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Author: foobarista Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127805  
Subject: Questions about rental property investing (long) Date: 5/23/2002 4:49 PM
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Hi,

We are getting into the rental property biz, and want to carefully explore the various issues involved with owning and managing property, so the inevitable learn-while-you-burn can be minimized (although we are under no delusion that there'll be lots of this). I also know that there is a real-estate investment board and these questions may be more appropriate there, but that group seems moribund.

We have already made a few decisions:

1. We want to go in with no less than a medium-term time horizon, and we'd rather have good cash flow from a slowly appreciating property than poor cash flow from a quickly appreciating property. (Both would be nice too, but it appears that these two attributes are at least somewhat mutually exclusive). We don't want to be in the "flipping" business for now.

2. We live in the SF Bay Area, where cap rates suck at 5-6%. In order to make money, we'll need to invest outside the area - probably Central Valley or High Desert of CA, which are growing and often have 10%+ cap rates, so we'll have to go with hired managers. We'll pay close attention to our properties, maintain them, and visit them frequently, but this would be too far for us to do day-to-day management.

3. We don't want to be slumlords, even though cheap properties seem to have the highest cash-flow for the money. We are willing to invest in working-class properties, but don't want to have to deal with the underground economy or Really Bad neighborhoods, or have to be Landlords from Hell to make money. (For example, we saw a property in the Central Valley which cost $500K, produced $110K/year with a 17% cap rate, but obviously required constant, careful management as well as requiring that the mgr be meaner than a junkyard dog to generally police the place. Also, since it was lots of cheap units, maintenance would be expensive - more units means more sinks to leak and toilets to break - turnover would be high, and appreciation would be minimal.)

4. We want properties which are genuinely cash-flow-positive at full occupancy, before tax breaks.

Our first question is: 4-plex or apt building? Based on a quick comparison of prices and income, apt buildings seem in general to produce higher returns and bigger cap rates than four-plexes in the same areas with similar sorts of units. The advantage that 4-plexes have is that they are residential property, so you can finance them with lower downpayments than 5+ unit apt buildings, which are commercial property with a min of 75% (usually 70%) loan-to-value. This also makes them easier to sell. But they do have lower return than equivalent apt buildings. (It appears a popular strategy is 1031 Exchange from 4-plex to apt building after letting the 4-plex appreciate for awhile)

Second question: working-class properties, which have more cash flow, or nicer properties, which have more appreciation and generally less hassles? What are the issues with each?

Third question: good books or resources on this sort of thing? I've been browsing the web, and far too many sites are get-rich-with-my-new-video garbage, as opposed to real discussions. I read _Investing in Real Estate_, which is good, but I'd like more info specifically on multi-unit properties.

Foobarista, wanting to learn...
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