Newbies Take Note: Why You Shouldn’t Buy Houses for $30,000

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Are a you newbie?

Are you confused by the title of this article?

Here’s the thing – seasoned investors on BiggerPockets like Jeff Brown, Brandon Turner, J Scott, or Brian Burke are not at all confused by this title; they know exactly what I’m saying and why…

BiggerPockets is a great place to learn the terminology and the formulas.  But, that’s the easy part, because now you have to put what you’ve learned into perspective; which is not quite so easy.  I’ll go even further and at the risk of offending your sensibilities say that if having learned the formulas for Cash Flow, NOI, CAP Rate, DSCR, IRR, and other basics you are not still confused, then the best thing you can do for yourself is to stay as far away from real estate as possible – for now.

You should be confused.  Real Estate is not rugby – it is chess at its’ highest level, and the truly difficult aspects are hidden from sight. If you are confused, as I hope you are, it is because either consciously or subconsciously you are aware of the following:

Not Everything that Shines is Gold!

Truth is found within finer distinctions and  you are confused because you are not able to make the finer distinctions past the formulas and numbers.  It is time for some perspective –

Defining Gold

Relative to acquisition of income-producing assets, something that you hear me and others say often is that Cash Flow is everything; cash flow is gold.  When I say this, I allude to several realities:

  • Cash Flow constitutes safety as it allows us time to weather storms,
  • Cash Flow constitutes financial freedom via passive income,
  • Cash Flow is far less taxed than other forms of income, and thus we don’t need as much of it.

All of the above are indeed true – on the surface.  But, there are a lot of things beneath the surface, and just because something cash flows, doesn’t make it a good investment opportunity.

Why not – you are thinking to yourself; financed with 30-year notes these $30,000 houses cash flow like crazy?  And they are cheap and you can wrap your newbie brain around them…  Besides, you seem to be getting all kind of reassurance from BP that this is a good way to go (be careful who you talk to).  In reality and for a variety of reasons, this is the worst thing you can do!

Related: BP Podcast 014 : Cash Flow, Creative Finance, and Life with Ben Leybovich

Not All Cash Flow is Created Equal

Yes – Cash Flow is Gold; we want Cash Flow.  But, having established the basic truth, now we must dig deeper.

First things first – we buy income-producing assets for 2 global reasons:

  1. To achieve Financial Independence
  2. To achieve Financial Wealth

Financial Independence

Financial Independence is thought of as your ability to generate income without having to show up.  Financial Independence is not needing a job, not dealing with the boss; it is knowing that your family will be OK should something happen to you; it is being able to live and retire on your own terms…

Yes – passive cash flow from income-producing property is indeed a good means of achieving all of the above.  But, here’s what you need to understand, and this is absolutely crucial:

What it takes is not just Passive Cash Flow – what it takes is STABLE Passive Cash Flow!  Cash Flow is nice, but unless it is stable you won’t be able to rely on it the way you want and need to rely on it…are you thinking yet?

Therefore, the question becomes:

What type of an asset and in what location is capable of generating STABLE passive income today, tomorrow, and forever – without needing you to babysit it constantly?

Let’s talk this through…

A Discussion of Desirability

Value in real estate is driven by the concept of desirability, and this is true at every stage of the life-span of an investment.  Follow me:

If people don’t feel that your unit (where it is and what it is) is desirable, then you are certainly going to have to work very hard at keeping it full.  Folks with options are going to choose a more desirable unit, and your pool of potential tenants will be left consisting of folks without options.  Do you think this would be a good thing?  Do you think that these folks hold the key to economic value?  Have you ever tried to market a unit that people do not want– talk about work; completely opposite of passive!

Well, if people don’t want to be there, then the income generated by your unit will not be STABLE – by definition, which is a problem not only because stable income is key to the financial independence that you are trying to achieve, but also because you’ll find it difficult to grow rents over time, or to grow value – not good!

And furthermore, when you are ready to sell, you’ll find it difficult to do since your potential buyers have all read this article and know that in order to achieve our goals we must buy assets that are more desirable than your $30,000 junker…

Related: Don’t Buy That Cheap Property! (UNLESS…)

So…

You bought this house for $18,000 and spent $12,000 to put lipstick on the pig.  You’ve had to work hard to keep it full.  The house was trashed more often than not.  You’ve evicted most tenants because people that are willing to live in this location and in a unit of this character are economically unstable…this doesn’t mean that they are bad people, just that they don’t have control of their financial lives, which often leads to evictions and frustration!

Now, let me ask you a question:

Do you think that this junker will grow your wealth over time, which is the other objective?  Do you think that it will appreciate?  Isn’t it kind of necessary for it to be desirable in order for people to want to pay more money for it?  Do I need to say any more…?

Conclusion

When buying income-producing real estate we have but two objectives: strong and stable cash flow which will allow us to leave W2 and 1099 income in the past, and reasonable probability of appreciation, at least enough to keep up with inflation.  It matters not if on paper something looks like it’ll cash flow – use your brain!  Buy quality assets!

Do you agree or disagree? Why? Share with me in the comments below!

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About Author

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

139 Comments

  1. Ben,
    Absolutely agree with you. One investor I know has a property that they have owned for 4 years and have had at least 4 tenants, all of which ended in eviction, damage to the property and periods of vacancy. The same investor has another property owned 8 years with more than 8 different tenants….

    That’s no way to run a business and looking at pro-forma rent instead of actual rent clouds the vision of the investor.

    • Of course you agree – you are not a newbie David :)

      Finer distinctions man, finer distinctions. I could be wrong, but I think that we owe the existence of BiggerPockets to these finer distinctions…

      Thanks indeed for reading David!

  2. Great post Ben!

    I completely agree, to me if your buying a <30k house typically its in the slums. So by definition
    Your now a slumlord, congrats.

    Over the weekend I rented out my newly acquired SFR rental on the first day with a 2 year lease. I had multiple applications, because it was in a desirable location. For me I wouldn't try to rent a place if I wouldn't feel comfortable living there.

    Cheers,
    Ray

  3. Ben,

    On aggregate, I agree with you – BUT! (There’s always a but, right?) The thesis of the article is stable cash flow from tenants that don’t need constant babysitting. Is it more work to find properties under 30K that will fit that bill? You bet! Is it possible? Absolutely. (Could that effort be better used elsewhere? Well, I’ll let you and Brandon fight that one out. :) )

    Thanks for the thought-provoking article!

    • Hey Ben – you got part of it right :)

      I’ll give you that it is not totally impossible to find stable cash flow under $30,000. However, the other reason we buy is to create wealth, which is a function of the marketplace deciding that the location is desirable. Sure, you can get a one of, but this price-point takes you into locations that the market at large has determined not worth of appreciation. This means that all you get is CF. You don’t get equity; you don’t get to pull it out and bridge it creatively into acquisition of more CF… this is a theme that I alluded to but did not explore in this article to any substantive degree.

      I am a creative finance guy. There is a lot more to it than CF! So – while I concede that there may be a “BUT” to this argument, there is other reasoning, more refined reasoning, which negates any but that there may be :)

      Thanks a lot for your comment Ben!

      • Well, I’d say the market at large is inefficient – us little guys are the ones who bring efficiency into these little corners, particularly in marginal areas with room for appreciation. For instance, my first purchase was at 12K, all in at 22K, and is currently running in the neighborhood of 53K – all while CF substantially.

