Little or Big? Which investment is best?

When starting out as an investor, most will purchase single units at a time, until a large portfolio is built.

Once a portfolio is built, is it better to transition to a large group of rentals in one property/location? Or is holding the single units the best way to maximize the return?

The Cap Rate for the small units in York County (1-10) is 8%, which is in contrast to the Cap Rate for large rentals (10-200) at 7%.

In Lancaster County, 1-10 unit owners enjoy a 7.3% Cap Rate. The larger owners with 10-200 units have a 6.3% Cap in contrast.

Looking at this number, it seems to make sense that a large portfolio of smaller units would be the better return. As an investor, the management of multiple properties in soft costs could start to lessen that. The accountant must track the depreciation and basis in many more properties, which increase the cost.

Calls for maintenance for properties spread out in many location may also affect the viability of the cap rate for these smaller units.

If financing is placed on these properties, the total effective cost of the financing should also be factored into the ratios.

For these reasons, we encourage investors to examine their soft costs in legal, finance and accounting before arriving at a final decision.

Before assuming an overall rate is reflected in the Cap Rate, we must also look at appreciate in value. Because investment value is tied directly to income generated, the increase in rental rate is a reflection of increase in value.

For large property in Lancaster, the rental increase sits as 2.7%. For smaller Lancaster Properties, they have a 1.9% growth rate.

In York, the large property owners have a 3.7% growth rate. The smaller units have a 2% growth rate.

This seems to indicate the larger properties will see greater appreciation in value from greater rental increase. Taking into consideration the overall picture of the investment performance with Cap Rates, rent growth rates and soft costs will help to form a wise decision.

If you would like a personal analysis of the overall picture of your investments, call for a no-obligation consultation.

Is Now the Time to Buy in Central PA?

Are you asking yourself¬† “Is now the time to buy an investment property?”

Money Crowing

That is a great question. Is the economy going to continue to grow as well?¬† Indication from GDP is that we continue to maintain a fabulous growth in our economy. The GDP grown was 3.2% in first quarter of 2019. A ‘Regular’ grown rate is 1.9%, so this number is well above the average.

What does this mean for investments? Well, it means rents are growing, demand is strong and your units will be easily filled, which results in the best cash flow.

If you wait to purchase until we have another recession, it may be a long wait. In the meantime, the low vacancies and higher rents provide a return that balances out any higher sale price.

Take these examples:

Scenario 1. If you purchase a four unit building for $250,000.

The building stays fully rented, so your Net Operating Income is a strong $25,000. This is a 10% CAP Rate.

Scenario 2. In a recession, you get a great deal on the same 4 unit at $200,000.

The building always has one unit empty, and rents are lower to keep the tenants you have. Your Net Operating Income is $13,800. This results in a 6.9% CAP Rate.

See the point? Purchase good deals in a strong economy, you will come out on top in the cash flow game.

The above scenarios are based solely on cap rates, which are an important measure of value. However, there is also the growth rate to consider as well. Buying in a downturn may mean that your potential for growth in value is much greater, which will grown in relation to the overall economy.

The Internal Rate of Return is a measure of how the property performs with both income and growth taken into consideration. In scenario #2 above, to really understand the outcome the growth rate should be added in as well.

Let’s say after five years, your income grows to $25,000. The value of the building has now increased to $250,000. You sell for a $50,000 profit. The overall rate with growth added in is 12.64%.

The growth rate now increases your return beyond just looking at income. Many factors play into what may be your best scenario. For some investors, the income stream is much more important. For others, it is the shelter from taxes. These factors may outweigh the benefits of just looking for growth in the investments.

If you would like to learn more, contact us for a consultation, and let us prove the value of professional service with results to your bottom line.