Rental homes - cheap vs expensive?

[Deleted]

Ratchets,

Are you buying in the US or the UK? What kind of financing do you have available to you?

The classic advice is to buy the worst house in the best neighborhood you can afford. DH and I have generally followed that advice although the irony is that our "better" house has made us the most (paper) profit, has the best cash flow and has the same tenants in it 8 years later. It's almost 50 years old. It's been pretty trouble free other than me re-staining the decks every two years. Last year I finally replaced the water heater (17 years old!).

We took a different tact than most. We have/will live in everyone of our 5 properties so they tend to be nicer and on the larger side. The newest one was built in 1982 (AZ). Between the great long term fixed rate mortgages and tax incentives we've done well.

[brdsl]

Ratchets,

This is what I look at. I look at the top rent you are going to get in an area. If it is 500 per month, the max I will spend is 50k on a rental property.

If your top rent is 500, and you pay 100k for the home, you will lose money.

The situation is actually two fold that you need to answer yourself.

1) Do you want to make money with the rental now?

If so, find max rent, purchase the house following the above guideline.

2) Do you want to wait for it to appreciate to make money?

Purchase a higher end house, knowing you might lose money and wait for appreciation.


FWIW....I NEVER buy RE based on appreciation. If it does, great...even better.....I buy to make money now though.

If you have read Paul's posts, I don't buy that cheap...but I can't find them that cheap. That is my next goal, the under 10k house.

[IPAfan]

I like the idea of getting a bigger home that's much newer. Perhaps that's just because I'm uncomfortable with repairs. Still, remember that the newer houses are going to have a lot longer economic life than the older houses.

[zibazinski]

Small homes are best.

[Politically_Incorrect12]

May 2, 2011 9:47:09 GMT -5 zibazinski said:

Small homes are best.

While I am in no way a guru on RE, I would think that you would need to look at the area that the homes are in as well. It seems like it would be much easier, and hopefully better renters as well, if you had a rental in an area that had good schools and low crime.

[Deleted]

I would look for something that's in a major metropolitan area that you're willing to live in. (Plan B or C ). I think it's important to structure the deal along the lines you are thinking. If you have good earned income a small negative is worth it to get a house in a better area (especially if you want to attract families with school aged children).

"I would love to have the same tenants for eight years! "

Yeah, the funny part of the story is that I wasn't sure I wanted them! We don't have kids and we had renovated the house 2 years before we needed to relocate to AZ (and now Germany). They had 3 little ones and I was a little paranoid because the house hadn't had little kids since the early 60s. Very, very few complaints from these folks. Last year I spent a week staying in the house while they were away in Europe. Very nice family. We'll miss having them as tenants since we'll be moving to that house in about a year when we leave here.

[phil5185]

Our best houses are/were near-new (2 to 8 yr) small 3bd2ba, 1000 to 1200 sq feet, no frills - no fireplace, no pool, no outbuildings, etc.

Renters are often young couples that need to rent as they save for a down-payment, finish some classes, lock in a more permanent job, get out of the Service, whatever. So a 2500 ft house is a poor fit for them, both financially and utilization.

A near-new house has new-code 3-wire service capable of powering modern appliances, modern plumbing/sewer, new water heater, new AC, new disposal, new appliances. The first owner planted the grass and hung the drapes, all you need is the key. So, for the first decade, all of your costs are covered in the mortgage (as opposed to buying a $150k unit and spending $25k in upgrades over the decade).

As for investment returns, if I was placing $300k of capital, I would select 2 - $150k houses rather than one $300k house. Big houses tend not to appreciate as fast, in tough times people move to smaller houses so the demand goes there. Nearly everyone needs a starter house at some time in life - but not everyone needs/wants a 2500 ft house.
The ratio of rent-to-value seems higher for small houses (in most markets).

[debtheaven]

I am in a very HCOLA (also in Europe, close suburb of Paris). Over time here I have learned that we can get "the best bang for our buck" by having more smaller places rather than fewer bigger ones.

We used to own only 1BR apartments. We sold one in February (because it was about to become a major money pit) and are about to close on a studio that is nearly the same size, in a better neighborhood instead.

But you're looking to invest in the US, not here, so I know I'm not being much help. This said, I'm guessing the same general rule would apply, even if not in the same proportions.

If you are looking at the rentals purely as investments, I think smaller is better. Of course then you have to factor in all the rest (upkeep, roof, boiler, etc). But GLOBALLY, I think smaller is better and more lucrative.

I actually have a plan to sell the other suburban 1BR apt in order to buy one or two studios instead, but DH doesn't know that yet LOL.

[stats45]

Neat thread. Exactly why I love this board.

[2kids10horses]

I am a real estate guru. Go with the less expensive, 5 year old house, just like Phil described.

If there aren't any, find another area for your rentals.

FInd where they were selling first time owner new homes 7 to 8 years ago. That's where the foreclosures are.

Shop now. Buy later. Wait until all the owner occupants have bought their homes. They will pay top dollar. You can't compete with that. Late summer, fall, and winter should be when you buy. Sellers will be desparate to sell, and more likely to accept low ball offers. I typically buy these houses for 1/2 what the first buyer paid the builder. I will have to replace carpet, and paint. The rest is usually ok, unless they stole the appliances. I get used appliances at Habitat for Humanity. Cheap.

Figure out why the owner occupants passed over the house. Wild paint? Nasty carpet? Cat pee odor?

Can you fix it? Paint is easy. You're gonna replace the carpet anyway. Cat pee? Pull up carpet and pad, soak the subfloor with Odoban, when it dries, seal the subfloor, new carpet and pad.

Rent it, or rent it as a "lease option".

I live on my rentals. I own mine free and clear, and occasionally flip for fun and profit.

You can too. Paul does.