        I admire your skills at creative financing – you’re using techniques that are making serious CF. However, I’d say that the two aren’t mutually exclusive! For instance, getting a commercial loan on a portfolio of cheap houses. You can have your junk house cake and eat it too. ;)

        • Haha – tou che on the cake. Though, if you try to get a lender to blanket a bunch of cheap houses, I think you’ll not find many takers. This is how they got burnt and while their memories are short – not that short… How do I know this…?

        • (I can’t respond to your last comment for some reason, so sorry if this doesn’t queue correctly.) Have you found that to be the case lately? I can’t speak from personal experience, but did speak to an Ohio commercial lender recently who said they’d do precisely that. Whether or not that was simply hot air or not, I can’t say. I’ll try to dig up more information if you’re interested (or simply for the sake of debate? :) )

        • Ben – my experience is that they are very uneasy about cheap singles for the same reasons I don’t like to invest in them. Very volatile.

          Listen – I bought a 10-unit for 373,500 a year back. The guy paid $400,000 for it 10 years prior. Granted, he did not do a good job managing it, but this is only a swing of 6.5% and the market has been to hell and back.

          On the flip side, Mark Fergusson and yourself are talking about buying 100k SFR and two years later they are priced at 180k. The bankers can see this volatility and they know that things can, and likely will reverse again. Commercial guys who keep this stuff on the books want more stable assets that are less susceptible to market psychology – specifically in a blanket situation…

  4. **Disclaimer on the following post** I live in West Central Ohio (South of Ben) where you can still buy a livable 2 or 3br house for $30K and it will be in a blue collar safe area. I realize in most areas 30k will get you a shack in the armpit of town, where your tools get stolen, etc. With that in mind……

    Ben, This may be the 1st article that I disagree with you on. I think a small fixer SF house is often the best 1st purchase for a newby. I can think of so many valuable lessons a newby will learn on a their first small inexpensive house. They enter the game with relatively small money, meaning smaller risk. As they learn the ropes they can try bigger ventures (like syndication, haha). Buying distressed starter homes in decent areas is how I started (and still buy some). As for stability, if done well (and rent priced right) you will have demand. I average around 1.5% vacancy overall annually, I’d say that’s more than stable. In fact my SF starter homes rarely turn over, with an average stay of ~4yrs. I would guess a lot (perhaps most) on BP started with a SF house that needed some lovin as their 1st purchase. Don’t start with a turd in the hood, but if 30k puts you into a fixer in a working class area, why not?
    Dave Tanner – Greenville, Ohio

    • Haha – love the disclaimer Dave!

      First – call me; I’d love to chat with a local colleague.

      Second – I am in the business of creative financing and forcing of appreciation. The type of houses you speak of, while providing stable cash flow which is good, do not answer the call of duty in ways transcending CF. Try to borrow 100% to buy and rehab this – not a chance. Neither private nor commercial money will touch them – not even in Ohio.

      There’s more to this game than CF – I want forced growth of the balance sheet, so I can lien on it to acquire more CF and repeat the process. I can’t do that with the type of houses you mention :)

      Call me :)

    • While I’m disagreeing with you I should mention that Real Estate Investing is not chess at the highest level (this article was for newbies right?). It can be quite simple to start in. Not EASY, but simple. You don’t need all the knowledge and metrics to get started, just basic math and motivation. If you wait until your an expert to start you’ll never start. I love the quote recently on BP (I think by Brandon), ” A year from now you’ll wish you started today”. That’s why, again, I think starting with an entry level fixer SF is a good idea for someone to get off the sidelines and test the waters of RE investing. I’m curious what your fist purchase was and what it cost. Mine was a 50k fixer that took 7k to rehab, sold for 64k a few months later. It lead me to my next on a buy and hold.

      • Dave – RE has two speeds, and reverse hurts like hell. Ask me how I know this :)

        I agree that the beauty of real estate is that you can buy 1 silly 4-plex, and love and care for it for 25 years, and you’ll retire much better off than most of your friends with Social Security.

        But, there is a caveat – it’s got to be the right kind of 4-plex that will withstand the test of time, and that is what this article hits at…

        Thanks so much for your comments!

  5. I like your article and for the most part I agree with it, but (I heard there is always a but). Just like everything new, RE has a distinct learning curve. Some may call it “tuition”, others “experience” and so on.

    I have been a landlord / investor for 15 years and currently own about 65 SFH and manage another 15 for others and have had many people come to me for advice and mentoring. After having them read, join sites like BP, and talk with potential vendors from banks to hardware stores I suggest they buy a low priced SFH. In my area (Rockford, IL) that could be around $15k (there are places for under $10k but they are in more dangerous areas – rule #1 is avoid getting killed or seriously hurt). Why do I do this you might ask. My philosophy is simple. First, most newbies do not have tons of cash. The entry point is much easier and they can start to get their experience and pay their RE tuition. Second, most newbies are not experienced contractors or tradesmen. Buying a low end property gives them the canvas to learn how to plumb, change light fixtures and outlets, repair drywall, proper painting techniques and color selection, window repair / replacement and so on. Low income houses will bring the newbie up the learning curve so they will be able to discuss larger projects with a contractor from a knowledge base. Third, people who rent in these areas are not financially stable as you point out and poor people have poor ways. They will come up with excuses for rent issues, confound your senses with maint. issues and challenge you with lease violations. In short order you will quickly learn how to deal with tenants or decide this is not the business for you. Sneaky tenants who want to violate the lease are always trying to rent my nicer places and using many tricks to get in. Having the knowledge earned from dealing with this class of resident gives me the tools to be successful at all levels. Finally, and I can not stress this enough, A $15k house will still be worth $15k (barring a fire or some intentionally inflicted tenant damage beyond hard living) a year, 2 years, 10 years from now. You tried to fix the hole in the wall but it still looks like a patch job, no problem still worth $15k. You go from copper to galvanized to cpvc to pex in the water line to the kitchen, no problem, still worth $15k. You have 3 new vinyl replacement windows and 12 old wood windows, no problem. You get my point. Try that in a $100k house and see what the value is when you are done.

    The bottom line is this. If you fail you are only out what you invested in time and material. I call it tuition. If you learn quickly you can cash flow the heck out of a house that rents for $650 with only a $20k all in investment.

    Once you learn, move on for appreciation, easier management and more stable tenants, Yes. Just my 2 cents.

    • Hey Tim – thanks so much for your comment!

      I will respectfully disagree. While being able to tell a rafter, from a gutter, from floor joist are indeed important, being able to install them is not – I never do any of the work. My time is much too valuable. Besides, until recently I though that 100 doors is all that I want out of life. But now that I am looking to syndicate, 1000 doors is more like it…

      I am sure you agree that fixing leaky faucets doesn’t work in this case. I am amazed that you can take care of 65 – that is a full ++ time job…

      Thanks so much Tim!

      • That is what I love about RE. Two successful people can have totally different paths and love what they do. I do have a full time maint guy and I only spend about 20-25 hrs a week “working”. That includes Home Depot runs for supplies, working in the office (I am a CPA by trade so I have the sick need to still do the books and such), dealing with the banks and insurance and so on. I have about half of those houses in lower income areas but have not purchased one in that type neighborhood in several years. Actually selling several on contract to the long term tenants. You keep writing and I will keep reading. I love BP and the folks who contribute. Thanx.

