There is nothing wrong with purchasing a cheap property (heck I’ve done it a few times), and that is usually the best way to get started.
However, your money can work harder for you in other areas of real estate investing. What exactly is a cheap property?
I am not talking specifically about the purchase price (maybe you got a great deal) but more so about the area you are investing in.
While this is a matter of some personal opinion, you can find cheap properties/communities in rural towns of Oregon and some pockets in the Metro area.
- Cheap properties tend to be in areas of decline. While there aren’t many areas of population decline in Portland, once you get out of the metro area, that could be the case. As with many rural towns around the country, they are struggling. If you are investing in towns like Willamina, Amity, Gaston, or Colton make sure you are looking at population and employment trends.
- There will usually be higher turnover which is a cash flow KILLER. A typical unit turn can easily cost $1000, not accounting for lost rent. Often times, people who rent cheap properties don’t have deep roots, so they are not tied to a certain property or area.
- Capital expenditures (CapEx) and maintenance are at a higher cost compared to rents. If you need to replace the carpet, a mid-grade carpet is going to cost the same in a less-expensive home as it does in a higher-priced home. You might need to set aside a higher percentage of your revenue for repairs and CapEx.
- Cheap properties do not appreciate as much as other properties for two reasons. The first reason is due to the lower price itself. A 7% appreciation on a $350,000 home is a lot less than a 7% appreciation on a $475,000 property. Beyond that, less desirable neighborhoods that have cheaper properties do not appreciate as much as areas that are more desirable.
- When you are looking to rent or sell, there is less demand for properties in less desirable areas.
This means the property will sit on the market longer and you might need to lower the rent or asking price in order to attract a renter or buyer. - Bonus Reason: The higher priced the property, the more the tenant is paying down your mortgage. If your tenant is paying $1,600 per month in rent, they might be paying down your mortgage by $500 per month. However, if your tenant is paying $1,200 per month, they might only be paying $300 per month.
While there is certainly a time to invest in cheap properties, I would not recommend making that your investing niche. While the cash flow is better with cheap properties, there are tradeoffs that you will make. If cash flow is important to you, I would recommend starting off with a cheap property and diversifying your portfolio with other properties that will provide you equity growth.