Is it better to buy two cheap cash flowing properties or one better growth property? This is a question I get asked daily so I thought it best to share my answer with everyone.
Here is the longer more detailed answer, so I am going to go a little bit analytical on you.
For the best answer, I went to Cleveland (cash flow market) and to Atlanta (cash and growth market) and at random pulled the first properties to appear that we promote. In Cleveland I pulled the first $35K and $45K property that totaled $80k and in Atlanta one property that totals $79,380.
Assumptions = all cash purchase with no mortgage / same monthly rent for 3 consecutive years
2 Cheap Properties
Two homes (Cleveland) with a combined purchase price of $80K net ROI of $1,093 per month or $39,348 for 3 years. This is a great cash flow market and not necessarily purchased for growth. At the end of 3 years you would have your initial value of $80k and $39,348 in cash flow, so your total 3 year portfolio would be $119,348.
1 Great Growth Property
Next I took 1 property from Atlanta (cash and growth market) with a purchase price $79,380, a $92,000 retail product. Net cash flow is $722 per month or $25,992 for 3 years. Assuming a 2% growth per year, we would have $92,000 at the end of year one, $95,717 in year 2, and end of year 3 $97,631, plus the $25,992 in cash flow so your total 3 year portfolio would be $123,623.
So the difference is about $4,000 in favor of the growth market. Considering we are using assumed growth, the values may be higher and may also be lower if the assumed growth does not materialize.
OK, now it gets more interesting when we run this same analogy for a 6 year hold, the cash flow market has a total portfolio of $158,696 and the growth market at 2% per year has a portfolio of $182,986.
I hope you were able to follow my reasoning here. As you can see the growth markets are capable of giving an overall better returns.
There are a number of additional things we could factor in as well of course, but I think the growth markets with a newer product and less repair possibilities favors the cash flow markets with less sustainable cash flow although growth tends to be more speculative in nature.