{"id":54564,"date":"2017-04-25T05:00:19","date_gmt":"2017-04-25T11:00:19","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=54564"},"modified":"2021-03-16T10:16:30","modified_gmt":"2021-03-16T16:16:30","slug":"2014-02-25-why-you-should-not-buy-cheap-houses","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2014-02-25-why-you-should-not-buy-cheap-houses","title":{"rendered":"Newbies Take Note: Why You Shouldn\u2019t Buy Houses for $30,000"},"content":{"rendered":"<p>Are a you newbie?<\/p>\n<p>Are you confused by the title of this article?<\/p>\n<p>Here\u2019s the thing\u2014seasoned 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\u2019m saying and why.<\/p>\n<p>BiggerPockets is a great place to learn the terminology and the formulas. But that\u2019s the easy part because now you have to put what you\u2019ve learned into perspective, which is not quite so easy. I\u2019ll 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\u00a0confused, then the best thing you can do for yourself is to stay as far away from real estate as possible\u2014for now.<\/p>\n<p>You should be confused. Real estate is not rugby;\u00a0it 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:<\/p>\n<p style=\"text-align: left;\" align=\"center\"><i>Not everything that shines is gold!<\/i><\/p>\n<p>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.<\/p>\n<h2>Defining Gold<\/h2>\n<p>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:<\/p>\n<ul>\n<li>Cash flow constitutes safety as it allows us time to weather storms,<\/li>\n<li>Cash flow constitutes financial freedom via passive income,<\/li>\n<li>Cash flow is far less taxed than other forms of income and thus we don\u2019t need as much of it.<\/li>\n<\/ul>\n<p>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\u2019t make it a good investment opportunity.<\/p>\n<p><em>Why not<\/em>, you are thinking to yourself. Financed with 30-year notes, these $30,000 houses\u00a0cash flow like crazy. And\u00a0they are\u00a0cheap, 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\u00a0for a variety of reasons, this is the worst thing you can do!<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-86412 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/02\/mobile-home-insurance.jpg\" alt=\"\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/02\/mobile-home-insurance.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/02\/mobile-home-insurance-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><em><strong>Related:<\/strong> <a title=\"BP Podcast 014 : Cash Flow, Creative Finance, and Life with Ben Leybovich\" href=\"\/renewsblog\/2013\/04\/18\/cash-flow-creative-finance-life-ben-leybovich\/\" target=\"_blank\">BP Podcast 014: Cash Flow, Creative Finance, and Life with Ben Leybovich<\/a><\/em><\/p>\n<h2>Not All Cash Flow is Created Equal<\/h2>\n<p>Yes, cash flow is gold; we want cash flow. But having established the basic truth, now we must dig deeper.<\/p>\n<p>First things first\u2014we buy income-producing assets for two global reasons:<\/p>\n<ol start=\"1\">\n<li>To achieve financial independence<\/li>\n<li>To achieve financial wealth<\/li>\n<\/ol>\n<h2>Financial Independence<\/h2>\n<p>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.<\/p>\n<p>Yes, passive cash flow from income-producing property is indeed a good means of achieving all of the above. But here\u2019s what you need to understand, and this is absolutely crucial:<\/p>\n<p>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\u2019t be able to rely on it the way you want and need to rely on it. Are you thinking yet?<\/p>\n<p>Therefore, the question becomes:<\/p>\n<p>What type of an asset, in what location is capable of generating STABLE passive income today, tomorrow, and forever\u2014without needing you to babysit it constantly?<\/p>\n<p>Let\u2019s talk this through.<\/p>\n<h2>A Discussion of Desirability<\/h2>\n<p>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:<\/p>\n<p>If people don\u2019t 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\u2014talk about work; completely opposite of passive!<\/p>\n<p>Well, if people don\u2019t want to be there, then the income generated by your unit will not be stable\u00a0by 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\u2019ll find it difficult to grow rents over time or to grow value\u2014not good!<\/p>\n<p>And furthermore, when you are ready to sell, you\u2019ll 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.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-84810 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/06\/emotional-decision-rehab.jpg\" alt=\"\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/06\/emotional-decision-rehab.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/06\/emotional-decision-rehab-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><em><strong>Related:<\/strong> <a title=\"Don\u2019t Buy That Cheap Property! (UNLESS\u2026)\" href=\"\/renewsblog\/2014\/01\/20\/dont-buy-cheap-property\/\" target=\"_blank\">Don\u2019t Buy That Cheap Property! (UNLESS\u2026)<\/a><\/em><\/p>\n<h2>So\u2026<\/h2>\n<p>You bought this house for $18,000 and spent $12,000 to put lipstick on the pig. You&#8217;ve had to\u00a0work hard to keep it full. The house was trashed more often than not. You\u2019ve 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\u2019t mean that they are bad people, just that they don\u2019t have control of their financial lives, which often leads to evictions and frustration!<\/p>\n<p>Now, let me ask you a question:<\/p>\n<p>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\u2019t 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?<\/p>\n<h2>Conclusion<\/h2>\n<p>When buying income-producing real estate, we have but two objectives: strong and stable cash flow\u00a0that will allow us to leave W2 and 1099 income in the past, as well as reasonable probability of appreciation\u2014at least enough to keep up with inflation. It matters not if on paper something looks like it\u2019ll cash flow. Use your brain! Buy quality assets!<\/p>\n<p><em>[Editor&#8217;s Note: We are republishing this article to help out newbies who have found BiggerPockets more recently.]<\/em><\/p>\n<p style=\"text-align: left;\"><em>Do you agree or disagree? Why? <\/em><\/p>\n<p style=\"text-align: left;\"><strong>Share with me in the comments below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Those $30,000 homes are enticing, but should you be buying? Find out why you might want to think twice before purchasing a cheap home.<\/p>\n","protected":false},"author":810,"featured_media":88163,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524],"tags":[],"class_list":["post-54564","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/54564","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/810"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=54564"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/54564\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/88163"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=54564"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=54564"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=54564"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}