1 property or 2?

Question

I wasn't sure how to start the topic, best title I could think of.  I'll be buying my first rental in the next 2-4 months, spending the time between now and then reading/researching as much as possible and getting some work out of the way.

I figure my wife and I can buy 200-300k of rental property a year using the 20-25% down rule using excess income and not having to alter our life style and not over extending ourselves.  My question is, does it make more sense to buy fewer higher "A"quality properties or more lower quality "B"properties?

I am not interested in being a slum lord, not interested in "C" properties or buying properties for 30k.  I'm in California so i'm looking more out of state.  I plan to speak with some turn key operators but also meet up with an RE Agent in the same area so I can compare with everything on the market as far as price/quality and location and go with the best quality for the ROI.  I'm willing to give up some ROI to have more quality properties, I don't want to be short sighted.

How would, for example, two 75k properties compare to one 150k property assuming ROI is the same?  I may be missing something but it seems like going with the one property makes more sense?  There is the issue of having a vacancy and not having the 2nd property to help carry the vacancy, but that is only a short term problem since i'll be buying more.

It seems that all the other expenses would be less however, closing costs, management, insurance etc on 1 property rather than 2?  This will be "full time" for me, I work from home and have all the necessary time to "manage the managers".

Long term goal is to build wealth and retirement and have something to give my daughter 30 years from now. I don't need immediate income but would like to generate as much as possible with my plan to add back into buying more.

Sorry for the long post, BP is great!  Thanks.

Paul Timmins · Answer

@Lee Shuemake

You have received some good advice.

To find out about an area go to IREM.org search for ARM certified property managers. Call 5 ask them what sides of the city they like/dislike and why. Ask what they see them selling for and what expenses are by category. Ask for market occupancy and rents. Ask if they know anything coming up for sale.

You can also search narpm.org for the RMP (Residential Management Professional) and MPM (Master Property Manager) certified.

Paul

Lee S. · Answer

Thanks Paul, I've bookmarked the site and will do so once I have a particular area i'm looking at.

Jacob Elbe · Answer

Lee S.

I agree with your first few replies that in my experience the B properties will have a higher ROI than the A properties.  All else equal, yes the A property is a better choice, but I think you'll be hard pressed to find that situation.  I've stuck to B properties because of the higher returns.  A class properties can help decrease maintenance and may rent faster, but the returns are going to be lower.  By buying with higher returns, you can build your capital faster and invest again sooner.  While investing locally is great, there may come a time when you don't want to self manage because you don't want to deal with the headache or have to move so it's usually recommended you factor in property management when you run your numbers to make sure it's going to continue to make money.  Counting on no property management, little to no vacancies, and little to no maintenance can be a quick way to get yourself into trouble when they do occur!  My returns are crazy good if I only count the maintenance and vacancies I've seen in the few short years I've been doing this, but I know long term that they will be higher.  Just something to keep in mind!

Elizabeth Colegrove · Answer

Lee S.

200k rents for $1600. It is consider to be class A property, and they are new (less than 10 years old). They are in great shape and need little work. The vacancy in my area are 0 and I self manage (locally here but all over the country, so doable). We get a 10-25% cash on cash return based on different numbers. Feel free to pm me.

Jon Huber · Answer

Lee S.  I have found that there is always a higher ROI with two properties over one if you were to spend the same amount for both scenarios in the same rental market. For the sake of your argument, assuming the ROI is the same, it depends if you're comfortable putting more eggs into one basket. You would have more flexibility by being able to sell one and keep one if things change in your financial situation.

Lee S. · Answer

Thanks All.  Been spending many hours on BP a day and and just starting to go through the podcasts as well.  I'm definitely more drawn to the "B" properties with a little less cash flow than I am the lower end properties, especially since i'm going to have to invest mostly out of my immediate area.  I've been using the spreadsheet available here on BP to analyze some numbers, what all falls under "Capital Reserves" for expenses?  I'll try a search also.

Andy Mirza · Answer

As others have already posted, the "B" class properties are a better choice since the ROI will generally be higher than the "A" properties. You get more bang for your buck for lower end properties versus higher end properties. "A" properties have a better Return OF Investment. You're more likely to get your capital back out of an investment that everybody wants versus a "C" or a "D" class property that less people want. That's why the Return On Investment of "C's" and "D's" are higher. More risk, more headaches, more problems with Return of Investment, but higher income.

One strategy is to start with the "B" properties and, over time and as your portfolio grows, sell those and convert everything to "A" properties. I'm involved in "C" and "D" properties myself but eventually I won't want to deal with the headaches. I'll want to eventually convert to "A" and "B" product and paper.

Christian Hutchinson · Answer

To me to get your feet wet, a great way to start is a simple condo in a nice shopping district.

or

A Duplex in an area with "good" but not "great" schools. The reason is because you will get younger families  one or two kids tops.  They are trying to save to buy a McMansion in the best area, but can't afford to rent a house in that area, and probably don't/can't live in an apartment in those areas.

Lee S. · Answer

Yeah I would be interested in that.  I'll send PM, thanks.

Lee S. · Answer

How can you get a 200k house in the central valley to cash flow?  I've looked around a little in the Modesto/Stockton area and the numbers don't seem to add up.  They also don't add up where i'm at up here in Sonora.  200k houses in my area may rent for $800-$900 a month.  Unless I put down a huge down payment, giving me a very poor ROI, I would have a negative cash flow.  Please correct me if i'm wrong but my math says i'm in the hole with just the financing and taxes with nothing left over for vacancy, repairs, management.

1 property or 2?

Most Popular Reply