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

Tom Sylvester
3 min read
Don’t Buy That Cheap Property! (UNLESS…)

It’s a fact, Josh Dorkin hates Detroit (and Rochester, Buffalo, Columbus, etc). 

Anyone who has listened to the BiggerPockets Podcast each week is just waiting for Josh to take any random topic and turn it into a way to bash Detroit. 

In this week’s podcast Josh decided that he was no longer going to talk about Detroit.  Instead he was going to tell everyone why “Podunk” Washington (aka. Aberdeen aka. Brandon’s investing area) is the new Detroit.  But Montesano is just the latest in a list of cities that Josh has rattled off that people (especially new investors) should not invest in, even though they have cheap properties.

So the question comes up… why does Josh hate cheap properties?  Is he destined to spend too much money on investments because he hates these cheap properties?  If you’ve listen to past podcasts, you will know that Josh, in fact, does not hate cheap properties [EDITOR’S NOTE: Josh doesn’t, in fact, hate any of these or other cities either], he hates cheap properties that are not good deals.  

And you should should too.

I’m Looking For a $30k-$40k Property

In the forums this week, a discussion started around this very topic.  A new investor in my area (Rochester, NY – another area that Josh has added to his list of areas to avoid) was asking about getting started and said “I’m looking for a 30k-40k property”.  Knowing how much you want to spend is important, but it is not the main criteria that you should be focused on when evaluating investments.  Instead you should be looking at things like:

  • What are your investment goals?
  • How much cashflow (profit left after all expenses paid) does an investment yield?
  • How much cash on cash return (cashflow compared to your investment) does the property yield?
  • How much of a headache factor will the property be?

Saying you want to spend $30k – $40k when you want yo purchase a car is fine, but it is not the most important criteria to focus on for an investment.

But Tom, Your First Investment was Only $26,000

If you’ve read any of my previous posts or listened to my podcast, you probably know that my first investment was a duplex that we purchased it for $26,000.  This may make me seem like a hypocrite because this is a cheap property, but that is not the reason that I purchased it.  I purchased it because the numbers worked and it made sense for me, which makes it a good deal.

  • Investment Goals: To get started in buy and hold real estate.  The duplex was in my target area and was an easy way to get started in real estate and learn the ropes.  It also seemed less risky because their would be 2 rents and vacancies would not be as painful.
  • Cashflow: Monthly rents are $1,225 for this property.  Assuming the 50% rule, NOI comes out to $612 with ~$325 in monthly cashflow after  a $288 mortgage payment.  This is above our target of $100 per unit.
  • Cash on Cash Return: Annual cashflow is $3,900 and we invested $8,000 for down payment and closing costs, so our cash on cash return is ~48%.
  • Headache Factor: This was our first property, so we were not really sure.  Since it was in our target rural area and the rest of the criteria matched, we took a chance.

So for us, this was cheap and a great deal, so we purchased it.  We have skipped over other properties that were around the same price or cheaper, because when we ran the numbers or looked at the other criteria that was important to us, it just would not be a good deal for us.

So Josh In Fact Doesn’t Hate Cheap Properties

Going back to the investor and the forum post, another investor from Rochester (Steve Santacroce) chimed in and provided the following advice:

“You don’t want to start investing in Rochester on 30-40k houses. You need to find yourself a VERY good property management company that has experience dealing with the headaches and issues that come with houses in those kinds of neighborhoods. If you want a fairly turnkey property, expect to pay at least 90k for a nice duplex that could give you a reasonable amount of cash flow.”

And this is why Josh and many other seasoned investors really try to drive home that cheap property does not make it a good deal.  It is important for people to realize that price is not everything and it is important to look at the entire picture when evaluating a potential deal.  Does the area support the type of investing that you want to do?  Do the numbers look good on paper?  Will you be able to achieve the numbers on paper in real life?  These are all very important questions to ask.

What is your view on cheap properties?

Photo Credit: Un-Alien-able

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.