        • Right on Tim. The time commitment illustrates the difference in our approaches. My time commitment is typically 5 hours per month – and I do my own management… When there are a lot of turn-overs my commitment doubles as I have to preview and check-out, but my handymen and contractors handle every single screw – down to hanging the fire detector. I plain won’t do it…

          Interesting ha? I mean different folks different strokes – you got to love it!

          Thanks Tim.

  6. Please send the $30k houses in Atlanta to me.

    I don’t want anyone to get lured in by them … These houses are like Sirens calling your real estate ship into dangerous waters. Beautiful cash flow, promising appreciation, repeatable and scalable rehabs, and value-based investing should be left to dummies like me.

    Rick

    • Rick, no worries. As you completely pay your purchase off within 4 years, and keep it with great tenants for the next 15, and shovel all maintenance to a property management team and just collect stable rent check…You can definitely laugh to the bank in Atlanta. Let over-sweeping blogs like this deter people, I was starting to get a little worried I was explaining this too well and inventory was being taken out from under me.

      With articles like these, we can just keep plunking away to build our wealth without any competition. That’s a beautiful for us.

      • Lisa

        Ive been checking the comment section for you since I read this blog. I figured Id let you stand up for us slum lording idiots since I don’t have very many polite things to say in regards to articles such as this.

        • Yeah, this one is one of the worst i’ve seen on here. Like I said, let them overlook so much area of land, so many neighborhoods, and leave it to us. Maybe that’s why we don’t need to swing as hard: Our rent checks and the easier real estate investing strategy means we have nothing to prove…

  7. Ben, of course I have to post being in the “sub 30k club” (I’m not sure who coined that phrase but it’s been rolling around BP for the last few months). Meaning, I buy houses under $30k.

    I will say that one should never invest in something you don’t understand. That means properties, REITs, stocks, mutual funds, gold, etc. Typically people put their money into a bank CD because it is very simple and easy to understand. That simplicity pays them 0.75% return and they can be happy with that.

    But one thing I do see is that as soon as someone writes an article about something — buying a house for under $30k, investing in tax liens, investing in REITs, etc. — it’s suddenly the new “shiny” and someone thinks that’s the #1 thing they should invest in.

    Just because one person has had success with something does NOT mean that everyone would have success with that one thing, otherwise, be real — everyone would be doing it!

    I am going to say that just because a house is $30k, does NOT mean that it’s in a bad area. It does NOT mean you’re guaranteed to have tons of evictions and it does NOT mean that you’re guaranteed to have tenants trash your house every year.

    Just wanted to make sure you got my point: A $30k house is not automatically a “junker”.

    • Dawn, to answer your question, that “sub 30k club” was started by someone who hasn’t purchased any investment property yet – a newbie :)

      • Or, someone who’s purchased 3 or 4 SFR and imagines that they understand REI. Sure – it works for a while, but then most find out that it has “some problems”; you got to live long enough to get to the problems though :)

    • I was going to mention you Dawn as someone who has great success with sub 30K properties. Like you mention every market is different, every investor is different and we all have different goals and different markets. You could buy sub 30k properties around here two years ago. Now those properties are worth close to 100k. I’m not saying that happens in every market, but those investors could have had great cash flow and a huge increase in appreciation. Would it take a little more work and a few more tenants? Maybe, but their returns destroyed mine. I still prefer my strategy of mid range homes, but we are all different.

        • I never bought houses at 30k, but you could two years ago and those same houses sell for almost 100k now. I bought houses at 80k to 100k and they are worth $160k to $180k now, but I bought them well below market and put 15k of work into them. I now have to pay $100k to $130k.

          They still cash flow and I still make money as soon as I buy the house due to buying below market, why wouldn’t I keep buying?

        • Point taken Mark. However – what is exactly market in SFR. You have seen a swing from paying 80k for a house that at the time was worth 100k, and it’s now worth 165k. Where exactly among those numbers resides intrinsic value. I don’t know if counting on the FED to keep pumping is anything but a little dangerous – it’s this pumping that you see on your balance sheet…

          Now – you are smart; you are paying those thing off, and for you it’s a must. SFR value is conditioned on the wrong kind of things to rly on it for wealth…

        • The fed has been pumping money in for 50 years, I can’t base my strategy on the fact that may change. For right now, there are not enough houses for people who want to buy houses that is why the market is increasing. They can’t build houses cheap enough to meet low and middle income demand so that won’t solve the problem. No houses were built for almost 8 years due to REO inventory, but the population keeps increasing. People need more houses.

          When I bought houses for $80k, they weren’t worth $100k, I bought houses for $80k, put $15 to $20k in repairs and they were were $140-$150k when I was done. Now they are worth $165k to $175k. It was only the very low end that shot up that high.

  8. Ah Ben. What can I say? I completely disagree with your premise. There are ways to go about purchasing a great cash flowing property that isnt in a warzone, IS COMPLETELY SAFE, and has wonderful tenants. I’ve done, many people on here have done it, and good thing is, I SHOW PEOPLE HOW here on BiggerPockets! You can’t get much better than someone who has success who is willing to share everything they have learned with anyone who wants to cash flow and listen! However, am I trying to convince Ben Leybovitch to do this? No, if you don’t like it, don’t do it. But, to say we shouldn’t do it based off the idea that (1) you ONLY get bad tenants (which is more your fault than anything) (2) the neighborhoods are undesirable is a VERY big blanket statement that encompasses whole swaths of city…Which make it easier for me and my followers to pick up the goodies.

    Oh yes, if anyone wants to see what lipstick on a pig looks like, please go to my website and look on my gallery. if you STILL think its a pig, point taken. But, if not, maybe someone’s general, sweeping stereotype was a little bit wrong?

    Oh yes, I have had great, fantastic tenants (as has others), I have had great properties (pics if you need them), and I have a ton of investors who want to give money passively to invest in these areas. I would think thats a successful strategy, right? And, anyone who wants to learn, of course, now they can! :-)

  9. One big message of this post is it is not always about price!! As usual, Ben, your big picture perspective is a pleasure to read.

    • Sharon – you know me well enough to know that I leave some things unsaid. This is part of the fun factor in writing for me – to cause critical though on part of the reader. Some are able to put the missing pieces in place, but some are not. This is a function of perspective, which in turn is a function of life…

      For instance, I spent 45 minutes on the phone last night with who? Yep – Brandon Turner. He said – what do you think? I said – NO, and here’s why. He said – wow, O didn’t think about it this way. We will find out shortly if he will follow my advice…

      You and I speak the same language more often than not my friend :)

        • Listen Sharon – you positive comments seem very out of place here. Didn’t you get the message – Ben is an ass who hates poor people?

          BTW- anyone who thinks this way, read some of the other articles I’ve written :)

  10. I am totally agree with Tim

    My first rental i bought for 13k and put 6k in repair….I am renting it for $800 a month.I have a great tenant that pays the rent on time and is almost 2 years since she moved in

    Learn from the button and then you can move up that’s my theory as well

    Just my 2 cents

  11. Oh, my tenants have included professions such as Correction Officer, Limousine Driver, Auto Mechanic, Dental Hygienist, Retired Veteran, Housing Authority Administrator, Water Authority Clerk, etc….I think they would have a few words about these sweeping generalizations too.

  12. Hey Ben,

    This was a great an informative article which was written extremely well because I was able to see your perspective of RE investing, so kudos =}

    But, I also agree with several commenters here that newcomers (myself included) should seriously consider 30k houses if the financials are there.

