170 and that rents for $1400 will suck money out of your pocket.

    A $550K house that rents for $3000 will REALLY suck money out of your pocket.

    If these are the best you can do DO NOT BUY RENTALS!

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    13y

    Hello all:
    I am new to the site. I just discovered it. I am in SW Florida. There is so much reading to do on this site I may never have time to go look for a good piece of real estate LOL! Would someone please explain what the 50% rule is?
    BTW...I know very little. I ended up buying a house last year that I had done a hard money loan on. After I bought it, I decided to keep it as a rental. Then I realized I could not make a lot of money with only one rental. So, I started searching and found # 2. It looked like a bargain and I knew I was going to buy it before I walked in the front door. Number 2 led to number 3. That one WAS a bargain until closing. Got some less than nice surprises and ended up costing quite a bit more than anticipated. So now, here I am with 3 houses and know very little. I dont know where to start...so if someone can explain the 50% rule that would be a help.
    Thanks again to everyone...I am extremely happy I found this site.
    mgjohn

    0Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    13y

    I think once you factor in vacancy and headaches a lot of higher end properties can out perform lower end ones.
    I find in Memphis a 100K home that shows 11% net will actually deliver 10%.
    And a 30,000 20% net on paper might put 7 to 8% in your jeans.

    If you can fund it go for the good stuff!!

    1Reply
  • James Park
    OP
    Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
    13y

    Totally agree dean! I much rather own 10 $200k sfrs than own 20 $100k sfr rentals.

    Originally posted by Dean Letfus:
    I think once you factor in vacancy and headaches a lot of higher end properties can out perform lower end ones.
    I find in Memphis a 100K home that shows 11% net will actually deliver 10%.
    And a 30,000 20% net on paper might put 7 to 8% in your jeans.

    If you can fund it go for the good stuff!!

    1Reply
  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    13y

    I have been purchasing SFH in the $25K range and putting some money into them, typically about $15K. Then renting them out. This has been working for me.

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  • Peter Chu
    Elk Grove, CA · Member since 2013 · 4 posts · 0 votes
    13y

    This was a great post. I say keep an open mind about investing in A B C and D neighborhoods. There is money to be had in each market. Why limit yourself?
    The "good stuff" is available in each market. And yes I do like owning the good stuff too, just as much as I love a good deal. Education and knowledge is key.

    Dawn you are getting awesome deals!

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    13y

    I would take exactly the opposite view. I live in the SF Bay area. My home is worth about $600K. If I rented it, I could probably get about 2800/month. If I have 20% equity, thats $200K. After mortgage/tax/HOA it would leave me about $300/month positive. Thats not including maintenance or vacancy. So at best its a zero cash flow investment. If it is vacant , the cost is huge.

    It only makes sense to do this if I am expecting great appreciation or if I am renting it for a short term and intend to use it again as a primary residence.

    Now instead of one home for 600K, I could get 12 homes at $50K each. Each would rent for at least $800 for a total rent of $4800/month. Yes I may have some vacancy but the fact that I would have 12 would make the impact of any single vacancy not too bad (8%). While I may have more vacancy than the expensive home, the number of homes makes the risk spread out.

    I would never buy a luxury home to rent out. I would buy it to live in. Think of it this way, if you were running a taxi service would you buy BMWs for your fleet or Toyotas?

    0Reply
  • Callum K.
    Rental Property Investor · Tulsa, OK · Member since 2012 · 291 posts · 102 votes
    13y

    ANISH TOLIA are you able to find $50k homes in the SF bay area? I would expect a $50k home out there would be a total war zone.

    With 12 homes at $50k in San Francisco, I could only imagine the costs associated with overseeing those. Wouldn't your expenses will go through the roof on repair and upkeep? Also, I believe that running 12 $50k homes are not linearly 12 times more work than running 1 $600k home. I think it would be much more involved. Many posts I see do not seem to account for investor time and your time is money.

    With respect to the Taxi analogy, I would think it depends. If I found there to be nobody renting BMW's and there is a demand for them, then absolutely I would buy them. Also, the Germans use use Mercedes as one of the primary choices for Taxi's probably because they are able to purchase them at better rates given that Mercedes are domestic vehicles. To me, it all depends on the level you buy the home at with respect to its market, but also know who your target client might be. Just because there is higher demand for low SFR's doesn't mean there is no demand for high end SFR's. In my area, the supply side for lower end homes is much more saturated than higher end properties which makes it easier for me to find tenants.

