Is it financially better to own multiple properties or less?

Question

Let me try to give a real world experience that may provide some conclusion as to whether or not owning more properties provides greater protection.I’m going to use a duplex that I purchased in city of South Minneapolis back in 2014, that I self manage.I purchased the duplex for 180k with a fixed 5.25% for 30 years with 25% DP and 3% closing costs.Let me point out some of the specifics of the duplex.The windows, furnaces, water heaters and HVAC were brand new as of 2012.I have put 5k into unit #2 for renovations and 3k into painting the house due to a violation of lead order by the City of Minneapolis.So keeping those upcoming expenses in mind for the near future, suppose two investors have 50k to spend which is to be used for closing costs, DP and realtor commissions.Since I paid for closing costs with cash, I’m not going to roll them into the loan for this example. The first investor is me who I describe in the paragraph below and the second investor is someone who will put less down with the intent to acquire 4 duplexes.Keep in mind the total rent paid for both units in each duplex is $2,100.

Total Fannie Mae conventional loan amount:$180,000

Loan Term:30 years

Interest rate:5.25%

DP @ 25%:$45,000

Closing costs @ 3%:$5,000

Mortgage Monthly payment which includes property taxes:$998.84

Insurance:$142.00

Sewer, Water and Garbage:$104.00

Average monthly expenses:$150.00

Renovation and painting expenses for early 2015:$8,000

Roof in 8 years:$11,000

The second investor decides to go with an FHA loan so that they only have to put 3.5% as a DP.Here are the specifics.

FHA Total loan amount:$180,000

Loan Term:30 years

Interest rate:5.25%

DP @ 3.5%:$6,300

MIP:$123.04

Upfront FHA MIP:$3040.00

Monthly taxes:$250.00

Insurance:$142.00

Sewer, Water and Garbage:$104.00

Average monthly expenses per duplex:$150.00 X 4 duplexes = $600.00

Monthly Mortgage payment:$1,491.00

Closing costs @ 3% rolled into loan:$5,000

Renovation and painting expenses for early 2015:$8,000

Roof in 8 years:$11,000 per duplex

Total money required at closing for purchasing duplex using FHA loan:$14,340

Using that figure, investor 2 can buy 3 duplexes and cannot afford a 4th home.That leaves investor 2 with $6980 as disposable cash.So investor 2 borrows$7360 (loan term=72 months)from Family at 8% to help buy duplex #4.

Private money lender monthly expense:$110.40

Investor #1 monthly cash flow per duplex:$705.16

Investor #2 monthly cash flow per duplex:$244.60 X 4 duplex’s = $978.4

*As you can see Investor #2 has more cash flow each month.

2014

Investor #1: NOI 2014 = $8,461.92

Investor #2: NOI 2014 = $11,740.80

2015

Investor #1:$8461.92 (NOI 2015) - $8000 (Code violation to paint 1 duplex for $3,000 and renovate unit #2 @ $5,000)= $461.92

Investor #2: $11,740.80 (NOI 2015) - $32,000 (Code violation to paint 4 duplexes for $3,000 each and renovate unit #2 @ $5,000 each) =-$20,259.20

2016

Investor #1: $461.92 (2015 balance) + $8,461.92 (2016 NOI) = $8,923.84 (2016 Year end Gross)

Investor #2: -$20,259.20 (2015 balance) + $11,740.80 (2016 NOI) = -$8,518.40 (2016 Year end Gross)

2017

Investor #1: $8,923.84 (2016 balance) + $8,461.92 (2017 NOI) = $17,358.76 (2017 Year end Gross)

Investor #2:$8,518.40 (2016 balance) + $11,740.80 (2017 NOI) = $3,222.40 (2017 Year end Gross)

*It took 3 years for Investor #2 out of the Red.

2018

Investor #1: $17,358.76 (2017 balance) + $8,461.92 (2018 NOI) = $25820.68 (2018 Year end Gross)

Investor #2: $3,222.40 (2017 balance) + $11,740.80 (2018 NOI) =$14963.20 (2018 Year end Gross)

2019

Investor #1: $25820.68 (2018 balance) + $8,461.92 (2019 NOI) = $34282.60 (2019 year end gross)

Investor #2: $14963.20 (2018 balance) + $11,740.80 (2019 NOI) = $26,704.00 (2019 Year end gross)

2020

Investor #1: $34282.60 (2019 balance) + $8,461.92 (2020 NOI) = $42744.52 (2020 Year end gross)

Investor #2:$26,704.00 (2019 balance) + $11,740.80 (2020 NOI) = $38444.80 (2020 Year end gross)

2021

Investor #1: $42744.52 (2020 balance) + $8,461.92 (2021 NOI) = $51206.44 (2021 Year end gross)

Investor #2: $38444.80 (2020 balance) + $11,740.80 (2021 NOI) = $50185.60 (2021 Year end gross)

2022

This is the year the roofs need to be redone on the duplexes.The cost per duplex is $11,000.

Investor #1 – Total cost for new roof on single duplex building = $11,000

Investor #2 – Total costs for new roof on 4 duplex buildings - $44,000

Investor #1: $51206.44 (2021 balance) + $8,461.92 (2022 NOI) - $11,000 (new roof) = $48,668.36 (2022 Year end gross)

Investor #2: $50185.60 (2021 balance) + $11,740.80 (2022 NOI) - $44,000 (4 new roofs) = $17,926.40 (2022 Year end gross)

After 9 years as you can see Investor #1 has $48,668.36 in savings and Investor #2 only has $17,926.40.My conclusion up to this point is that having more properties may bring in more cash flow each month at first, but expenses can wipe out those savings quickly.Eventually the cash flow from investor #1 should outpace Investor #2 as proven by the larger balance.Let me know what you think from my example.I tried to keep everything completely even between the two investors, the only difference is the way the two investors choose to spread their intitial cash.I’m personally more in favor of doing it my way.