    For some background, I am a recently graduated commercial broker who has managed houses since my freshman year in college. My family got into some trouble due to the housing bubble and I did my hardest to ramp up CF when we needed to pay the mortgage.

    As such, and since my geographic location (NYC) restricts houses available for 30k, I believe that it is merely a diif asset class within Real Estate. Quite honestly I believe it is the easiest asset class for newbies to TARGET and to learn from. Mainly because the capital risk is low and mistakes will not give you the legal or financial liabilities a MF building with partners will give you.

    While at the same time I do agree that these types of properties will not make Donald Trump in the long-run… they can still be a crucial step in the education for a small investor for all of the benefits mentioned above. I believe their expectations should merely be adjusted as you so wisely pointed out… these types of assests will not appreciate and require a lot more time capital to maintain.

    So, in summation, I believe >30k houses are an important asset class to learn and build CF/Equity so that in 3-5 years that same investor can cash out and go after the larger more desirable properties closer to the metropolis they live by. Then in in 10 years, that same investor who may still have some SF <30k homes around, is now able to afford a full-time office housing their property manager, leasing agent, marketing strategist and a couple interns/BP trainees to manage their larger asset class investments that will give them the type of appreciation that creates wealth and allows them to leverage out to buy more properties of larger scale.

    Best,

    John – anyone in NYC looking for a hard worker, Give me a call ! ! Looking for syndication partners…

    • I thought this was excellent summation. The possibly exists that I will get out of Sub30k real estate investing, but it IS a great place to start for many who don’t want 1000s of dollars leveraged when they are new to investing.

    • Thanks for your comment John. I don’t want you to think that I am speaking out of anything but experience. Guess who bough a few of these houses when I was starting out? Guess who still owns a few? They, on paper, make the best return on investment. But, having lived a little, I am now able to see past what’s on paper…

      Hopefully you guys can benefit from perspective which comes out of experience. If not, that’s OK too

      • Well, you DO have to admit that it was an inflammatory headline, Ben. ;) I’m curious – other than the realization that your time and money was better spent elsewhere, did you get any other education from those first few houses of yours? Or looking back, was it a complete waste?

        • Ben – nothing is a waste, not money lost, and not time lost. Everything is an educational process – always learning my friend.

          I didn’t write the headline – that’s Brandon or someone else. It’s probably less inflammatory than the one I had hahaha I would think we can see past the headlines, though…

  13. Christian Morency on

    I have found that a vacancy on a trailer that has no mortgage and no insurance costs me less than my other properties to turn over between renters. Poor people are not bad people. Poor screening is what invites bad tenants. People on formal probation cannot afford to violate any laws.. “or else” . An Unlawful Detainer fits that catagory. They also need permission from their probation officer to move so they don’t move as much. Their probation officer is like having a personal law officer on your side. Just talk to them as part of your screening process. Some people think I am a Slumlord. The truth is, I buy from Slumlords and provide decent housing at an affordable price. That is my service. I love recycling and I love helping people. With Bottom End Real Estate, I get to do both, and get paid for it.
    Having said all that…. I totally agree with your post, if I wanted to play the game at that level.

    • Poor people are not bad people indeed, and I’ve written extensively about that in other articles here and on my site. But, just because someone is poor, I don’t expect them to live in a unit that I myself would not live in. I place Section 8 tenants, for instance, in the same apartments that I place everyone else in – no discrimination on lack of high income, just on laziness.

      Thanks so much for your comment Christian!

  14. Ok I cant resist. Ben, from the wide sweeping comments about investments that have clearly worked for many people being awful since you don’t like them, to taking stabs at BP commenters (Rick B February 25, 2014 at 8:06 am) to the little comments about you syndicating and being at 1,000 doors; you seem like a genuinely unpleasant person to be around, and are the first and only BP contributor I will actively avoid moving forward.

    • Hey Kevin – I’ll cry a little and then I’ll come to grips with the notion that you don’t like me. It’s OK man – really, it is!

      We can agree to disagree, but there is no reason to get personal…

    • I don’t necessarily always agree with Ben (and in this case, I’m willing to learn from him about where I’m wrong), but I’ve never found him to be unpleasant or to tout his own achievements for any reason other than trying to educate.

      We can disagree without being disagreeable.

  15. Joshua Dorkin

    Folks – The premise of this site is to have a place where people can share a variety of ideas on what works and what doesn’t. If you’re looking for one opinion, turn to your favorite national guru and follow his advice after paying $997 or $25,000 or something else to him.

    By sharing differing opinions on what works and what doesn’t, we stimulate you to think and really analyze what works best for YOU — and that’s really the ONLY thing that matters.

    Take everyone’s advice with a grain of salt, and lets try to be positive here. Thanks!

  16. The point about there being more to it than pure cash flow is valid. But that $30K house needing a $40K renovation, in the right neighborhood can be a good value for someone who knows renovations. Even if they are new to investing. Especially when the neighborhood supports rents in the $1200/month range. I could have easily made money using buy and hold rather than selling. And the college professors who live in that $120K slum are considered reliable tenants. It seems to me that this provides a pretty secure starting point to learn the lessons with less risk than might otherwise be needed.

    Sweeping generalizations serve no valid purpose. Sure, knowing the market and not buying in the slums unless you REALLY know what you are doing is a great suggestion. But there is more than one road that can be followed, and cheap properties don’t have to be in the slums. They can also be distressed properties needing major rehabs. But then I’m just a newbie who made $50K renovating his first home, what do I know?

    Rant over.

    • Walt – does a newbie have the means and the intellectual worth to buy for 30k and rehab for 50K? NO – they buy cheap cause that’s what they can wrap their heads and checkbooks around, which is the wrong move in my opinion and serves as one of the premises for this article. I have no argument that buying for 30 and spending 50 to rehab the right way in (and this is key) a neighborhood that commands $1,200 rent is anything but appropriate. I don’t play the SFR game, but if I were this is what I’d be doing – right on.

      That’s not what this article is about though :)

      Thanks so much!

      • Ben,

        I guess it depends on what you classify as a newbie. I had a ton of renovation experience, so I put myself into a project that took advantage of my strengths. But it was my first investment and as such I still had a bunch to learn, and still do for that matter. But I guess that is also part of what you have left unsaid … jumping in is great, but do it where you know the depth of the waters.

        • Walt – I left a lot of things unsaid. I could write a book. And yes – every day we learn. I am fortunate to have access to some of the best in the business. I couldn’t pay enough for the guidance I receive, but it has historically cost me tens of thousands of dollars…

          Be mindful of the power of the beast. Respect the fact that you don’t know what you don’t know, and you’ll be fine. We will all be just fine if we are able to see the unseen and hear the unspoken…

  17. Ben,
    Thank you for reminding me what I know about taking the time to learn and be patient rather than trying to jump in and figure as I go! For this reason exactly is why I spend so much time reading on BP, reading books, other websites, and learning on my own for over a year before having jumped in and bought a property. Believe me, with low interest rates at their historic lows, I have been tempted to jump in before totally ready just not to miss out- but I’d rather finance a percentage or 2.0 more than royally screw it all up!
    I make every attempt to analyze on the micro level for individual properties but I tend to take a much longer look at the macro-level and what trends are happening with employment and supply/demand for housing in both where I live now and also the places I am most interested in investing in. Thank you from this fellow buckeye! :)

  18. I’d like to point out the Time Value of Money. Seems to me that this maybe one of the missing pieces that you are talking about Ben, but which works as a “But” argument for the other side.

