which of these two is the better deal..

Question

I am currently shopping for a multifamily in eastern mass and have narrowed down 2 deals that are both attractive in their own ways. I am under the gun to place an offer on property #1 and would like to get some feedback from a seasoned investor as to which of these two is the better deal? (Both properties are in the same city, both are turn-keys) Property #1: - 3 family - sale price: $850,000 - total cash needed (downpayment + closing costs): $115,000 - total rental income per year = $90,000 - PITI: ~$5,000 Property#2 - 4plex - $850,000 - total cash needed: $56,500 - total rental income: $78,000 - PITI: ~$4,800 Obviously property#1 cashflows better albeit at a higher initial investment. Conversly, the cash-on-cash return on property #2 is much better due to the lower cash required up front, which means better leveraging of my money.. Should i sacrifice cashflow for leverage??

Account Closed · Answer

Your numbers dont compute. Both properties have the same price. How can PITI on property 2 be less than property 1 and at the same time put down half the cash?! The loan on property 2 should be higher shouldnt it?Also, Property 1 gross rent ratio is higher even with one fewer unit. Means its in a better neighborhood or better units. I would go with that option any day.

Dan Lam · Answer

it's funny because both of these are actually fairly close by to each other. Property#1 force appreciated after all 3 units were updated (which contributed to the higher rent figures as well of course). property #1 is the better cash-flowing deal, the only downside is the high up front cost to get into it, which will take a while to recoup and limits my 1-2 year plan to procure another property

Clayton Mobley · Answer

@Dan Lam I agree with Account Closed , Property #1 has higher gross rents with fewer units, meaning it's in a better area. You're more likely to have stably employed, long-term tenants. If the price is the same, I always go for the higher-class investment - especially since the cash flow is better on #1 anyway. With the revised PITI of #2 @ $5400, this is a no-brainer for me.

Dan Lam · Answer

Thanks for the very insightful response by the way, much appreciated

Dan Lam · Answer

you hit the nail on the head. My hesitation was in the higher up front capital needed for prop #1 knowing that on paper it make sure sense. The property had full upgrade, done correctly with high quality appliances and finish work. Prop# 2 while in good overall shape, is a notch down in terms of overall finish quality if that makes sense. It seemed like a Moreno attractive deal due on the lower up front investments while still cash flowing modestly.

Clayton Mobley · Answer

@Dan Lam if #1 saw some forced appreciation after rehab and they are both turnkey, why didn't #2 have the same increase? How recently have capex items been updated in both? I'd be interested in a scope of work for both properties if they are being marketed as turnkey, because people throw that word around a lot these days and it doesn't always mean the same thing. To me, turnkey means fully rehabbed with new or nearly new capex items (roof flooring HVAC water heater etc). If the units include any appliances, same applies there. It sounds like you are leaning toward #2 because the bar for entry is lower. If all things truly are equal quality-wise (though definitely not cash flow-wise) and you are more focused on scaling than you are on income, then go with #2. Personally, I prefer to have higher cash-flowing properties and then pour all the income back into paying off the loan more quickly, which saves a ton of interest. If you don't need the income, you could still take #1 for the higher income, and use it all to accelerate pay-down (still all tenant-paid) and then refi or HELOC down the road if you want to pull out the equity. Just sort of following the math to its logical conclusion:The difference in cash required is about $60k. So assuming you have the full $115k needed for prop #1 but decide to buy #2 and use the remainder as a dp on a new prop, you're looking at about a $200k - ish property @25% +closing costs. (I'm also assuming that, in either case, you're not deploying your last penny - always keep a cash reserve.)If you can get a prop that produces more than $12k per year in gross rent (the diff between $78k and 90k on these two props) in your chosen market, then that might be the way to go for you if your primary goal is more doors. For me, I'd rather have the higher income and use it to pay off the loan faster or to build up another dp. This is doubly true if #1 was updated more recently (or simply rehabbed to a higher standard if they are both turnkey but only #1 increased in value after rehab). The higher PITI and lower rent on #2 makes it much less attractive to me, but it sounds like our goals differ somewhat.Good luck!!

Dan Lam · Answer

Correct

Jay Hinrichs · Answer

your owner occupying these right ?

Theresa Harris · Answer

Assuming everything else is comparable (rental potential, taxes, etc), then the second one would mean a lower down payment and leave you with ~$50K to invest in another place. It would also mean dealing with 4 vs 3 sets of tenants.

Dan Lam · Answer

Difference is due to the loan structure, based on the fact that one is a 3 unit and the other is a 4