Realty411 Magazine Featuring Lee Arnold from Cogo Capital | Page 89
Certainly, in expensive areas like the San Francisco
Bay Area, Los Angeles, San Diego, New York City and
others such markets, it is usually far more logical to be
a renter, while owning rental properties in affordable
markets, where rents are actually quite high as a
percentage of the home purchase prices.
Buying homes in expensive markets
may not make sense
If you are thinking of buying a home in the San
Francisco Bay Area for $1,400,000, for example, and if
that same home can be rented for about $4,700 per
month (quite typical in 2018), the math is in favor of
being a renter living in that house. While $4,700 per
month appears to be very high (in absolute terms it is),
it is actually very low compared to the purchase price
of $1,400,000. While renting the house for $4,700 (and
not being responsible for property taxes, dwelling
insurance or repairs as a tenant), you might, (in this
example) use a similar amount as a 20% down payment
on the $1,400,000 home (plus closing and loan costs),
to buy about SEVEN rental homes in an affordable
market, using 20% down on each all brand new in
good areas, for, say, $180,000 each, in a market with
low property taxes and low insurance rates.
Each one of these $180,000 homes will fetch a rent
of $1,500 per month. Now that is high rent! (as a
percentage of $180,000). Seven such rental homes,
requiring a similar total down payment as the
$1,400,000 which is rented and not bought, will fetch a
gross rent of 7*$1,500 per month = $10,500 per month.
That is indeed high rent. And these will be brand new
homes which are fully under warranty to boot. In
addition, the seven new investment homes can be
diversified over a larger geographic area or even over
more than one metropolitan area.
Sense of accomplishment and
satisfaction in purchasing rental homes
Another example could be a potential home purchase of a
residence costing $725,000. That property could most
likely be rented for about $3,200 per month. For the
amount used to put a 20% down payment (plus closing
costs), you can rent this home, and buy four brand new
rental homes for $180,000 each rented at $1,500 each.
Total gross rent: $6,000 per month for the 4 houses, and
they can be new, under warranty, in good locations, and
paradoxically each may likely be bigger in size and
bedrooms than that one $725,000 home, which is also
likely substantially older. Again, the four rental homes
can also be geographically diversified.
Even the sense of accomplishment and satisfaction of
home ownership may be fulfilled by owning four brand
new, good-sized and wellrented homes in an appropriate
market, while paying a relatively low rent in an expensive
market. In fact, the higher the home prices in the expensive
market, the lower (relatively) the rent gets as a fraction of
the home price. Thus, the savvy investor can pay a bit
more in rent and get a bigger, more expensive home to
live in, while investing in more optimallypriced markets
and choosing areas that have not yet boomed, and which
can yield higher rental rates.
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