    Say I have 100k in capital and I invest in 3 30k that are throwing off free cash flow of $400 I’m collecting a $1200 paycheck each month that means that I’m able to increase my return my portfolio of 30k units in 2.2 years. Debt free.

    However if I use the same 100k in capital to purchase a single house (Heaven-forbid it’s a condo!) the rent scale does not actually change significantly. You might be able to get 1200/mo on a 100k house (Not here on the right coast!) and have a free cash flow of $600/mo over the course of 5 years and a 2% appreciation I’ve now collected $36,000 in free cashflow and just about 10k in appreciation. 46k in 5 years versus 30k in 2.2years if I didn’t add another house or two thereby increasing my monthly cashflow I’d still be at over 60k over the 5 years in the ‘junkers’

    The value of being able to invest those dollars sooner than later increases my wealth quicker. Now you say forced appreciation, and when I think about that I look towards multifamily. Where I can increase the worth of the property by increasing my NOI! You simply can’t have forced appreciation in SFH. The market pays what the market pays.

    • You are almost right Troy. In fact, mathematically you are right. There’s one thing missing: it shouldn’t be your 100k. You bring the knowledge, and you should let others supply the equity. The question, which is one of the many things I didn’t mention in this article, is this: how much equity will you be able to attract to junkers – people want safety first and foremost… I don’t want to go any deeper on this, but does what I said make sense Try?

      • I don’t disagree that others should be allowing me to enjoy passive income. However, newbies are not going to be able to attract the kind of capital needed to finance a larger project. I’d wager someone who has amassed 100k worth of capital and received it is going to be someone who has a better chance of being able to attract that money.

        You are talking about people not buying SFH from someone who admittedly doesn’t play in that space. You’re understanding is completely mathematically based. Don’t waste my time (a value calculation) on things where the upside is not as large as on something where I’ve spent time (value consideration) learning the inside outs of. I don’t play in that space either. So the value I add is pointing out that the math is there. The money can be made, whether it is what gets you out of bed or not, that’s a different story.

        Wholesalers ask me, what ROI/COC/Cap do I want. And I look at them in the eye and say if I can’t get a COC of 20% why should I get out of bed for it? And I pass on deals that others jump at. I love that you wrote what you did, but I think you needed the “Big Reveal” at the end to really push your point home on what you are trying to say rather than create the vitrol that has come up on this post.

        • Haha Point taken Troy. Vitriol is a choice – some of us choose it…

          Others, such as yourself, look past what’s on the surface, and this is where the intellectual exchange takes place.

          Thank you!

  19. Mark Graffagnino on

    I appreciate Ben’s opinions although I don’t necessarily agree with them.

    I think the reason for many of the ‘reactions’ of the commentors is that most blog articles are written from a perspective of “this is what I do/believe and here is why”, while this one has more of a “this is the right way to do it and if you don’t agree you are wrong” perspective. That and the condescension of some of Ben’s replies to comments.

    • Thanks for jumping in Mark!

      I truly write everything that I write from the stand-point of wanting to help folks. But, I concur that it takes a hell of an open to receive some of the things I write, specifically since there is hardly a way to convey the whole story in an article…

      I appreciate your comment very much!

      • Ben,
        You provide a lot of good information, but to be honest the partway there answers, especially saying things that imply you don’t have time, or don’t want to be bothered explaining parts of the reasoning can tend to be frustrating. Sure, make the answer brief so it doesn’t take forever for you. Sure, leave the mental work of researching the topics rather than feeding all the answers. But at least point us in the right direction. Just a bit of feedback from one who both loves and hates reading what you write. :)

        • I love it Walt – “one who loves and hates what I write.”

          Here’s the difficulty on my end Walt:

          Everything in life is interrelated. Everything in REI is interrelated. I am a student of the game and prefer to think globally, and yet I am having to write articles which focus on a tiny sliver. This is very difficult for me as I innately want to go into great detail about everything.

          We attack mentors on BP, and yet this is exactly the bets form of training for my money. I’ve written a course which includes 200 pages and that doesn’t even do it justice. I spend hours on the phone and in person with folks outlining mu perspective. I apologize for that “broken-up” essence of delivering content in this format.

          Thank you for reading!

  20. Ben, as a new investor I realize you could write articles that would go completely over my head. An advanced article on creative financing would do that nicely! And yet, an article I can grasp that creates a lot of great food for thought from proponents and opponents alike leaves me with some nice bread crumbs to follow. I realize more and more that just as soon as I start to think I’ve got a decent grasp on this game, I’m still just seeing walls and passageways. I’m looking forward to the day when I can hover at the 30,000 ft. level and see the maze as a whole.

    P.S. I have a buddy who is a syndicator and is doing quite well for himself. Best wishes for your upcoming venture.

    • Thanks so much Tom!

      The thing is – life is just going from one maze to a bigger maze. Respect the game. Be a thinker, which I think that you are. Ask questions, which is embracing as hell but needs to be done. Be persistent, and don’t give up – you’ll get to that 30,000 feet.

      There are good people out here who are willing to pay it forward – ask me how I know this…

  21. Ben – another great article. I understand where a lot of the push back is coming from but I do agree with you 100%. I have a portfolio that consists of both types of investments. I have 4-5 years of actual financial data that I compare and I’m constantly analyzing for trends. Looking at a set 20 properties that you would describe as “desirable” vs 20 that you describe as “junkers” I have found:

    The desirable homes have appreciated 100-150%, have an average of 5% vacancy and run at an average of 30% expense to rent ratio (self managing.).

    The “junkers” (all of which I would classify as solid working class) have had 10-20% appreciation, 10% vacancy and a 50% repair ratio. Literally none of these homes met my paper cash flow projections made when I purchase the homes. I have not been able to get lenders to buy into these properties and although representing less than half of my portfolio they take up three fourths of my time. The worst part of about this class of property is that it is never easy to resell. There is always the issue of functional obsolescence and the qualifications of that buyer profile.

    If you look at the people that have created real wealth in RE, its nearly always through long term equity appreciation of quality property. That being said, there are barriers to entry in this strategy and as such I do understand the lure of the sub $30k property.

    • And those barriers that you speak of are precisely why I’ve chosen to dedicate myself to the art and science of creative finance. Yes, money is a problem in RE – but, there are ways around it :)

      Right on Sergei!

  22. Great post Ben.
    BP + Ben Blog Post + Comments = Real estate investing with eyes wide open. Or should I say, BP + Ben Blog Post = Flurry of stimulating comments?! It’s about knowing as much as possible about the risks upfront as you can, knowing your goals, and what you can tolerate. You can buy a 300K house that looks great on paper but if you didn’t take the subtleties into account, it could be worse than the 30K house with all the right subtleties. Regardless of the price ~ 30K or 300K, there are many other factors to consider besides the just numbers. If all we cared about were numbers, we’d all be buying in F neighborhoods.

