Is it really all about the good deals?

Question

Hello all,

With respect to finding good buy and hold deals, has one ever noticed a higher ROI with larger properties?

Larger meaning higher priced properties.

Obviously the monthly mortgage goes hand in hand with the price of the property but does the higher price make it a better deal?

Thanks

Raeven

Evan Polaski · Answer

@Raeven S. Reivers when talking multifamily vs single, I think if you truly take an apples to apples look at financials, yes you get a better return on larger properties or at least the same.

As Sam mentioned, I feel most single family owners self manage, and therefore don't account for a management fee in their cash on cash.  I see people posting here quite frequently "the roof is only 2 years old, so I don't need to reserve for it" which I disagree with since the roof WILL need replaced and you can save now or save later, but either way that roof will fail, need replaced and cost money at a point in the future, whether or not you have adequate reserves.

Typically, when you are dealing in larger assets, these items are priced in and accounted for.  Not always, but from my experience they are.

Blake Dailey · Answer

I think agents oftentimes try to mark the price up to reflect the quality of the house. I don't necessarily think the higher price means higher returns. It can often mean the opposite, especially if rent is not rising with the price. With a higher priced home, you do have a bigger mortgage payment, which means you pay off more principal each month and thus build equity faster. But that equity growth will not matter if you pay $1M for a house that rents for $1k per month. I like to find that sweet spot, usually around the median priced property, where I can buy it under value and bring it up to the market value while renting for a proportionately high amount (aka 1% rule or greater). Usually past a certain point the higher priced homes do not make sense with what the house could rent for so it wouldn't make sense to buy as a rental for cash flow.

Sam C. · Answer

I buy a single family home, I expect a 12-15% cash on cash return. Since I will most likely have to cover all aspects of ownership: management, repairs, rehab, etc. Price/cost to market doesn't matter other than can I afford it. I buy a 30-+ unit property I am happy with a 4-6% cash on cash because I will do nothing other than oversee the running of the complex. Gross income has to be enough to pay for everything without me having to really do anything except regular inspections, hiring-firing and managing the money. When number of singles or 2-4 unit properties reach the benchmark I have for the 30+ number owned then I can accept 8-10% cash on cash income. At that point I am in the business full time and can always choose to make more money for myself by doing the things that I have to pay for.

Sam

Raeven S. Reivers · Answer

@Blake Dailey

Beautifully said! Thank you

Jill F. · Answer

When you say larger, higer-priced property, are you asking about multi-fam vs SFR or large vs small SFR?

Around here, smaller multi-fams are where I see the best deals-- you aren't competing with as many owner occupants like you would with SFR but the big guys aren't interested either. You are mostly competing with other mom&pop landlords who are going to buy based on the rent the property can generate. One-bedroom units are where I see the most deals-- it seems like many investors prefer two+ bed units. But even here in cash-flow land deals are getting harder and harder to find.

Joe Villeneuve · Answer

No

Raeven S. Reivers · Answer

@Jill F.

I was referring to the multi fam properties. Thank you so much!

Is it really all about the good deals?

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