Real Estate Investing Basics

Newbie Investors: Here’s the Truth You NEED to Know About $30k Properties

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Business Management
32 Articles Written

Which sounds better: three properties that bring in $700 a piece for $33,333 each or a property that costs $100,000 and brings in $1,350? Well, just judging from the numbers, it would be easy to say buy the three properties. Most new investors see the low cost of entry and the high price-to-rent ratio, and they assume this is a good property. But there is more to investing than just the numbers.

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There is this whole subculture in real estate investing that invests in under $30k investment properties. Unfortunately, it most often is new investors who got sucked in by the numbers on paper. They haven't owned the properties long enough to really appreciate what owning $30k properties actually entails.

Let’s analyze certain factors here.

For Advanced Investors Only

If you haven’t owned an investment property before, your first purchase should not be a property under $30K. These are for experienced investors only. I see it too frequently. An out of state investor is told that there is a neighborhood somewhere in the Midwest that has a price-to-rent ratio of greater than 2%. They decide that this is a tremendous opportunity because they just got done reading Rich Dad Poor Dad, so they need to start getting out of the rat race today. They purchase the property more times than not sight unseen and are ready for the checks to start rolling in. Little do they know that they have bought a property in a high crime neighborhood.

Does this story sound familiar? Have you seen this story told countless times on popular real estate forums? If you are going to start investing without any experience, start with something easier. If you are going to do it yourself, start with a property in a B-class neighborhood. The returns won't be as good, but it will allow you to get comfortable with investing. If you are looking for someone else to guide you through the whole process, make sure you do your due diligence and get comfortable with the company selling you the property.

Try to Stay Local

If you are a new or budding investor, try to start your research by looking at the properties locally. You can talk to real estate agents, investors and other experts to understand the market condition. Look for neighborhoods that have a potential of giving you good returns with high rental demand.

Related: Why I Don’t Buy Houses for $30,000 or Apartments in D-Class Areas

If you don't want to get your hands dirty, you can look for the right turnkey investment company that could assist you in finding a good deal. It's easy to meet them because they are in the same city.

If you don’t find any success locally, then you can start looking for properties or turnkey companies in different cities. You will have to make sure that you meet them in person and see the properties before investing in them.

There are many cities out there that can offer properties under $30K, but whether they are worth the price or not is debatable. Some of them won't be able to generate enough income in the form of returns, whereas others will be in shady neighborhoods or require a lot of maintenance. You need to do your calculations properly before making any decision.

Economics of a Property

Property management is a day to day process. It’s not solely about finding the tenant, renting out the property and collecting monthly rents. It is an everyday activity where you have to deal with all the problems faced by the property, tenant or you. It could be a leak in the faucets or getting rid of bad tenants. Any property requires a lot of care, including preventative maintenance, regular inspections, repairs, and improvements. So when you think about this, think about what you are charging.

The example property brings in $700 a month in rent. You pay your management company $70 per month to manage. No matter the price of the rent, these properties still require the same amount of time to manage, and I would argue that $30k properties require more time. Unfortunately as the property owner, you will have to find a property manager who may need to cut corners to stay profitable.

Also consider the leasing of the property. Typically, property managers charge one month’s rent to fill a vacancy. That is either kept all in house or split with a cooperative broker. At $700 a month, the property manager may try to keep it in house so he can get the whole amount as opposed to splitting it. The cooperative broker might not even show the property because making $350 takes the same amount of energy and time as it takes to rent a property that has twice as high rent. All of these activities take time, and if you are going to pay less for someone’s time, inevitably you are going to get less in return.

Continuing with this theme about the cost of things, what do you think the overall condition of that property is going to be? If you bought the property “turnkey,” how much work do you think was actually done to the property? Our typical rehab cost for a property is around $30K. How do you expect someone to buy the property, rehab it and sell it for a profit if the sales price is $30K?

There is no room for profit. Heck, there’s no room for a rehab budget. Too often, people buy “fully” rehabbed properties, where the seller came in and painted everything and called it “fully rehabbed.” The person who gets stuck with the “fully” rehabbed building is a newbie investor who just bought a money pit.

I don’t know about you, but when I got to the Home Depot when I am looking for materials, I have never seen the aisle for materials for $30k properties. That’s because it doesn’t exist. Replacing a furnace is going to cost at the minimum $1,500 regardless of whether it is a $30K or a $100K property. So when that furnace goes, it’s going to take a much bigger bite out your profits. Just because the price of the property is cheap doesn’t mean the repairs are going to be any less than they normally would be.