  23. Sara Cunningham on

    Ben, I love your articles and find the comment sections even more dare I say it entertaining. Doesn’t it all boil down to what your goals and objectives are though. Not everyone wants to be a multi millionaire. We all have our own different reasons for investing. For some they plan to be very big powerful players, for others they only want to supplement income. They are so many reasons for getting involved. We can’t all be top dogs! I consider myself fairly intelligent but there are just some things that I will never understand in this business. Some people are just so risk averse that they will never step up to the next level. However that’s a good thing if we were all busy trying to achieve success on your level then there wouldn’t be enough to go around. So for me it won’t change my strategy or goals on investing in low income properties but it’s good to see stories on how people do achieve big success. I say that tongue in cheek since I consider my success big in my world and in my definition of achieving my own goals. Each to their own. Can’t wait to read your next article.

    • Sara – thank you, first of all. And secondly – I respectfully disagree. This is not about goals. If you buy the wrong thing, the price that you are exposed to pay is much greater than simply admitting failure as it relates to your goals.

      One of the above comments alluded to the notion that RE is not rocket science – I agree. You can own a few units and retire in king-like comfort compared to your friends. However, and I believe this firmly, the units still have to be the right kind of unit.

      So, while the notion of long-term REI is not complex, there are fine distinctions that have great impact, and it doesn’t matter whether one wants to own 2 units or 2,000.

      I appreciate your comment. Having read this thread, I am sure it took a bit of consideration to jump in – thank you! Thoughts?

      • Ben,
        I too think it is somewhat about goals. True, if you buy the wrong thing it doesn’t matter what your goals are, you lose, at least in relative terms and maybe in reality. But my goals and strategies as an old fart near retirement will by nature be different than yours. I want to build both short term (slightly early retirement) and long term cash flow (secure retirement). Had I started earlier I would definitely use leverage to the max. But at this point it becomes a bit of a balancing act. I am not as interested in letting the rents pay off the mortgages as I am in how to maximize my cash flow while minimizing my work flow. My goals and risk factors dictate a different strategy than you might follow. Or even considering those factors, am I missing something important?

        • Walt – thanks indeed for commenting!

          I have a few thoughts for you:
          1. Financial safety in life and RE is in large part a function of the crossroads of diversification and focus investment strategies. By buying 1 SFR asset for cash, you are acquiring 1 revenue stream. To me – there are few things more dangerous than this. You are better off to spread the risk by acquiring several of these houses and using your cash for down-payments. Leverage allows you to do this. It also allows you to buy multies and higher quality assets.

          2. Cash purchases with a lot of instant equity are a liability concern as well. We live in a litigious society – are you sure you want to own equity?

          3. One of the biggest issues with older assets is upkeep. I have a few of those houses I bought in the beginning. I fix them nicely and I keep them nice, but I feel pain every time I pay for a service call because this is akin to throwing good money after bad.

          Find some like-minded people. Go in with them and buy a high quality NNN asset with long-term tenants. I had one come across my desk which was advertising proforma CAP of over 10%. It is not going to work for me and my syndicate, but I would think that this would be a good option for you. They are hard to find, but they are out there/ Reach out to me if you want and if I can’t help you, I’ll put you in touch with someone who can.

          Thanks a lot for your comment Walt!

      • Sara Cunningham on

        Ok Ben, I actually don’t disagree with most of your comments, but it does still come down to what do you need and want do you want, in other words your goals. For example like Walt my goal is to have extra money for retirement. I have already achieved enough financial independence that I gave up my full time job. I don’t work hard at my investments because I have a property management company that deals with all those things for me. My CF makes that possible. My goals for my investments are to make it possible to travel anywhere I want when I want. I don’t want to sell any of my properties and won’t need to because I already have financial independence regardless of how they perform. IF RE was how I was going to fund my retirement or present life style I would probably use your strategy and of course I wouldn’t buy low income properties because they don’t appreciate in value, and yes it’s as hard as heck to resell them. Selling them is not one of my GOALS. I’m a complete amateur and do this for fun, more than CF, stability, financial wealth or independence. Serious investors should follow a different route than me for sure.

        • Haha – I wouldn’t classify you as a newbie Sara. In your circumstance, you have options a newbie does not. If shit hit the fan, you’ll be OK where as a newbie would not be. The article was written for the newbies who rely on things going write a lot more than you. Apples to oranges Sara…Thoughts?

        • Sara Cunningham on

          You hit the nail on the head. However I was once a newbie and did all the things you said not to do. A lot of comments on here have been made by seasoned investors that did the same thing too. The real audience you targeted with this article seem to really appreciate your insight. Wish I’d been so lucky when I started. Then again I never did believe that old saying about not being able teach an old dog new tricks. Hence I am sure I will continue to follow your blogs and to make comments too.

        • Sara – I appreciate your kindness. I truly aim to help new investors avoid some of the difficulties that I encountered. Lest you believe that I wasn’t in a place at one time where I thought a $20,000 looked attractive – I still have several lol. I am spending entirely too much money to maintain them – I want it to be nice for tenants, but it really is throwing good money after bad. I’ll take a loss on them some day just to get rid of them…

          Thanks for your comments indeed!

  24. Thank you for the great advice. I am in the process of finding my first rental property and it seems so much easier to just buy a cheap property but you have really got me thinking about my search criteria.

  25. Brandon Turner

    Ben,

    I’ve waited a bit to jump into this conversation, because I wanted to see what everyone else would say!

    Alright, I believe you are incorrect in two ways :

    1.) Putting me in the same “seasoned” category as Jeff Brown and Brian Burke.

    2.) Assuming that your opinion and the truth are one in the same.

    The first mistake i’ll let slide. The second, I cannot.

    I think your premise is based on “desirability” but desirability is based on your opinion. What’s desirable for you is VERY different than what’s desirable for everyone else. A nice property in a semi-rough area (not bad area, just semi-rough) can rent really well and stay rented forever. In fact, the lower income rentals I have, the better experience I’ve had. Over and over this is true for me. My 2 highest priced homes are the most difficult to keep rented and cost the most to turn over. My $395 studio apartments are a breeze.

    So I think your premise is wrong, which invalidates your whole argument. :)

    In fact, I seem to recall you bought a 10-plex recently for $375k. That’s only $37k per unit, which is not much more than a $30k house, and the tenants who would rent a 10 plex are going to be (yes, I’m generalizing) far worse than those who rent a $30k house. So the question is… were you WRONG to buy that, or are your GOALS (as someone said above) changing, thus your opinion changing? Originally you were interested in getting enough Cash Flow to let your wife and you live comfy for the rest of your life. Now it’s wealth… and suddenly the cash flow people are wrong? When I think of a 10plex in Lima Ohio, the word “Stable cash flow” doesn’t come to mind.

    That said, I agree that newbies should not jump at these cheap properties without understanding what they are getting into. I wouldn’t buy in the ghetto, no matter how cheap. But if you can find a $30k house in a decent blue collar area that will rent with stability for $600 a month or more… why the heck not?

    • Brandon,

      1. Buying 10 units for 37,500/ea. is somewhat different from buying SFR – economies of scale.
      2. I bought $1,500/month of CF ($2,300 on a good month). My out of pocket expense for the acquisition and stabilization was $25,000 – $2,500/unit. It is difficult to buy property for under $30,000 which only requires $2,500 of capital outlay to purchase and rehab…I’ve since been paid back in full and have been recapitalized.
      3. The building sits in an area of SFR which run 60k-80k. This is a solid C Class in Lima
      4. In this location, I would not have done the deal had I had to dip into my pocket more than that. There is a lot of value in financing package – this type of package is impossible in SFR space…
      5. This is the most questionable location of any apartment buildings that I own.
      5. Bottom line – I will not own anything that I wouldn’t live in myself. More than that, if shit were to hit the fan, any place that I wouldn’t put my family in. This would not be my choice of a place to live, but if we had to we would.

