Do Cheap Properties Really Cash Flow Better?
When it comes to real estate investing, the strategies vary, but the end goal is pretty much the same: put a minimum amount of money IN and get a whole lot more out. Many investors find excitement in the search for the most inexpensive properties; properties that just need some TLC to generate significant positive cash flow. But are cheap properties always the way to go? Does the “too good to be true” rule apply to real estate investing?
The first issue that arises when discussing cheap properties and their potential for significant ROI is in defining “cheap” While some investors choose to call it “inexpensive, affordable, budget-friendly or underpriced,” they’re all talking about properties that fall way under current market value. What you can get for $75,000 in the Temecula, CA is a lot different than what the same amount of money will get you in NYC or other high-market areas. What is inexpensive in one market could be totally different just across state lines. It’s common for investors to jump on an opportunity because for them, in their home market, the price seems exceptionally low. Jumping on these properties without an in-depth understanding of the local market could be costly. Before you get excited about finding a cheap property, make sure you know how it compares to others in the area.
Understand The Local Market
One of the main reasons a home is priced exceptionally low is because it’s in a less than desirable area. And while creative and crafty investors can do a lot to spruce up a home, there’s very little they can do about the location. If a house looks great, the ROI is impressive on paper, and the home still seems underpriced, do more digging. Research the neighborhood, talk to people in the community, visit during peak and slow times to get a feel for the location and a better understanding of the local market. Better yet talk to a qualified Property Manager. There’s nothing worse than putting money and time into rehabbing a property in Murrieta only to have to really struggle to convince renters to move into a shady neighborhood.
Property Managers Aren’t Magicians
Some investors convince themselves that buying a property in a bad area is a good idea because their property management team is amazing and can make even the worst property look good. And while professional management companies like Benefit National Property Management do help in many areas, even THEY can’t make a bad location good. A rockstar management company is important in making money through investing, but don’t compromise on the neighborhood and hope the management team can work magic.
Understand Cash Flow
It’s easy to be attracted to low priced homes in hopes that it’ll churn out significant positive cash flow. However, it usually doesn’t work like that. A cheap house usually has more issues, meaning you’re going to be pouring more money into rehab and repairs than you would in a more expensive home. This will subtract from your monthly returns. Also, cheap properties usually mean lower rents, and lower rents mean lower returns. It’s important to remember that, in theory, cheaper homes should bring in higher returns, but that’s very different from CAP rates and COC returns. When it comes to cash flow, cheaper properties usually can’t compete with the more expensive properties.
Does It Ever Make Sense?
Buying cheap properties in hopes of great returns in risky, and not recommended for new investors. However, if you’ve been around the investing block once or twice and have a growing portfolio, it may work for you. If you’re going to do it, we suggest:
- Staying local (areas like Temecula and Murrieta are hot markets right now)
- Having a solid portfolio already
- Doing it to diversify your portfolio
- Thinking about this type of investment like you would invest in stocks
If you’re being tempted by a ridiculously low priced property, take a second. Look at the numbers, look at the location, and consider how much work is going to go into making this space comfortable and safe for tenants. If you’re new to investing, talk to a property management company (or a friend who’s been doing this a while) and get their thoughts. It’s possible you found a really great deal, and it’d be in your best interest to jump on it. It’s also possible (and a little more likely) that there is something you don’t know about this property that you’ll probably find out once you write the check. It’s worth it to spend a little more money up front to see more revenue coming in over the long run.
Benefit National Property Management
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