Landlording & Rental Properties

5 Ways to Protect Yourself When Buying Cheap Real Estate

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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America still has a significant number of inexpensive properties available for investors. How do you stay safe when investing in them?

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There can be great profits found in buying, remodeling, and flipping or renting out inexpensive properties. However, it is crucial to realize that a low price tag doesn’t always mean a cheap or valuable deal. In fact, you can lose money fast buying cheap real estate if you aren’t careful.

Here are some ways I’ve managed to minimize the downside risk and stay safe in the process of buying dozens of homes for less than $70K each.

5 Ways to Protect Yourself When Buying Cheap Real Estate

1. Choose the right location.

Lots of cheap real estate exists in the U.S. However, much of it may not be worth a lot. It may not be worth much for a couple hundred years, if ever. The key to success is buying in good locations that have demand and good fundamentals. We’ve all heard it over and over—location, location, location.

Related: Investing in Cheap Real Estate: Is a $30,000 House Necessarily a “Pig”?

2. Buy title insurance.

Getting a buyer’s title insurance policy is important. This is especially true when buying cheap homes from auction or homes that are in distress. Often, agents and auctioneers try to wipe their hands of any liability, which is completely understandable. Still, these properties can have the most title issues. Get covered with insurance.

3. Make smart offers.

I’ve bought auction properties sight unseen, as well as out-of-area properties. I’ve stayed profitable by pricing my offers right. It doesn’t matter if you are bidding on a $2MM home in L.A. or a $30K home in Indianapolis. The key is buying undervalued property and locking in profit from the beginning. We’ve all heard it time and time again—you make your money when you buy.

4. Get good inspections.

Where many investors fail is buying “cheap” homes and then finding out they may have to put in several times the purchase price in renovations, repairs, or even tearing down parts of the property and rebuilding. Always get inspections done unless you’re very experienced with rehab numbers.

real estate, young, investor, millennials, generation

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

5. Make sure your property management is top-notch.

Many investors just aren’t cut out to effectively operate lower-end properties. They don’t understand the quirks, tenants, or the processes. Poor management can destroy even the best opportunities on A-class real estate. Great management can effectively turn a lemon property into lemonade.

Beware of trying to manage these cheap houses from afar. It can turn into another full-time job easily. 

Summary

There are attractive, low-priced properties to invest in today. Just make sure you know exactly what you are buying, price your offers right, have protections in place, and get great management. This will make all the difference between losing money and generating positive cash flow.

Do you have any “cheap” real estate in your portfolio? Any tips you’d add to this list?