      If you knew how often I get approached by seasoned investors with many tens of these houses who having made very considerable money and built a self-employment out of it just want to get out – they can’t. What they have is just not what most buyers want. I can’t help them; it’s too late. I can help the newbies reading this.

      Thanks for your thoughts my friend. Love you to death, but disagree on this issue.

      • I think Brandons main argument is not that you are making money with your 10 plex, but that the main part of your argument is

        “Folks with options are going to choose a more desirable unit, and your pool of potential tenants will be left consisting of folks without options. Do you think this would be a good thing? Do you think that these folks hold the key to economic value? Have you ever tried to market a unit that people do not want– talk about work; completely opposite of passive!”

        For your 10-plex I am guessing rents will be less than or equal to a $30k house right? Your 10-plex is attracting the same folks that you say newbies should avoid, but times 10.

        Brandon makes another great point about desirability. As a licensed real estate agent I can’t steer people to certain neighborhoods in any way. What I consider desirable may not be desirable to someone else or what they think is desirable may not be to me. We all have different reasons for where we live and agents should not be telling buyers or anyone what is a good or bad neighborhood. That should be up to the buyers to decide for themselves.

        • Mark – have you ever tried to rent and/or manage a property that attracts people who don’t have the option of being somewhere else? How well do you know this game – I do. I am speaking from experience and I think that this is the wrong move for a newbie. It’s true – a lot of money can be made this way, but it’s not an investment; it a business and there is nothing passive about it.

          There is a a guy who works for me. He grew up very poor in what most people would consider the ghetto. He had some issues with the law and he came to me at a time when nobody else would give him a chance – I did, but that’s only because I feel that poor people are evil and lazy, as has been suggested in some of the comments…He is still with me and we have become friends.

          About 2 years ago I was considering buying a building in his old hood and he and I took a drive in my truck to take a look around. The CF looked killer – on paper… I said – what do you think? He said – don’t. I said – why? He said – you like to fix things nice, but if you do it in this neighborhood it won’t stay nice for long…

          It’s true – not everyone likes what I like. I like my buildings to attract those folks who would want and expect me to fix them up nice. But, I am a for-profit business and in order to do that, I need to buy in an area which supports my capital expenditures in terms of both equity and CF. Makes sense?

        • Ben, I think the confusion comes from what you are investing in and what you are saying others should do. It seems as though you are buying $30k units, but say newbies shouldn’t. I understand your argument that it can be a huge pain dealing with tenants.

          I think the biggest issue is you are saying newbies should never buy these houses, when people are reading this article from all over the country and every market is different. You also don’t know the skill and goals of each newbie either. I think a big part of investing is finding your own strategy and experimenting while you learn. The best teacher is usually experience.

    • Brandon,
      I have seen the same thing, as a third party. I think part of that is that blue collar workers want stability, but often can’t afford to buy. So if they find a decent property, with a good landlord, they will stay as long as circumstances allow. Often they are a landlord’s dream, assuming due diligence, of course.

  26. My gosh. I wish I could write like you. I must say after reading this post my will to keep writing posts has diminished some. I wish I could of summed up my arguments as eloquently and descriptive as you managed to. If you’d like to read my post it’s here:
    http://www.biggerpockets.com/blogs/4834/blog_posts/35134-the-challenge-of-out-of-state-investing-in-indianapolis

    You summed up the main points of my article which is to know the market and don’t fall victim to the $30k investment properties in Indianapolis, especially if you’re living out of state.

  27. This is a great article. Especially for those who are new to real estate. The only thing I would add to this article is that it depends on your current real estate market. I invest in Detroit where a 30k house is a great deal and a lot of times in a great area where you can get $850-950 rent from good qualified tenants all day long.

    So outside of that you article is on point.

  28. Speaking solely from our own experience in managing several dozen properties in our own and our clients’ portfolios, I have to agree with Brandon – $30k apartments are a breeze to populate and manage, zero maintenance, and when bought in the right place at the right time also appreciate beautifully.

    Sorry, Ben, I’m with the nay sayers on this one – way too generalized and, not to put too fine a point on it, plain wrong in many of its assumptions to my view (very eloquently written, as usual, though ;))

    • I do not disagree about apartments – I buy mine for $33,000 – $40,000 per door. Apartment investing is a different animal Ziv, as I am sure you know.

      We will have to respectfully disagree on the rest my friend – thank you!

  29. Hey, if “Those” kinds of houses, in “Those” kinds of neighborhoods, with “Those” kinds of people scare him (Ben), he doesn’t have to invest there, it just leaves more for folks with back-bone (like Lisa, Joshua and Brandon) to draw a nice cash flow.

  30. Ben, I appreciate you sharing your investment philosophy. Generally I agree. Specifically, I would disagree as many 30k buys are worth 60k or more and especially if you pay cash. I am very surprised by your reply comment to Mark Ferguson. He pointed to a current example and you claimed his appreciation was due to Fed policy? I wonder how someone with experience would actually think that. If your logic held up all properties would be up in the entire country. I am not going to tell all real estate is local:) Thanks for sharing.

    Thanks again,
    Matt

    • Matt –

      Most of the wealth of the middle class resides in their homes. Knowing this, it is easy to understand why the FED has focused on stabilizing this market. The banks are helping by holding back foreclosures. Aside for a few places around the country such as Texas and Oklahoma where there is legitimate fundamental economic reasons for growth, all the rest of it is designed through monetary policy.

      I certainly don’t fault Mark or anyone for playing the game – that’s exactly what they should be doing. My only point to Mark was that anything that comes up de to monetary policy can come down due to monetary policy – equally rapidly…

      Finally, I don’t see Mark buying those 30k house in those neighborhoods. Why – because they are not appreciating even with the very accommodating monetary policy. What they are is what they will always be. Mark buys nicer homes in nicer areas.

      Finally, referencing the multi-family, those of us who understand income investing in RE know that valuation of a function of income. Price per door is meaningless. If I can take 100 units from $550/month rent to $600/month rent. I will create value. And doing this is possible today due to the very same monetary policy which is causing inflation in values – it’s also causing inflation in rents.

      Thanks Matt!

  31. You really know how to get people talking on a subject Ben. I myself like to learn from everything, good or bad and articles like this bring out so many different viewpoints. The thing that makes real estate so cool is the diverseness of investing strategies and levels.
    As I have decided that local multifamily properties are my only hope in having any cash in my “retirement” years I have to start somewhere. And it is at the lower level. But believe me you, if I can break into the next level I will. And if I can gain enough traction to start seeing things from your level I will be doing well for myself and my family.
    But in the mean time no one can ever say I didn’t try.
    Thanks for article.

    • Hey Ken –

      Valuation in multi-family is a function of income. Be sure to buy in locations which, in your estimations at least, will accommodate growth of rents. This works the same way at any level – do not buy just cause it’s cheap Ken!

      Here’s some food for thought Ken. You, like most, are likely defining your entry point relative to the amount of down-payment you can afford. This is a real barrier, I don’t disagree. I faced the same issue…

      I decided to ask a different question Matt. In lieu of asking “what can I afford…” I always ask “this is what I want – how can I afford it?” This is very different perspective. In that now I look at multi-million dollar assets, I don’t want you to think that I on my own can afford them,,,

      This brings us to what I loosely coin Creative Finance. If you were going to finance a purchase 100% with OPM, then the question is “what kind of asset would be attractive enough to OPM that it would go along with financing the asset 100%?”

