what's better 30 units at $600 rents or 15 unit at $1200

What’s Better, 30 units with $600 rents or 15 with $1,200 rents

This was a question that came up in the comment section of the latest article I wrote on BiggerPockets. The answer may surprise you.

What’s Better, 30 units with $600 rents or 15 units with $1,200 rents

Let’s tackle this question in two ways because we are discussing two separate elements here, unit count and rental amount.

15 units are Easier and Cheaper

First of all, on the surface, it would seem that a lower unit count is always a better idea. After all, fewer tenants must be easier to manage. Secondly, fewer units to manage is more likely to be done on your own without the help or the expense of property management.

So, not only does 15 units seem to make sense from to ease of management perspective, but also it seems to be cheaper.

$1,200 rents are easier

The wisdom I’ve been preaching for years is that you, the owner, can do very little to attract good tenants. Indeed, your property, what it is and where it is, that will be attracting tenants, good or not so good.

Having said that, $1,200 rents certainly seem better than $600. At higher rents, we would seem to be dealing in better locations and attracting more financially stable tenants. All things being equal, $1,200 rentals are indeed easier to manage…

All things are not equal

It is important to understand how the rental fits into the fabric of the market. For instance, in a town in the midwest where incomes are $40,000 per year and rents range from $400 to $800, a $600 rental is right in the middle of the range – not too cheap and not too expensive. Isn’t this what you want?

On the other hand, in another kind of market where incomes are $200,000 the $1,200 rent may be the absolute bottom of the barrel, meaning you are getting an unstable tenant base at that price.

All things are not equal, and therefore rents have to be placed in context.

There is one caveat

A certain amount of rent is necessary in order to cover the OpEx and CapEx, which are dollar amounts not percentages of rent. $600 in 2018 is the bare minimum, but in most towns mat suffice.

Here’s the twist

In a lot of ways (all the ways I care about today) any 15-unit is just as inefficient as any 30-unit.

First, there is no data available for OpEx, which makes those impossible to underwrite efficiently.

Secondly, you have to self-manage those because:

A. They don’t produce enough revenue to pay for management, and

B. Even if you do hire management, it will not be professional, by definition.

I want neither

Given the option of any 15-unit or any 30-unit, I want nothing to do with either. I will not buy anything that can’t sustain payroll.

Makes sense?

 

 

6 Comments

  • Nicholas Leamon Reply

    Obviously more details is required to make and educated analysis, and there is not a blanket X is always better than Y. However in general terms both scenarios are bringing in $18,000/month. With the 30 unit that is 30 leases, 30 background checks, 30 credit checks, 30 move-ins, 30 move outs, 30 water heaters, 30 A/C units, 30 roofs (potentially), where as the 15 unit is half of that, I know you have spoken before about how you have to consider expenses not just income and it would seem that if income is the same here, it would be a very peculiar scenario where expenses would be higher with a 15 unit.

    • Ben Reply

      The scenario is not peculiar at all. IN a given market, folks willing to pay $1,200 require different finishing textures, appliances, and fixtures. They demand better condition, which costs more. So expenses can easily go up. You are considering this in a vacuum – if you put this into the context of the marketplace, some things change.

      Having said this, it’s not what I am talking about. All of the underwriting and management inefficiencies inherent to a 15 unit are also inherent to a 30-unit. Literally nothing much changes…

  • Jesse Reply

    so are you saying you want 100 unit apartments then??

    • Ben Reply

      Of course!

  • Rich Reply

    What is the minimum Gross Income/NOI, or number of doors you need to look at an investment? Have you always had this philosophy or was this after you got into the large apartment complex arena?

    • Ben Reply

      Rich, it’s somewhat of a moving target. But, in most of the markets I look at close to 100 units is what it takes. However, in other markets this may be more or less depending on the rent projections.

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