How do you feel about 2/1s?

Question

Hi,

I'm finding that 2/1 units seem to have better CAP rates that "nicer" places with 2/2s or 3/2s. Do you think demand for lower end properties (2/1s) will decrease over time, or be just fine.

thanks,

Joel Owens · Answer

Ron 1 units do have more turnover. Times for all 1 beds might be student housing or the elderly who do not move much and need less space for a cheaper rent.

All 1 beds are hard to get financed and refinanced down the road. They are also harder to sell off. 1 beds have there place but I like the mix to be 25% or less of the overall development. So if you had 100 units no more than 25% 1 beds.

You can do things like take 50 1 beds and take out walls and change unit mix that way if you buy cheap enough to meet market demand. You have to figure in costs on the buy side to make the deal work and know what the county or city will require with updated codes to change. Sometimes they require fire sprinklers and other things which can get very expensive on rehab.

Mark Mosch · Answer

Hi Ron,

I have a mixture of 2/1, 1/1, and 3/1 Apartment units in several buildings in Montana.  I too find the 1/1's for some reason just seem to have higher turnover too.  The 2/1's seem to be my most stable type of units from a rental perspective.  The demand for the 2/1's actually seems to be just fine and i don't really see any decline.

Stan Hill · Answer

Thank you for that, Joel. I would rather make a little less money and have less turnover. You're right about the elderly- we have two 1/1 condos. The tenants are older and have been in place for at least 7 years. I say at least because we've owned the units for just 3 years. They are low maintenance, no drama- I LOVE IT.

Stan Hill · Answer

@Ron K.

At the risk of sounding pessimistic, I believe feel-good government policies will hit the lower wage workers the worse. They will become increasingly poor as time goes on and lower end rentals will be a good place to invest.

Ron K. · Answer

Thanks all. Actually, I'm referring to apartments, but all the above advise is very useful even if it was referring to houses.

I had read that 1 bedroom units have higher turnover, so I'm looking at at least 2/1s.

Kathleen Leary · Answer

I can only speak about my own little Midwestern town, but there are a lot of 1900-era 2/1 homes that are now rentals. I have one myself! There is as much demand for these smaller properties as for the larger ones, at least around here.

Although my 2/1 actually had 10 (yeah, that's TEN) people living in it until it went up for sale, usually there are one or two adult tenants, which means less wear & tear on your property. And since it's often too small for folks with kids, you don't have as much writing on the walls, toys down the toilet, etc.

If there's a college, hospital, manufacturing facility, etc. in the vicinity, you won't have any trouble attracting renters.

Mike Alder · Answer

Hello @Ron K.

I can only speak on my experience investing in 2 bedroom 1 bath properties in Cleveland OH.  As rentals they are great! Typically  the rehab work is easier and the turnover rate of tenants in these properties are lower in my area. I do not think the demand for these properties as rentals will decrease overtime. There will always be a need for affordable rental homes. As we all know its the resale of these properties that are lousy!

How do you feel about 2/1s?

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