JD Martin · Answer

^Your last line is true, but cash reserves are different than wealth creation. It may be true that the guy with the 4 duplexes will have to scramble if things go wrong, but that's more a feature of overextension than it is an indictment of the multiple property system. However, your original post was whether or not it was financially better to have more or less properties. All things being equal, it is better financially to have more properties. If you have ample cash reserves to cover contingencies, or ample access to easy liquidity, having all of that cash sitting in houses doing nothing is like hiring workers to sit around the shop all day. Capital that is not deployed is opportunity wasted. Of course everyone needs to have some waste in the system, to protect against catastrophe (that's what insurance is for, right? wasteful purchasing to protect against catastrophe), but only to a level that's prudent. Just as you wouldn't buy $100 million of liability insurance if you owned nothing, so too is it financially foolish to leave extreme sums of capital sitting around in any entity doing nothing.

Marcus Johnson · Answer

@Russell BrazilBy the way I wish I would have bought Apple Stock in 2000 when it was worth $7.00 a share. :)

Marcus Johnson · Answer

I believe what your saying in regards to diversification. Unlike a lot of people on this forum who only consume Real estate investments, my wife and I have diversification between real estate (1 duplex thus far that's doing great), 401k's, Pera's, 403B's and Roth IRA accounts that are in Index funds (3000 companies). We feel that should one area drag at retirement, the others will pick up the slack. FYI, I'm working extra jobs to speed up the process of getting another DP together for another duplex and then rinse and repeat.

Russell Brazil · Answer

Multiple properties, like owning multiple stocks helps to spread out your risk. I believe very much in the notion of diversification. If you have 10 properties and 1 vacancy, you only have 10% vacancy. However if you only own one property and have one vacancy you have 100% vacancy. This holds true for any expense in your portfolio. And diversification can conceivably lead to worse returns. If you only owned Chipotle stock from 2012 to 2015, your portfolio killed it. However with the lack of diversification comes an increase in risk, because from 2015 to 2016 if you owned Chipotle only you got killed. Owning multiple properties could hurt your return conceivably....but it spreads your risk out....so maybe you have 1 property killing it, and one that sucks. Sure owning the one property that is killing it is better, but then all your eggs are in one basket.

Iza Grek · Answer

More or less, I think it comes down to how much energy you have to manage the properties, running after tenants, short pay rent etc or if you want to add this to your list of expenses -factor that in to your equation of more vs less. www.moneyfor2morrow.wordpress.com

Marcus Johnson · Answer

You missed the point, I was trying to keep things equal across the board. Each investor is consistent with their purchasing method. If you want I can do the math on investor #2 buying a duplex a year for 4 years with FHA loans, or using Hard money or Private money, but what your going to find is the same problem holds true for investor #2 when it comes to cash flow early on and large expenses. Investor #2 will have problems financially.

Treston Wobig · Answer

you are also failing to consider that you cannot legally buy 4 duplexes at the same time with Fha loans. You may only use FHA for owner occupied properties.

Marcus Johnson · Answer

@ Jd MartinActually, Cash reserves are part of wealth creation whether you want to believe it or not. If the scenario did actually happen and Investor #2 did use an FHA loan with little down and was achieveing only $$900 a month of cash flow on four duplexes and a large expense did come and there are insufficient funds available (32k for repairs) it could be a major problem that can destroy ones finances. Although risk=rewards, sometimes risk can bankrupt someone. Kind of like the housing bubble. So when investor #2 doesn't have the funds to fix the repairs, they either have to use credit cards, take out a heloc, borrow money from a bank or friends or sell one of the homes. All of these ideas could put someone in debt for a short term or long term, which the result is that in the end your wealth creation is effected. For example, you give 3 people $1 million dollars and in 30 years you see which person had the highest net worth. It's a guarentee that all 3 won't be wealthy in the end. Human nature gets in the way and life. One guy ends up broke, the next one average and the other wealthy.

Marcus Johnson · Answer

Bare with me, but the reason I kept all duplexes as experiencing the same exact problems, is to keep things equal across the board to see what would happen in this scenario. It's very interesting to see how having multiple properties with FHA loans with little down and low cash flow can break the bank quickly if you're not financially stable. As for roofs. Roofs have a shelf life of 20 years and when you buy properties, they most likely aren't brand new and that's why I used the average replacement life of 8 years from the time of purchase. You can pick any length of time, but the longer you have multiple properties, they will all need new roofs eventually if not sooner. I mean the house I'm using in the example is from 1915. As for code violations from the City, they can happen at any time, so my point is that you should be ready with cash reserves should this happen and unfortunately having four duplexes with FHA loans with low cash flow per duplex, can be detrimental to the checkbook.

Marcus Johnson · Answer

I don't think your wrong if everything happens perfectly for Investor #2. But as we all know as investors that risk needs to be calculated when making investment decisions. As I showed in my example, because Investor #2 didn't have enough savings early on when a large expense came up, he may have had to try to borrow 32k or sell a property (which he could take a hit on if the value of the property took a hit due to the housing market) or even have to declare bankruptcy. So yes the reward may be larger for someone taking on excessive risk, but from my own experience I have gained my wealth by taking things slow, putting 25% DP that I bought for 180k on a duplex that cash flows well and is worth 70k more then I paid for it and the mortgage left is only 125k. Plus my Vanguard Index funds that my wife and I've had for years have done quite well and our 401k's. So wealth can be built slowly due to compound interest and for Real Estate properties putting more down. I realize we may not agree on this, but my method has been beneficial to me and I thought I'd share my findings with everyone regarding the cash flow situation.