      Seeing things this way automatically drives you into higher quality assets – period. I don’t see OPM financing 100% of $30,000 houses… I did not touch on this aspect in the article, as this would have been too much info for most people reading. But, since you mention…Do not limit yourself by the amount of cash you have on hand. Knowledge in combination with perspective are much more powerful than money!

      Do you understand!

      • Hi Ben,
        I do understand and believe in the theory. The things that possibly are the biggest obstacles for most is the education and experience factors. We can read about it all day, but there comes a time when we have to start applying it.
        I look at the two properties that I have and if the math all works out They will be paid for and put a nice c.o.c return in my pocket. Yet I know that one great deal and I could be on my way to a faster and easier? financial freedom. I need to continue to broaden my horizon. Keep learning and keep passing it on brother.

        • Ken – keep an eye out. At the risk of offending some people’s sensibilities I do indeed plan on continuing to preach that which I know to be true – at least until Josh tells me to quit. Next Tuesday’s article – case-study in the very points discussed here, so keep an eye out :)

  32. Ben, however controvercial, I enjoyed the article; learned a lot from it as well as from all the opposing arguments. I look forward to your next articles.

    IJ

  33. Ben,

    Ahhhh Ben wish I would have read your link BEFORE buying my 1st two homes. Both cash flow beautifully but both require constant supervision. My hang up is why buy more expensive homes 50-75K and cash flow less and not get that better of a tenant? My homes are in Philly. Philly is a series of older single families in general. Other than appreciation, and a bit of a better tenant how do I com to grips with the lower cash flow which I need .

    Thanks,
    Scott Smull

    • Scott – if you do the numbers over 5 years I bet you would see that because the CapEx is so much higher on older homes, you CF is not what you think it is…

      In this case, you need appreciation opportunities. It may not happen, but you should buy such that it at least has a chance…

  34. Another good one Ben! I get more “healing” from one of your articles, blogs, pod casts, or posts than I do from my weekly 1 hour session with the Psychotherapist.

    Kind of like….. “This music it speaks to me” I wonder if anyone will know what movie that is from?

    Big fan of your analytic style, both written and verbal.

    Большое спасибо

  35. Another good one Ben! I get more “healing” from one of your articles, blogs, pod casts, or posts than I do from my weekly 1 hour session with the Psychotherapist.

    Kind of like….. “This music it speaks to me” I wonder if anyone will know what movie that is from?

    Big fan of your analytic style, both written and verbal.

    Большое спасибо

    For an analogy some may understand; this type of buying is a Position Play, similar to playing cards. Lets take the game of Texas Hold’em; everyone seems to think they know how to play that game. Where you may limb in with pocket 2’s in late position, you would almost never raise out in early position with pocket 2’s. You may win a hand or two doing this; but in the long run its a losing propitiation. Statistically you want the people your playing against to make that move.

  36. Hi Ben , you know what you all are not a newbie so you all can say any thing to us who is newbie, and to be honesty with you it’s confusing. I read all the blog here from Brandon , you and the rest and I do learn some things. But when you all come and say buy this, buy that, and what area is good and what area is not good and all sort of stuff, it’s hard for a newbie. You guys are expertise, but what about the newbies that starting out and getting overwhelm with all this., I am not knocking no one but I for me I am goining to different seminars, work shops and read as much as I can and build a nich, and strategy and take it from there.
    Thank You all

    • Lorna – if you are confused, that’s good. You are learning. I am confused too; on a different level, but confused. Keep reading and keep learning. Keep asking questions :)

  37. Dave I so so agree with you, Ben what you post on newbies I don’t think it’s all correct
    what you are saying because if you wait till you become an expert , you never get there, and yes Ben you can find good $30,000 properties in the right pace at the right time. And remember you all was a newbie before you all get where you at right now. And I don’t believe Real Estate is a chess!!!!!! Hello
    Thank You
    I hold on to this scripture , fear thou not for I am with thee, be not dismayed for I am thy God.
    May Lord bless you all, and for us newbies God is at our right hand.

    • Ben Leybovich

      Lorna – thanks for your comment.

      Look – most nubs buy cheap houses cause they think that it’s the only thing they can afford. The last deal I did was $400,000 which required me to put in $5,300 to close. You can buy a $30,000 with that, or you can do what I did.

      The deal before that was $200,000 with no money down. And $120,000 with no money down; and $90,000, and $180,000 – all with no money down…

      You can buy quality assets which will withstand the test of time much more so that $30,000 houses. Don’t kid yourself, buying those junkers is the wrong kind of experience – it won’t teach what you need to know to go further…

      Thanks so much for commenting!

  38. All this talk of 30k homes, I think last time i saw even a junk house for that price was 1985 here in Brisbane, Australia. From my point of view with rubbish homes at 300k i would happily spend 100k doing up a 30k house if they existed here :). All I can see viable here is searching out properties with large rear yards in appropriate zoning to build a granny flat for 75k and rent out at 300 a week for positive cash flow. things seem easier there :(

  39. Frankie Woods on

    My favorite quote from Ben: “… nothing is a waste, not money lost, and not time lost. Everything is an educational process – always learning my friend.” Excellent philosophy and one I always try to espouse.
    I must say, I’m quite conflicted about your article. On the one hand, I see the cash flow from <30k properties as a good way to create passive income if bought right (key: bought right), to learn the ropes, and to get started. However, I also feel that you shouldn’t stay in this realm for very long. AND, if you have the skill to buy properties like this right, why wouldn’t you want the added benefit of increased 1) property appreciation potential (potential, NOT guarantee) and 2) syndication/funding access? Regradless, great article Ben!

    • Ben Leybovich

      Frankie – let me resolve your confusion.

      The hindsight on these $30,000 junkers is that the Cash Flow looks good on the pro forma, but it doesn’t work out long-term. The apparent CF is all they have going for them, and without CF these $30,000 junkers loose all investment value. Well, I am telling you – CF will not be there long-term. Period!

      It require faith in my hindsight for you to believe this, but I hope you do believe me – I know this…

      Thanks so much for your comment!

  40. Wilson Churchill

    A true cash flow calculation takes both vacancy and repairs into consideration. You are either making money or you are not. There is nothing magical about a certain price point that makes the calculation of cash flow different. Some areas will be more management intensive than others, of course. But tenant screening can be effective, even in lower income areas. I personally prefer to spend no more than 20,000, but I will buy a 30,000 property if it also offers appreciation.

  41. Some people are tone deaf, some are color blind, Some people simply are NOT good at RE.
    Given that it is not as easy as newbies think, doesn’t it make sense for people to start with a relatively small investment over which they have total control than to try to jump in the deep end with syndication/leverage-to-the-hilt CF, etc?
    I remember my father investing in real estate in the 70s. Turns out he was a very good judge of properties, but a poor judge of partners. When he bought small SF and small multis he did very well. When he tried to do CF with partners he lost money, primarily due to the failure of the partners to do their part.
    As far as “$30k” , I don’t think they exist in SoCal except as derelict mobile homes in parks. Vacant lots 100 miles from anywhere cost more than $30k. Our equivalent would be $150k (that’s the property you don’t visit at night, & when you hear a gunshot you don’t investigate).

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