4 x $50K homes or 1 $200K home

Hi Everyone,

Just reading through all the threads here is a learning tool that’s hard to find. Nothing beats actually doing the deals but learning through your fist hand experience is invaluable–thank you.

I currently have four rental homes that all retail around $250K-$300K per home. I have mortgages on all of them except one that I paid cash for (I said I was a newbie right?)

I have been working hard to soak up all I can on investing in real estate and want to make more investments. Is there an advantage/disadvantage to purchasing 3 x $200K homes (for example) versus 12 x $50K homes from a long term strategy. My plan would be a long term play on the properties.

As a follow-up, am I barking up the wrong tree? With $500K -$600K of cash, should I seriously consider multi family?

I know there are so many variables, just some generalities would help my sharpen my focus a little I guess.

Thank you in advance,


ps. I am a newbie so please be gentle :biggrin

Hello Jake. With $500k you need to be in multifamly. The advantages are just too great to fool around with individual houses.

Yes, definitely. With multi-family, you compartmentalize your losses when there’s vacancies and/or a tenant trashes an apartment or some other major issue in one or two apartments. And if you negotiate correctly, you can quit your J-O-B working for someone else. Whereas, with a single house, if it’s vacant, you’ve lost all your income for that month until you find someone to rent it.

IMO if you have $600K, use half towards a downpayment towards a multi-family and save the other half in an easily accessible bank account for any major emergencies. Negotiate as best you can to not spend that other half while factoring in a decent salary for yourself. Try really hard not to touch that other half sitting in the bank account and think of better ways of saving more money on your monthly expenses including doing as much of the work around the building yourself and finding ways to improve the property to raise your revenues. Whenever a challenge arises, get a book or read online how to fix it yourself or hire a tradesman for that issue just once so you can pick their brain and learn how to do it yourself by watching them. Go in with the mindset of loving to learn new things and do as much of the work as you can yourself and you’ll be a superstar

Multi-family can create a good cash flow. But… I believe that in this economy, we need to take into consideration property appreciation. Property values have plummeted to all time lows. The potential for value growth is very high. I believe that the rate of appreciation for SFR is much greater than MF.

So if it was me, I would look at purchasing as many cheap SFR discounted properties (i.e. foreclosures, REO, distressed sales etc). The reason behind this is that a $50 purchase will usually be below market value. By rehabbing the unit, you can see immediate value appreciation plus get the market appreciation that comes down the road.

Additionally, the rental rate per square foot is generally higher for smaller homes. Much depends on your area. If a $200k home and a $50k home is going to rent for 1% of value ($2,000 and $500 respectively), your return is going to be the same and I would go for the $200k investment. But if rents for a $200k home are only $1,800 but you can get $650 for the $50k home, your return will be much higher.

This example will show you why:

Lets assume a conservative annual appreciation rate of 3% over a 5 year holding period. We will set aside 50% of gross income to vacancy and expenses (assuming a cash purchase). Here is the 5 year total:

$200,000 House

$21,600 Annual Gross Rent at $1,800 Month
$10,800 Annual NOI

$54,000 5 Years NOI (not including mortgage or income taxes)
$231,900 Market Value after 5 Years Compounding Appreciation

$85,900 Total Profit/Return after 5 Years
x 3 Homes
$257,700 Earned in 5 Years with a $600k investment
43% Total Return on Investment

$50,000 House

$ 7,800 Annual Gross Rent
$ 3,900 Annual NOI

$19,500 5 Years NOI (not including mortgage or income taxes)
$58,000 Market Value after 5 Years Compounding Appreciation

$27,500 Total Profit/Return after 5 Years
x 12 Homes
$330,000 Earned in 5 Years with a $600k investment
55% Total Return on Investment

This is assuming that you have $600k cash. If you need to get mortgages on these properties, it is going to be a challenge to finance 12 properties because of lending caps. You will probably need to move the properties into a jumbo loan which carries a higher interest rate. These costs must also be figured into the equation to get a true yield.