Is spending more on a better rental property worth it?

Question

Hello everyone, I am relatively new to real estate investing. I have one rental property currently and am looking to add one more to the portfolio.

My question is: Is it worth it to pay more for an all-around nicer, much more desirable property? I am really on the fence in regards to this issue. The more I think about it, the more it doesn't make sense to spend an extra 30 grand on a property that will only generate you $100-200 more in rent. At the end of the day, $1,200 isn't going to make or break my bank account, or get me excited for that matter. But what WILL kill a property's cash flow is lingering vacancies. If the property is superior, or at least higher quality to the rest, that should (in theory) minimize vacancies, which I believe is worth the extra capital. Not only are you paying for lower risk of vacancies, you are paying for peace of mind knowing that it's a lower risk compared to its peers.

The way I am currently analyzing a property's rental potential is basically the "eyeball test" in that I ask myself "Would I actually WANT to live in this property myself?". If the answer is even close to a maybe, or I have to convince myself why I like it, then that's a pretty good indication that I should move on to the next property. But what I am starting to realize is that not all renters are like me, and maybe I should be more open minded to buying a property that is much cheaper, but not as nice (in my opinion).

Has anyone ever been in this predicament before? If so, what did you decide to do and what were the results? Thanks in advance!

Ray Johnson · Answer

@Ryan Greenspan In my opinion this will depend on the individual type of investor and how much time and energy they want to spend on their portfolio. Since I have no intention of quitting my W2 job, I look for properties that will require the least amount of my time, money, and energy, yet be a great investment.

With the exception of One of my properties all of them are Class A properties, While they may not be bringing in the $800 +/- a month Net cash-flow that some of the BP posters mention, I'm good with the $300-$550 per month net and never having to deal with the headaches I see many of the posters on BP discussing. I've been doing this since 2002 and I've never had to evict anyone, never had a late payment, never had a vacancy more than 1 month, etc... the list goes on.

The message is in my targeted markets of Orange County California, and Washington DC paying a little more for the nicer property gets you a lot more benefits beyond the small difference in cash-flow you're thinking about.

Russell Brazil · Answer

I always go nicer. I want to own the nicer properties and they attract better tenants.

Frank Adams · Answer

I guess it depends on the value you place on your own time for management, maintenance and showings. Back in the '80s and '90s in Houston I used to answer it this way. Let's say you had $100,000 to invest. Your choices might be:

3 or 4 lower priced places at $25-$33K each. Maybe each place grosses $450-$500 per month.

2 middle of the road places at $50K each. Each grosses $700 +/- per month.

1 higher priced place for $100K, gross rent for $1200.

Your highest gross is at the lower end, but so is your highest "cost" for the factors mentioned.

Your lowest gross is at the highest end and the time cost should be negligible. Although you won't be able to put off replacing a bad dishwasher until the weekend.

I tended to play in the middle part of that pool but reduced my time costs by a few factors; always had garage door openers, which weren't as common then, higher quality HVAC, solar reflective screens and increasing the attic insulation. Which in houses built in Houston in the '70s and '80s was pretty minimal. These factors allowed me to command a higher rent for the neighborhood and requiring a MINIMUM TWO YEAR LEASE got me a better class of tenants.

All of my houses were within a 10-15 minute drive of my house and I was always up to date on sale and rental prices.

Good luck

Michael Noto · Answer

@Ryan Greenspan In my experience, although more expensive initially properties in better areas that attract better tenants perform better over time.

One of the biggest reasons is typically the unit is not trashed when tenants move out and the turnaround is less in terms of dollars and time. Limiting vacancy like you mentioned.

Collin Garbarino · Answer

Over the next five years, we'll probably make more money off of appreciation in Houston than off of cashflow. I'd go with slightly nicer houses.

Ali Boone · Answer

Well you aren't off in your thinking at all, but there would have to be some more specifics given or considered in order to say yes or no. Like what span between "nice" and "not as nice" are we talking here, and what range are we talking? Are any of these properties cash-flowing? If it were me, I'd specifically be looking at the quality of the property and the neighborhood of each and the cash flow on each.

On an extreme level, the riskiest properties should come with the highest cash flow predictions. The nicest properties should some with the lowest cash flow predictions. It's all about risk trade-offs. But if you go too high in price or quality, there won't be any cash flow at all. And if you go with the worst property, you may have a whole new slew of issues.

There's a big difference if you're talking comparing the extreme to the extreme or if you're comparing two properties that aren't drastically far from each other in terms of quality but just enough to make a cash flow difference.

Any chance you have a sample property in each of the categories you can show us? You don't have to include addresses but just some kind of details of them.

And honestly, the "sweet spot" of rental properties--best combination of quality and cash flow--often aren't properties any of us would personally want to live in. Doesn't mean there's anything wrong with them, just not a preference on property or location.

Jennifer Matsumoto · Answer

Thanks for posting. I was wondering the same thing.

Max T. · Answer

I like easy tenants.

Lesley Resnick · Answer

It is difficult to say for any given market in any given year. As a general rule, the first bedroom is the most profitable. A two bedroom is not 2x the cost of a one. The nicer the property the less profitable as a percentage. A multi million dollar ocean front property would rent for 5k a month in most cities. Good deal for the renter, not so for the owner. I am only representing this as a percentage, in real dollars, the bigger properties generate more money.

It is impossible to predict vacancy rates. Nicer properties are typically take longer to rent since there are fewer takers. I find if you are in the middle, there are lots of people to rent and you can be more picky. On the low end there is turn over, but there is also a limitless supply of low end renters.

Bottom line, ever deal needs to stand on its own merits. Let the market direct you to the profitable spots.

Derrick E. · Answer

Yes. Big difference in looking to rent and looking to buy.

Is spending more on a better rental property worth it?

Is spending more on a better rental property worth it?

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