How to Invest in Real Estate When Everything Is Too Expensive
The most inexpensive property I’ve ever bought was for $16,000.00.
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It wasn’t in terrible shape, but it did need a good deal of work to get it up to a rent-able standards (about $30,000.00). The most expensive property was over a half-million for an apartment complex which I still own and love dearly.
However, in some areas of the country, those prices are simply not realistic. In fact, in some areas you can barely buy the lowest-end home for what I purchased my apartment complex for. I am often asked by visitors to my blog who have read my book, “but what if I can’t find properties as cheap as you do?”
It’s a perfectly valid question. I am located in a very low priced area, but I know that there are some areas where the prices are astronomically high. Many major metropolitan areas such as New York, LA, or Washington DC have prices well above the national average. If you live in an area such as this, this article is for you. I want to just share a few thoughts I have concerning high-priced locations and how you can still invest while living in such a place.
Are You Looking for Homes On Sale?
How much do you pay for a gallon of milk?
$3.00? $4.00? $5.00? These are all prices I see whenever I shop for milk. However, I never spend more than $2.50. How is it possible that I can get milk for $2.50 a gallon and others are paying up to double that? It’s because I’m actively looking for a deal. $2.50 a gallon for milk is not normal. It’s a sale.
In the same way, the prices I talk about are not normal. No one lists a home for $16,000 like the one I mentioned earlier, even in my area. Often times seasoned investors like myself talk about the cheap prices we are getting to make a point (like I’m doing in this very post) – but remember that those prices are not retail prices. That home was actually listed at over $30,000 (still a low price, I know) but I knew the seller was desperate and I could solve her problem quickly. I was actively searching for a deal.
Are you actively seeking a deal?
When you pull up your list of nearby homes for sale are your simply looking at the average sale price and trying to compare that with the $16,000 deal I got? You are going to be very disappointed. The average price for a home in my area is over ten times more expensive than what I offered. I’ve only seen a few properties that cheap -and most have MAJOR problems with them. The $16,000.00 deal was a special deal. The apartment complex for half a million was also. I only buy special deals. They are not once-in-a-lifetime, but they are also not every-day deals.
I forget now where I heard it (probably the BiggerPockets’ forums) but to find a good deal you should look at 100 homes, offer on 10, and only get one offer accepted. This means that only 1% of the deals that look promising actually are.
What does this mean for your business?
It means you need to look at a lot of properties. You can speed up the time by having very defined standards that you follow, but in the end you are simply going to need to look at a lot of properties.
Is The Price Relative?
Let’s go back to that analogy about milk.
In fact, I have a bit of a math problem for you:
When would it be the same for my bottom line to pay $5.00 for milk as $2.50?
The answer, of course, is if I made twice as much money. In other words, if I suddenly made double my income but spent double the amount on milk – the percentage I’m spending on milk doesn’t change.
This is also true in real estate. A home that sells for $100,000.00 in one area may produce $1000.00 per month in rent. However, that same style house in another area may sell for $300,000.00 – but the rent may be $3,000.00 per month. It’s all relative. So before you instantly assume you live in an area that is too expensive to invest in, decide first if the math still works.
Often times certain investments are working in your town – they just are not working at your financial level. Perhaps saving $150,000 is too large of an investment for you. If so, there are always partnerships you can form or wholesaling you can do to still be involved.
I understand, or course, that in some areas a home for $300,000.00 still may only rent for $1000 per month. I understand that in some areas the price relativity between rent and price is out-of-wack. Sometimes properties are just not worth buying.
What Is Working In Your Area?
Perhaps your goal is to buy-and-hold single family homes in Manhattan.
I’m sorry – but it’s probably not going to work out real well for you.
Each area is good at certain things – but not at everything. If the math doesn’t seem to work on a certain type of investment in your area, perhaps it’s time to consider what is working.
- Would wholesaling commercial properties be a better use of your time?
- What about multifamily properties?
- How about condo conversions?
- Fast food triple-net leases?
- Subsidized low-income housing?
Before blacklisting your entire town, make sure you take time to investigate exactly what your town is good at. Perhaps you’ll discover a highly profitable investing strategy that your “expensive town” is excellent at. Check out my list of “The Top 100 Ways to Make Money In Real Estate” for more ideas.
Have You Checked The Outskirts?
How much do Starbucks’ employees make in downtown New York City?
My guess is not a whole lot more than they make in my town. Simply put – the large percentage of society who make under $15 an hour still need to live somewhere near those cities. Baristas are not making six figures (unless you live in Northwest North Dakota) yet still manage to get to work in downtown expensive areas.
In nearly every expensive city there are still pockets of low priced properties.
Have you found these areas?
Don’t get me wrong – I’m not advocating slum-lording or investing in the ghetto (though, some investors do make good money from these properties – I steer clear). Location is still key in any real estate investment. I’m referring to the middle-class neighborhoods on the outskirts and in the suburbs. Generally these areas are found twenty to forty miles outside the city center.
Talk with a good real estate agent about these areas. Find the best location with the lowest prices and focus your efforts there.
If still you find that there are no decent locations nearby that you can invest in, perhaps it’s time to look outside your area and look into long-distance investing.
Investing Outside Your Area
One of my favorite Podcasts is the Real Estate Guys Radio Show. Each week, they interview highly successful real estate investors and offer a lot of great advice. One of the phrases they state often is “Live Where You Want, Invest Where It Makes Sense.” I think there is a good amount of truth to that- but it must be approached with caution.
I included this section last because I don’t want people to jump the gun and start investing thousands of miles away from their home. When you are first learning the ropes behind real estate investing you will quickly learn that there are a lot of ropes. Sometimes those ropes get tangled and need to be untangled.
No matter how many books you read, forums you ask questions on, consulting you pay for, or blogs you consume- you will still find there are hurdles you need to overcome. If you immediately begin investing from thousands of miles away, your ability to handle these problems can be severely hampered.
That said, if investing out of the area is the path that makes the most sense to you, be sure to research your market carefully and plan on using excellent property managers. If you are looking to invest in smaller single-family homes, there are turn-key investing companies who specialize in assisting you in investing from a distance. For a great example of a company that is helping many investors across America as well as thousands of BiggerPockets’ readers each week, check out Chris Clothier and his company Memphis Invest.
Now It’s Your Turn…
What is your market like?
- Is it low priced, with great cashflow?
- Or is it high priced with no cashflow?
- What about the sub-markets?
- Or different investing strategies?
These are all questions you need to ask yourself when deciding how to move forward with your investing career. Don’t let “prices are too high” be an excuse for you to continue sitting on your couch each night watching re-runs of Supernatural. Get out there and find some sale prices or find an area where they exist.
I love comments and I’m curious like a cat (meow.)
So if you have a minute, please leave me a comment below and let me know about your area.
What kind of market do you live in?
Photo: Images of Money