In my last post I talked about learning to set a fair rent value for a property. Both Biff's research and the bankrate.com article indicated that the lower the price of the home, the better the return you get on it.
Therefore it seems like a no-brainer to buy cheap homes and rent them out right? Well... maybe. Biff asked me to do a quick rent comparison for investing $400,000 in various house combinations to compare what sort of rental conditions we're looking at. Here's what I sent back to him:
Monthly rent income on a combination of houses with a combined total worth of 400K (approximate).
$2,250 = 1 400k
$2,450 = 1 300k, 1 100k
$2,500 = 2 200k
$2,505 = 3 133k
$2,550 = 1 200k, 2 100k
$2,600 = 4 100k
$2,500 = 4 75k, 1 100k
As it turns out, buying lots of smaller houses does seem to offer you more in the way of rental income. However, there are more factors to consider than just rental yields. In the same e-mail to him I looked at a few other factors, some of which argued against the more/cheaper homes model:
- Cheaper houses, and thus cheaper rent, can lead to less desirable tenants. In other words, the more expensive the rent, the more likely that the person who can afford it is somewhat responsible.
- More houses takes more time, from both a landlording point of view and an accounting point of view.
- Each house will incur closing costs. On the above model it'd take the best 2 house model almost 2 years to turn a great profit than the 1 house model, assuming a $5,000 closing cost per house.
- More houses increases your chances of vacancy, but lowers the cost of it. If you own one $400,000 house and can't find a tenant, that's one hell of a mortgage you'll have to cover.
- You can buy as you go. You might not have enough to buy that $500,000 apartment building yet, but instead of plopping that money into savings it might be better to start investing with something smaller.
So which is best? It depends on your business model. Biff and I decided that our goal was to cater to young military families. So we're looking for townhomes with plenty of space in the $200,000 range. Upscale and expensive that we don't get much attention from young bachelor that might treat our property with less care.