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Podcast Hard Money Lenders Books Washington
BlogArrowReal Estate Investing BasicsArrowNewbies Take Note: Why You Shouldn’t Buy Houses for $30,000
Real Estate Investing Basics

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

Ben Leybovich
Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
175 Articles Written

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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 two 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, 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 that will allow us to leave W2 and 1099 income in the past, as well as 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!

[Editor’s Note: We are republishing this article to help out newbies who have found BiggerPockets more recently.]

Do you agree or disagree? Why?

Share with me in the comments below!

By Ben Leybovich
Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Ben is the creator of Cash Flow Freedom University, the author of House Hacking, and a noted Multifamily Underwriting coach. Through his company, Source Capital LLC, Ben currently operates $40M of multifamily real estate. Learn more about him at JustAskBenWhy.com.
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193 Replies
    robyn bunting
    Replied about 4 years ago
    I learned this the hard way. 🙁

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    robyn bunting
    Replied about 4 years ago
    I learned this the hard way. 🙁

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    Daniel Sisto Rental Property Investor from Liverpool, NY
    Replied almost 4 years ago
    That’s my bread and butter up here in good old upstate NY. -Depends on your market

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    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied almost 4 years ago
    It seems a lot of people learn this lesson the hard way. I’ve seen multiple people lose a lot of money on cheap, warzone properties. Definitely something to avoid unless you’re seasoned and it’s your specialty.

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    James Moore from Ozawkie, Kansas
    Replied almost 4 years ago
    I think that the purpose to share one’s opinion and knowledge should be taken as a privilege. To teach and motivate and to forgo, if one can resist, to preach a one man sermon. Ben you may be quite right to say what you believe so dearly in, but to elevate yourself and to cast down others who have taken their postion in having 30k junkers as you say, is providing no service other than to devalue your own convictions in the process, and not of those who you choose to rail against. Have you not read that the very stones which the chief builders had rejected, shall be the very cornerstone of his kingdom. You dispute with the man or woman that has only but one of these stones, but you revel in having many more of these same stones (30k units) – you blind hypocrite!

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    Jessica Renard Real Estate Agent from Hainesport, NJ
    Replied almost 4 years ago
    As Daniel says, it definitely depends on your market, especially when you are targeting a numerical position. In some midwest areas, some non-coastal NW areas, the upstates, $30K is over halfway to a turnkey at 50-55K. “Not everything that GLITTERS is gold!” What a telling, FALSE analogy, Ben. When you are referring to toe cheese of the Monopoly board, what the heck applies about precious metals except that there’s absolutely a ton of polishing. Models of appreciation are to consider, and *income property neighborhoods* assessed with due costs in mind, still does not warrant *your* ill-appreciation of applicability in straight-numerical market datas. Read the numbers right. For REAL. It’s not any truth of it: to try to barb about inelastic details at the far-side of how the deck unfolds. It’s like picking any matchstick to light – great for campfire but don’t try that at home. And then, then Ben, you bring out the James indoctrination right above =) about the boomerang going on in his quality control… oh no no no thank you on that 2014 hallmark of yours. I did not revel in your commentary as much myself, and yet, that is in fact hypocritical to gloat about the challenges of your own temptations, as condemnation on enticement itself. Where some landlords amass income properties and derive more problems from them, I do say the system can allow for some fresh eyes on it. And property being what it is, humane qualities are what make for real estate.
    Zach Quick Investor from Rogers, AR
    Replied almost 4 years ago
    Huh?

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    Edward Abel from New Jersey, New Jersey
    Replied almost 4 years ago
    Thanks Ben for great insights… You mention creative financing and one of the exciting parts of RE investing is the creative financing opportunities leveraging CF, proper tax management and all the other variables that exist… I am looking for someone to work with me, a program to take to help me understand the in’s and out’s or a book to read… Any suggestions to cut through the BS and get to the meat!? Your advice is much appreciated!
    Ben Leybovich Rental Property Investor from Chandler/Lima, Arizona/OH
    Replied almost 4 years ago
    Thanks so much for reading, Edward. Feel free to look me up. I offer a very inexpensive course (CFFU) at my website. It will answer all of your questions. Look up CFFU here on BP – there’s been fair amount of discussion. Feel free to reach out.

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    Daniel Pollock Real Estate Investor from Brooklyn, New York
    Replied almost 4 years ago
    Great article Ben, gives me a different perspective. Thank you!

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    Julie Rogers from North Lauderdale, Florida
    Replied almost 4 years ago
    Great article Ben! I am kind of confused why there has to be a right or wrong, following some of the comments. You have your direction, they have theirs. Of course I just do SFR and have bought pretty cheap $37.5k and $35k. I am about to close on a $60k home. This one is in the worse neighborhood, but is a very nice home. I do worry about the items you spoke of, but? Still great article, I am just not up to your knowledge level, so though I would like to do what you are doing, I don’t see it in the near future. I appreciate you giving your time to create an article that conveyed a different way of thinking to me.

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