Should I buy these two houses?

[Jack B.]

Background. I have 3 houses already (two rentals) and am looking to buy 2 more rentals. I want to buy these with 25% down. One of my rentals is paid off and the other is mortgaged and I like the CoC return of that better, frees up money to invest, but having one paid off house is good for peace of mind too.

Option 1:

2 bed, 1 bath, just under 800 square feet. One car garage. 

There are three apartment complexes right across from this, but it is a block away from a really nice/new elementary school. Area is a bit higher crime according to Trulia. Turnkey, 107K

Option 2:

3 bed, 1 bath, just over 900 square feet. Carport instead of garage. Much better neighborhood, literally down the street 2 minutes to one of the base gates for the Air Force gates. Metal roof. Needs new appliances and flooring in the kitchen, but has new paint and carpet as well as water heater from bank. This is a foreclosure. Might be a little higher priced and need 3k of appliances and flooring, but it is also newer, larger, THREE bedrooms, and in a better area., and at the end of a dead end street to boot, 113K

I am investing for cash flow. Note that Option 1 is supposed to appreciate 10% while Option 2 is about 6%.

I just feel that the location, location, location of Option 2 is sooo much better, and the house is 17 years newer, and man I can't tell you how much the location is better than the other house. I mean it ain't Beverly Hills, but I wouldn't be afraid to walk down the street day or night.

[Tom Mole]

@Jack B.  congratulations on your success to this point. You seem to be doing well and you're looking to add to your portfolio. My hat's off to you.

Whether or not you should invest in these two candidate properties however leaves me with more questions than answers. 

• Are you planning to purchase both properties, if all goes well or you trying to decide between these choices? 
• Have you figured your expenses other than cost of money, such as taxes, insurance, vacancy and reserves for the unexpected? 
• What is the market vacancy rate, particularly in the less savory neighborhood?
• What are your repair cost estimates?
• How long do you intend to hold these properties?
• Are you counting on passive appreciation to make the deal?
• What are you doing for to protect your assets? 
• Do you have property management?

First of all, the only appreciation I would depend on is forced appreciation. I love passive appreciation, but since that is not under my control, I don't factor that into my investment calculations. That being said, if you had to pick between these choices, I might use the possibly of appreciation as a tie-breaker.

Along the same line of reasoning I wouldn't focus as much about the market value of a property that I planned to hold for a long time, but I'd keep it mind. I would want at least some equity at the time of acquisition. 

If I would be uncomfortable walking through the neighborhood at night, that would weigh heavily against my decision to purchase a rental property. @Brandon Turner invests in the Seattle area and he doesn't invest in rental property that would make him uncomfortable having his wife walk through the hood at night.

Have you set up entities, have liability insurance or enough debt to protect your assets. It seems like you may attract an unscrupulous tenant somewhere along the way that may sue you just for the money. If they can get to any of your assets with a suit against one of them, you're gonna have a problem. If you have enough insurance, you'll be OK, but how much is enough to protect you against the worst possible lawsuit. Leveraging your properties could provide you with the most cash while lowering your asset exposure. Combined with entities and insurance could provide you best safety along with greatest cash. Have you considered this?

The bottom line is how you feel about these deals. Do you like them, one or both? Have you considered everything? I suspect you've looked at most of this and you're probably pretty sure what you want to do. It's very wise to run the idea by the community, but this will be your decision. I'd be fascinated to hear what you decide to do.

All the best.