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    13y

    My $50K houses are not in the Bay Area. Its almost impossible to get decent rental returns in the Bay Area. I am a firm believer in the power of diversification to manage risk. Putting all your eggs in one basket may work with high returns but a lot can go wrong in a single property. Vacancy, damage, natural disaster, declining neighborhood etc etc. Diversification protects you from risk. So I prefer more properties than less.

    0Reply
  • Steve Vu
    Real Estate Agent · San Jose, CA · Member since 2013 · 43 posts · 39 votes
    13y

    I agree with ANISH TOLIA. Buying several cheaper properties, rather than one very expensive property is a good way to spread your risk of ruin.

    To simplify the example, let's assume that you are only allowed to choose between buying 1 expensive property or 10 cheaper ones.
    If something goes wrong in one of your cheaper properties, the 9 other ones will act as a cushion to weather the mishap. However, if something goes wrong in your only expensive property, you will be in trouble until the issue is resolved.

    The concept is somewhat similar to the Kelly criterion from probability theory, which defines the % of your total bankroll you should be investing/gambling in a given proposition to optimize your profit and minimize your risk of ruin.

    Cliff Note: Don't put all your eggs in one basket

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    James, from your first post:

    Maybe commercial would be a better fit for you. If you get a NNN property you may never even see or speak to the tenant.

    0Reply
  • Jose Gonzalez
    Residential Landlord · Houston, TX · Member since 2012 · 2 posts · 0 votes
    13y

    James, I believe that cheaper homes are the way to go. Even if you had $1,000,000 I would go for 15 - 20 properties since the returns are way higher. A $500,000 SFH will break even or at best give you 5% return as cash flow. All the properties I have bought have been in decent áreas where with all the repairs my cost is still at 70 to 80% of the actual market Price.
    1 High end of 500,000 will deliver you $3,500 to $4,000 right? In the market that I focused, the homes between 50-60k including repairs give you $950-$1050 rents, which at the end you pay off your property faster...
    If you want this to be a long term business, income generator, retirement tool... whatever you want to call it, I believe CASH FLOW is the thing to focus on...
    I mean I keep hearing the appreciation expectatives of everyone but still... if you have a property that might not be in the best neighborhood but still gives you enough cash flow to pay itself in 5 to 7 years even WITHOUT leverage... I dont mind if its worth the same amount in 30 years... because in that time that same one would have given me the money to buy 4-5 times its own value...

    Again, going lower end has to be much more profitable so you can say 1 half million dollar unit that gives "X" ammount or 8 Properties that give me 2 times that X ammount... Is it really worth it?... Dont know about you man... but that kind of spread pays everything... Just be sure to have a great management company that picks the right tenant!

    Jose

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  • Rahul Saini
    Investor · Allen, TX · Member since 2017 · 4 posts · 0 votes
    9y

    I would like to wake up this old thread as I want to better understand the pros & cons of investing in a low end Vs high end property for me. I have been going through older forum entries and blog posts that  I read here: https://www.biggerpockets.com/renewsblog/2015/04/0...

    & here: https://www.biggerpockets.com/renewsblog/2016/04/1...

    I guess everyone's market & specific needs/goals are different and one solution cant fit all.

    I am debating how to move forward in DFW RE market that is exploding below the $400k price point. As a full time W2 waged employee who loves his job, my focus is medium to high end SFR.

    Option #1: I can buy a property in good school district @ $300k that barely cash flows positive after 25% down @ 4.5% interest .

    Option#2: Because the $500k+ market is not that hot, I can buy & move into a new home (~$500k) within the same area(Allen, TX) with minimal disruption to kids schooling and rent my current residence (SFR) valued at $550k+. Penfed can give me 3% on 5/5 ARM with 20% down. This makes the total PITI difference between option #1 as $750/mo but I have a bigger, better property that should appreciate more than Option#1.

    I also have a SFR ($325k value) that has an equity of $200k+ with a principal balance of $100k that I would like to leverage in any way to acquire more SFR.

    I would like to hear your thoughts.

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