Just jumping into the rental business and I have the option of 5 houses for around 30k each or a couple nicer houses for 75k each. Regardless of the deals, what is your opinion and experience? Have you had good luck with smaller homes?
Thanks for the input!
Buy the five houses.
You’ll have more cash flow potential.
There’s safety in numbers. 1 vacancy with five houses is only 20%. 1 vacancy with two houses is a 50% vacancy.
The rent/price ratio will always be ‘better’ with the $30K houses than they ever will be with the $75K houses. That means you’ll have more leverage, and more cash flow with five cheaper houses, than with a couple ‘expensive’ ones.
The assumption here is that all of the houses are similar in age, location, and condition. If you’re buying 80-year old, tired, bungalows that need tons of maintenance that’s one thing.
If you’re buying 15-year old duplexes that just need some carpet, that’s quite another.
Meantime, all things being equal it’s wiser to leverage yourself across several income streams, rather than fewer.
Hope that helps.
Another thought… If you’re comfortable owning five units, why not just buy a five unit building? They’re compact, potentially more profitable, and a safer leverage than houses would ever be.
You didn’t mention whether any of these prospective income properties is a bargain, or not. Unless you’re a buy and hold (forever) type of investor, you need to be capturing an equity profit at the get go. Otherwise, your only meaningful profit point is cash flow. Even then, if you don’t get a bargain price, your cash flow will be negatively impacted for years. :banghead
Lots of questions…
Good advice by Jay. We’ve done those 30k deals you mentioned. Actually we’ve never paid 30k for a house, but have always come in under that amount. I’ve often thought of moving up to the nicer 75k houses, but as Jay points out the rent vs price ratio isn’t nearly as good. It seems like the people who are buying the more expensive houses usually have longer term loans like 30 years in order to make them cash flow each month. I want our things paid off in about 10 years.
We have had really good luck with cheap smaller homes. Most of our rentals are around 850-900 sq ft for the 2 bedroom houses and around 1000-1100 sq ft for the 3 bedroom houses.
If you look at what you can rent those five cheaper homes for, I can almost guarantee it will be much higher than what you can get out of two 75k houses. Of course you have five properties to maintain vs two, but the vacancy risk is spread out and the extra cash flow makes up for having the additional properties.
Thanks for the advice! Here’s some more info about the 5 houses…hopefully it will help get me even better counsel!
They can each be bought individually or I can group them together in one $75,000 purchase (a land contract is available…would that be better than conventional financing?). All the homes are fairly old, but 4 of the 5 already have renters that I would inherit.
House 1
Price $9,900
Beds 3
Baths 1 full
Home size 1,050 sq ft
Lot Size 4,356 sqft
1890 built
rent $525
House 2
Price $19,900
Beds 2
Baths 1 full
Home size 970 sq ft
Lot Size 10,956 sqft
1906 built
rent $600
House 3
Price $19,900
Beds 2
Baths 1 full
Home size 760 sq ft
Lot Size 6,072 sqft
built 1940
rent ??? (vacant, market average is around $650)
House 4
Price $24,900
Beds 4
Baths 2 full
Home size 1,560 sq ft
Lot Size 4,257 sqft
built 1909
rent $750
House 5
Price $24,900
Beds 4
Baths 1 full, 1 half
Home size 1,404 sq ft
Lot Size 8,712 sqft
built 1946
rent $625
If I had a deal like this, I would go to one of my local banks who would give me a commercial loan for all five properties. This loan would likely be amortized over 10 years and the rate fixed for either three or five years. After that time, the loan would get looked at and renewed at the new market rate. This loan would be around 1-1.5% above normal financing like you’d find on a personal residence.
This type of financing is what you’d find at a local bank…not a big bank like Bank of America or Wells Fargo. One of my bankers has said he likes when we group multiple homes on one loan because it’s about the same amount of paperwork for him to do that versus just paperwork on one home.
I’ve had some good luck with inherited tenants while others had to be kicked out. You never really know. The main thing is that they comply with your rules…you don’t comply with them about when they’ll pay, what they’ll pay, etc.
The purchase price vs. rent looks really good obviously. What I would be looking closely at in this situation is the condition of the properties. Many small time landlords will let properties run down over time and then they get to the point where they pretty much have to either put money back into the properties or they just dump them so they don’t have to deal with the issues.
So I’d look to see if these houses have circuit breakers or if they have old fuse boxes. What’s the plumbing like? Are the attics insulated? Things like that.
I would just want to make sure there wasn’t a ton of deferred maintenance involved with the properties. If there are a lot of repairs needed, just go in knowing that you’ll have to spend thousands and make sure the numbers are still good. We bought a bunch of properties last year from a guy who’d let them run down. It’s taken a long time to get them into good shape. It was very evident they weren’t putting money back into them to fix them up.
justin0419 offers a fantastic plan.
In any case, it sounds like it’s worth it to at least see the properties.
If/when I go, should I bring a contract along? And correct me if I’m wrong, but I understand the process is to first secure the deal and then secure the financing.
Tie up the properties, and then do your due diligence.
Chances are there’s not going to be a lot of competition. When sellers are offering to finance you, you can bet the houses are ‘hard sells.’
Meantime, you need to avoid making a clean offer… Otherwise, you’ll end up being asked to put 50% down… No good.
You want to trade off all the work you’re gonna have to do to these houses in return for a low/no down payment. if not a better price than the seller’s asking for.
If an agent is not involved, and you’re buying with a Land Contract, the seller doesn’t have a lot to lose, since the deed isn’t transferring to you, until you pay off the note. If you default (which you’re not going to do), the contract turns into a lease, which extinguishes upon default (since you’re not an owner-occupant).
At the same time, you need to demonstrate what a reliable, trustworthy (experienced) investor you are …or have some reference letters that testify to what an honest, hard working, credible person you are. This goes a long way to making the seller secure about financing you without a big down payment.
Again, your offers a need to carry lots of extra requests at the outset, so that you have something to give up, and to help the seller work to close this deal.
If you don’t make the seller work for this, he’ll make YOU work for it, and then you’re gonna pay either too much, and/or put too much down, and/or pay too fast.
Just saying.
I would definitely stick with 5: more money, less headache.