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.