Real life comparison: 150K rents $1000/mo vs 300k rents $1500/mo

[Perry Z.]

I have a friend who just purchased a 300k SFH (3bd, 2b) in Elk Grove, a nice suburb of Sacramento, and is renting it for about $1500 a month. He told me that every month the rent broke even with the mortgage and expenses, and at the end of the year he probably puts in about $300 in property taxes + fees. Basically, at the end of the day, his return comes from the appreciation of the house, which is currently at 5+% in that area for that kind of house and the rent increase next year.

When I heard this I am a bit shocked, because my strategy is completely different. I would buy something around 150K 2bath/2b in lower income neighborhoods in Sacramento, rent it for $1000 and maybe even $900. With property management fees I have about $100-$200 a month in cash flow. Those properties probably appreciate at the rate of 2-3% a year. 

What do you guys think?

Cheers,

Perry

[Joe Bertolino]

I think spending $300k on a rental in a cookie cutter suburb with average to below average schools like Elk Grove or Natomas is crazy. When those 3/2's were trading for less than $200k fairly recently it was a different story. You can buy basically the same product (newer 3/2 in a B- neighborhood) in Antelope/Citrus Heights for $175-210k. If you are willing to do some clean up you can get closer to $150,000. If you are going to drop $300k for a hassle free rental with potential for high appreciation... Look at Folsom or Rocklin. Parents will sacrifice to be in those school. Finding a decent rental under $2000 is tough.