Two rentals worth $350k each versus one rental worth $700k?

[karenpnz]

I have one rental worth about $350k in New Lynn getting rent of $375 per week. I am almost ready to add a second property to my portfolio. What are people's thoughts/experiences regarding having two rentals worth say $350k each as opposed to selling my house and buying one more expensive house in a potentially better area of $700k?
I know this will depend on a lot of factors but just seeking the feedback of more experienced investors out there. As I see it the positives and negatives are below but feedback appreciated!

Positives of one house: only one lot of maintenance/property management fees etc and potentially greater capital gains as the house should be in a better area.

Negatives: If the house is vacant you lose all the rent. Is it harder to rent out houses in this price bracket? Is twice the rent achievable ie. $750 per week?

Positives of two houses: halving your risk - if one is vacant you only lose half the money. Also perhaps there is greater demand for rentals in this more average end of the market?

Negatives: twice the costs of management fees, maintenance etc. Possibly less potential for capital gains?

[Keys]

OK. Why is it twice the cost for management fees?

$350 per week times two for rent would equate to the same as the more expensive rental of $700 per week. That's assuming that you get twice the rental income for twice the value in property.

Some companies do have a smaller fee when there is a more expensive property to manage.

[Keithw]

You have identified most of the pros & cons, but as Keys says, the management fees are on the basis of a % of the rent so there should be little difference there.
In fact you are unlikely to get twice the rent, so fees will be less than twice.
Body corp fees are a different issue though.

& your cash % return on the higher value place is likely to be less than the cash % return on 2 lower valued places, & in the present market most are concentrating on cash return as opposed to the unknown of capital gain.

As you have said, the target market for high rentals is much less, so you could have longer vacancy periods.

So it very much depends upon your view of future capital gain & ability to carry the costs of vacancy (or even the negative gearing if you choose to go that direction).
In the end you will not get rich on cashflow, but it allows you to hold property for long periods,
whereas you are likely to make much more from future capital gain providing you can hold it long enough for that gain to occur (probably 10 years or so)

[flyernzl]

As a general rule, you will do better with two less-expensive properties than with one more expensive one.

The rent does not usually increase at the same multiple as the value of the property. One 700k property will generally return a lower rent than two 350k ones.

[karenpnz]

Interesting. It is just that my friend has a $700k house in Orakei and reckoned that he'd get $700 per week rent for it. Good point about the management fees, I hadn't thought of the percentage factor. But I guess worth trying to negotiate the fees down for one more expensive or two properties as opposed to one.

[Keithw]

Your friend may be dreaming, does he just think thats what he can rent it for or is he actually getting that ?
Simple return calc :

$350 pw on 350k property
350 x 50 wks = 17500 pa
17500/350,000 = .05 5 % gross return before expenses

assume 6% mortgage rate (very low by normal standards)
6% - 5% = 1% of interest not covered (disregarding expenses such as rates insurance etc)
1 % 350k = 3500 you have to cover
times 2 for 2 properties = 7000 interest you have to cover

However you have already found you can get $375 pw
so thats

$375 pw on 350k property
375 x 50 wks = 18750 pa
18750/350,000 = .0535 5.35 % gross return before expenses

assume 6% mortgage rate
6% - 5.35% = .65% of interest not covered (disregarding expenses such as rates insurance etc)
.65 % 350k = 2275 you have to cover
times 2 for 2 properties = $4550 interest you have to cover


Whereas

$700 pw on 700k property
700 x 50 wks = 35000 pa (probably less due to higher vacancy)
35,000/700,000 = .05 5 % gross return before expenses


assume 6% mortgage rate
6% - 5% = 1% of interest not covered (disregarding expenses such as rates insurance etc)
1 % 700k = 7000 you have to cover
same as 2 properties at 350 pw
but (7000-4550) $2450 more than 2 properties getting 375pw

push interest rates up a percent or 2 & suddenly these numbers start getting a lot bigger

7000 @ 6% becomes 14000 @ 8 % (interest rates increase but rents dont at any where near the same rate)
4550 @ 6% becomes 9100 @ 8 %

the difference is then $4900

[flyernzl]

my friend . . .reckoned . . .

Ignore anyone who 'reckons' or 'says'. They are usually dreaming.

The only figures that really matter are what someone is actually getting, verifiably, right now in today's market.

Anything else is just smoke and mirrors, either to sell you something or to make themselves look good.

[NovInvestor]

I would prefer 2 x $350k in this scenario.

[Harvey]

Or a 350k house with a minor dwelling all up probably about purchse price of 500k and rent equivalent to a 700k property.

[donna]

Wouldn't it be easy to find tenants for the $350K properties too?

Cheers,

Donna

[jimO]

Wouldn't it be easy to find tenants for the $350K properties too?

Cheers,

Donna

there would be a lot more of them

[Wayne]

I would go for 2@$350k as you are less likely to have both empty at the same time therefore won't lose as much rent. Spreads the risk.

[gavinc]

My experience has been that cheaper properties i.e. 350k in Auckland are usually 2 bedrooms and that the type of tenants you attract are unlikely to stay long term. I had 3 two bedders for years and was getting tenant churn every 12 to 18 months. I sold them and purchased two 3 bedroom properties and the tenants have been in for 7 years and 3 years. The return is slightly less but the vacancies are way down and more than make up for the slightly lower gross rent. As you identified there are less repairs and less to manage.

[DaveW]

It depends how quickly you want to get ahead in the game but I would rather have the higher end properties.

The investment return will usually be less but you could buy a 2 level home and income type property to start with. There are also less investors working in this area because of the lower return.

I wouldn't worry about vacancies, there are plenty of people who like living in the 700k areas.

Did you mention you have to sell your home in order to buy the 700k?

[Wayne]

I should put my comment into context - in Hamilton $350 will get you a nice property in a nice area so I would have 2 of them rather than one @ $700k with more limited demand.