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Being in the Middle of the Market

May 5, 2012

On page 182 of Gary Keller’s book,“The Millionaire Real Estate Investor”, Keller shows a chart that illustrates the sweet spot at the low end of the middle of any market.  I like his chart – it does a good job of illustrating the whole property class issue. As an owner of a mix of these property types  – I think he is spot on.

His graph illustrates almost exactly what I have experienced – my high-end property does not cash flow as well as my low-end and still has some of the same hassles. I think this is due to a combination of more property to maintain and tenants that expect a higher level of product.

I find my low-end properties certainly cash flow better. However, this is where I have had the most turnover, late pays, city citations, etc. If you are good at dealing with these tenant issues and don’t mind the hassles then the returns in the low-end spectrum are very enticing.

Keller’s recommendation is to stick to the solid cash flow, strong appreciation, and low hassle offered by mid-market properties. I am beginning to think he is right. I would classify 4 of our 7 properties as mid-market, 2 low-end, and 1 high-end. Our low end stuff is paid for and our higher end properties have long-term mortgages.  I like this mix and think it makes for a great balance overall.

What are your thoughts? Where are you playing in this market? Has your strategy evolved at all? 

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From → Buying

2 Comments
  1. Nice post Chuck! I love that book.

    As for me, I’m shoot for the lower-mid range. I’m trying to buy between 48-65K and renting them for about 1000-1150. These properties are a bit older so they usually need a little more TLC on the front end. So far it has worked out great, but I think the real test will be how they preform over 10+ years.

    It is hard for me to justify paying too much more than 65K, especially for a SFH. Once repairs and vacancy are factored in, the cash flow can get eatten up pretty quickly. The problem is I need a lot of these guys to replace my day job income :(.

    The only new strategy I’ve been trying is buying in cash and doing a cash-out refi at 70% LTV. This has helped make acquisition cost (per property) go down to 5-12K a pop. There are few more steps than buying with 20% down, but this will allow me to get better returns and stretch my money further.

  2. Arthur,

    Paying 48-65k and renting for 1000-1150 sounds really good to me. I would take those deals all day long. I keep struggling whether to buy down here or move up the food chain to the 85-100k properties. They don’t cash flow as well – No doubt about it… but the class of tenants is delightful AND I think they have the potential to appreciate more (once we get appreciation back).

    We have been on a similar cash strategy for our last couple of purchases. What we did was take a line of credit against one of our fully paid off properties. We also got it for 70% LTV, but the bank valued it very fairly in my mind. I like the line of credit as I only pay interest charges when I draw it down and there are NO closing costs at all. We only make a purchase or 2 per year, so I don’t need the funds all the time. Interest rate is good, but not quite as good as taking a loan.

    take care,
    Ch.

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