Be sure to leave your comments below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
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    Michelle
    Replied about 3 years ago
    I’m interested in buying from the Vegas area as they have low prices. I’m flying to view properties next month . Any tips on what to look for in area and property?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    I personally recommend avoiding areas with high crime and loitering..Are you looking for properties to flip or buy&hold in that market, Michelle?
    Michelle S. from Alexandria, Virginia
    Replied almost 3 years ago
    I’ve decided to change my location and stick to the area I’m currently in. I’ve decided to buy and hold as a rental property in VA area. Sorry for late response just seen this.
    Alex Sanfilippo from Jacksonville, FL
    Replied about 3 years ago
    I’m in the process of buying a fix / rent home that is under 100k. This was a good read for me today! Thanks.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    You’re welcome..Glad you enjoyed the read.
    Erik Whiting Real Estate Investor from Springfield, MO
    Replied about 3 years ago
    Thanks for taking time to post some summary warnings. I invest almost exclusively in these types of “cheap” properties. There is much more that could be said on this topic, but this is a good place to start. For anyone wanting to get into cheap properties, I recommend having a high cash flow expectation to help make it worth your while and to minimize alligators eating up all of your profits. I follow the “2% Rule”. For every $10,000 invested (purchase price + rehab), the property must return at least 2% (i.e. $200) in gross rents, and this assumes I’m not paying any amenities for the tenants like utilities, lawn care, etc. If I can’t get the deal to at least that level, I pass. An investor can easily pick up $30K properties in my town that rent for $600, so there’s no reason to settle for anything lower. These are all “Class C” on a scale of A to F. Not war zone neighborhoods, but not placed I’d choose to live. Yes, there’s drama, but I used to be a public school teacher and went into the Army in 1996 so I can manage that. There are good low income tenants, but another key thing is screening carefully. Learn to take control of conversations and quickly weed out the “story tellers” and “can you work with me on the deposit?” folks. When someone says, “Here’s my story…” I’ve never had it come out good.
    Michael
    Replied about 3 years ago
    Great comments Erik! I’ve recently started investing in these “cheap” properties and I can relate to pretty much everything you said.
    Susan Maneck Investor from Jackson, Mississippi
    Replied about 3 years ago
    My experience coincides with your advice. 30K properties can work well, but only if you are there to stay on top of things. As for title insurance, I remember when my son bought his first house, 3bdrm 1ba for 23K from HUD. Now, he had learned from car buying with me not to let the loan officer put a bunch of extra stuff like gap insurance on the price of the car. So he figured the same principle applied to buying a house and was going to turn down the title insurance. Fortunately the real estate agent had the good sense to call me so I could tell my son, yes, we do buy Title Insurance. Always. BTW I get $800 a month on my 30K PIGS.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Thank you for sharing your story. What market are you purchasing your 30k PIGS, Susan?
    Marcus Auerbach Real Estate Agent from Milwaukee - Mequon, WI
    Replied about 3 years ago
    I would ad one and probaby put it on top of the list: financial projections for at least 10 years including capital expenditures, short capex. The 30k home will need a new roof, HVAC, windows, plumbing, kitchen, flooring, electrical, driveway or new sewer lateral at some point, to name just a few examples. If you can still show a profit over the next 10 years it might be worth a look. If not, the little PIG can turn into a money PIT really fast.
    Tricia O'Brien
    Replied about 3 years ago
    What do you consider high crime and how do you research that? Do you consider the “see reported crimes near this home” on Trulia to be accurate and/or useful ?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Trulia is a great source. I’ve used it and it is pretty accurate. Typically you can find crime stats by neighborhood depending on your city as well. Hope that helps Tricia.
    Tricia O'Brien
    Replied about 3 years ago
    Thanks Sterling. Besides Trulia do you recommend any other online resources to check crime like crimereports.com or spotcrime.com?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    I do not have any other sources. The resources you have will suffice..
    Tricia O'Brien
    Replied about 3 years ago
    Thanks Sterling. Besides Trulia do you recommend any other online resources to check crime like crimereports.com or spotcrime.com?
    Jason Treadwell from Chicago, Illinois
    Replied about 3 years ago
    Great article! My first property fits the bill to a T, still profitable but many lessons learned to Sterling’s and Erik’s points.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    Glad you found value in the content..Congrats on purchasing your first property!
    Nancy C. Professional from Jacksonville, Florida
    Replied about 3 years ago
    Hi Sterling, great article! If the property has a mobile home on it, how do you confirm who owns the land? I can confirm who owns the single wide trailer home through my local property appraiser’s office, but what if the land is owned by someone else who is renting the usage for a mobile home? Where do I check the “OR” “Plat” info and what should it say if the land comes with the house? Separately, my 2 cents for due diligence checks on ANY house you’re planning to invest in: 1.) clean title, property on record accurately, any tax, nuisance or other liens on house; 2.) area hazards affecting insurability (flooding, environmental/leaking tanks, former drug lab usage) 3.) other related crime factors, ie. registered offenders in immediate area; 4.) and finally, school zoning and school scores for the immediate area. Speaking as a Florida Licensed Home Inspector, it’s absolutely worth the money to get a top notch, thorough home inspection (takes ave of 3 hrs, 2,000 sq.ft.) and the report may be able to include an investor’s cost estimate on the various repairs needed. If your home inspector does not provide this perspective, try another company!! Ask for a sample report before signing up with a home inspection company. Or just call me 😉
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 3 years ago
    I do not have experience dealing with mobiles homes..For that reason I am not the best person to answer your question. I would recommend posting the question in the forums for others to address. Hope that helps.
    Jimmy Lu
    Replied about 3 years ago
    This is definitely a great read! I’m in the process of purchasing a new home and this definitely shed some light for me, thank you!
    Steven Freed
    Replied about 3 years ago
    The resources you have will enough. California is a great source and it is pretty accurate. There are lots of way to investment in Real Estate!
    Michael Lee Investor from Coppell, TX
    Replied about 2 years ago
    That was smart advice for beginners. Thanks!
    Don Taylor New to Real Estate from Raleigh, NC
    Replied 3 months ago
    Enjoyed the article