Related: The $30k Rental Property: How to Finance & Profit From Cheap Real Estate

I’m not saying that people shouldn’t buy $30K properties. What I am saying is that to make it work, it requires you to most likely be a local. You’ll want to be able to manage the property yourself and be as hands-on as possible, so that you can squeeze every nickel out of your revenue. Because the actual dollars return is so small, you have to work harder to be extremely efficient. Otherwise, those promised returns will not be there.

If you are not local and not hands-on, you will end up performing the same—if not worse—than on that $100K property you avoided because you thought it was too expensive.

[Editor’s Note: We are republishing this article to help out our newer readers.]

Have you had luck with “cheap” investment properties—or do you have a story of disaster?

Be sure to leave a comment below.

Mark Ainley is an investor, managing broker, and property manager with almost two decades of experience in real estate. Mark found his way into real estate by purchasing and flipping condominiums p...
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    Brad Nelson from Cleveland, Ohio
    Replied almost 3 years ago
    I noticed some of the comments go back a few years. As of late 2017 it is very unlikely you will find a property under 50k that does not need to be bulldozed. I looked at about 50 hoses in Cleveland (known for 30k houses) in the past year. Back in 2015 maybe, but not any more. If it’s not falling over at that price, it’s probably in one of our lovely east side neighborhoods. Along with your paint and broom, bring a bullet proof vest.
    Dan Heuschele Investor from Poway, CA
    Replied almost 3 years ago
    I think there is some good advice in the article for the newbie investor but it neglected one aspect that holds true for $30K properties. They have historically appreciation rates that may not even keep up with inflation. This is true for both the property and the rent appreciation. I do realize that there are periods where these properties do appreciate faster than inflation but in the long-term they do not (if they did they would not be $30K properties due to the appreciation). This in effect caps your likely return. It is very tough to generate real wealth on cash flow on such properties. There are only so many you can self-manage. Using a PM significantly diminishes the return. I am not indicating you can not make money on these (if purchased correctly) but that they are a really difficult path to get you wealthy. So I think the article serves the purpose of at least providing the newbie RE investor the information on the hurdles to overcome if choosing this path.
    Jonathan Carter Real Estate Investor from Raleigh, NC
    Replied almost 3 years ago
    I recently purchased my first deal. a duplex in a C- area. for 38k. This is a great article to remind new investors about the difficulties investing in 30k properties. Another thing to remember is it could be hard to refinance a small loan many lender don’t do it (but you will find one keep looking). A big reason for me to start with a 30k was I could pay cash without finding a private lender. I wanted the experience with little risk. I’ve learned so much from buying this property and it will help me with future deals. If you can buy a good deal for 30k now I would do that verse waiting a few years to buy a deal 70k property. Just make sure its a good deal. It has been a lot of work but I expected it to be, and I’m learning so much about rehabbing, working with contractors, working with tenants, etc.
    Varun Parkash from Jersey City, NJ
    Replied over 2 years ago
    I am an out of state investor and it all boils down to 3 simple questions: 1. Would I want an everyday headache that will eat a major chunk of time by buying a bare-bones 30K structure? Usually in pathetic areas with a very very minor chance of appreciation – if any at all. 2. Would i want to deal with Gang-bangers/homies/drug-dealers/penny-pinchers – as tenants? Am i going to be a slum-lord? 3.Do i want to NOT buy in an “emerging market” which is projected to grow immensely in next 10 years and has already shown significant growth signs? The answer to above is NO NO and a BIG NO Hence, i own CLASS A Brand New Properties with 10 rated schools and Quality tenants who call me once per year to extend that lease – of course the fairy tale doesnt stay like this forever – but i can focus a majority of my time in doing my business and other dollar hustling activities than CRYING a river on a broken gas-pipe-leaky toilet or a crazy roof – to each his own – but time is money and i spend it in efforts to line up myself with more properties.
    Anthony Dooley Investor from Columbus, Georgia
    Replied over 2 years ago
    One of the few things that I agree with from this entire article is “buy local.” Knowing your market is the most important factor in buying right. There are properties in C areas that are distressed that I can buy for $20-30K. Rehab for $10-15K, and rent out for $800. The market value of the property would be around $70K at that point. Most of my portfolio consists of these and they are owned free and clear, so cash flow is excellent. The assumption in the article is that poor, low rent tenants are all bad and require more time and hassle to manage. Not true. With very few exceptions over the last nine years, I have had excellent tenants that pay on time, maintain the property well, and stay for years. This has enabled me to shift from a cash flow focus to asset preservation.