Will Investing in High End Rental Property Pay Off?

The housing market is full of different property types. Single-family homes, multi-family properties like duplexes and fourplexes, commercial buildings, and more. Each of these can be divided into property classes of A, B, or C, which I’ve discussed in previous posts. For the investor interested in acquiring single-family residential properties, one of the questions you’ll have to ask yourself is which property class you want to focus on. And this almost always leads to another question: does it pay off to invest in higher end properties?

Before that question can be answered, however, there are several pros and cons about high end investing that you must consider.

Pros

• Property Quality - Higher end properties are in better condition than those found in lower classes. This is great for investors, because it means less needs to be done (and less money spent) to get it ready for tenants.
• Tenant Quality - Higher end properties also tend to attract higher quality tenants who have better jobs, stable incomes, and are willing to pay more for rent. In general, higher quality tenants will be more dependable about paying rent on time and in full, they’re more likely to renew the lease, and the wear and tear on the property will usually be less.
• Maintenance Costs - Maintenance costs can also be lower with higher end real estate, as homes may be built using better and more modern materials that don’t require as much upkeep. The age of the home may also work in your favor; newer properties won’t be due for maintenance as soon as older properties.
• Exit Strategy - With a higher end property, you also have the opportunity for an additional exit strategy: your high quality tenants may be interested in purchasing the property from you should the occasion arise.

Cons

• Higher Purchase Price - There’s an entry barrier that comes with high end properties - the cost. Naturally, higher quality homes are going to be more expense than lower quality properties, so you’re going to pay more to snag one of these homes, and your options may be more limited as well.
• Less Diversity - That higher purchase price may mean that most of your funds will be tied up in one property, so you won’t be able to diversify as much. When you buy less expensive properties, you’re able to purchase more real estate, giving you greater diversity and less risk.
• Maintenance Costs - Yep, maintenance costs are both a pro and a con. While maintenance may not need to happen as much with a nicer, newer property, when something does break, it may be more expensive to fix it because the parts and materials need to be high end as well.
• Vacancy Hurts More - When you’ve got a high end property that’s sitting vacant, it can put a much greater financial strain on you. In the case of vacancy, owning several cheaper properties provides a bit of a buffer, as just one of them isn’t making money. However, with one big ticket home, there is no buffer. You’re out on the cash until you get new tenants.

Investing in high end property isn’t for everyone. Some investors may not even qualify to purchase these more expensive homes, and many of the ones who do qualify don’t want to take on the additional risk that comes with this property class. However, there are plenty of investors who prefer to carve out a niche in high end properties because of the benefits listed above. Before deciding on this type of investment, consider your goals and be sure that high end real estate will help you reach them.