Buy and Hold. Is it Okay to purchase cheaper homes as Rentals?

Question

Greetings,

I'm still a newbie, but planning to purchase our first rental in a few months. The location will be in Memphis, TN. The homes are listed at 65K - $80K. Is this a good price for our first rental property, if the home is in good condition? Looking forward to hearing your feedback.

Theresa Harris · Answer

What is the average home price in the city?  If it is $75K, then sure, but if it is $200K, be careful.  You want to buy homes that will attract good tenants.  That doesn't mean fancy homes, but good starter homes or better.  The numbers need to make sense.

Nathan Gesner · Answer

Cheaper homes attract cheaper tenants. You'll have an increased risk of bad tenant behavior like damages, non-payment of rent, abandonment, home left unclean, higher turnover, etc. If the area is really bad, you won't find anyone to manage it for you because it's too much work for them to make any money.

Nathan Murith · Answer

@Lionel Thomas welcome to BiggerPockets and congratulations on doing the work!

I would agree with Nathan G, cheaper homes will typically attract lower-end tenants.

More importantly, what kind of house does $65k-$80k get you? In what neighborhood? What would they rent for?

Also, at that price point, do you plan on purchasing cash or get a loan? Keep in mind that finding a lender that will lend on these price points is harder. Often, though you can find exceptions, lenders will not do loans under $75k.

In any case, exciting times for you. I still remember when we were getting started. I am happy to share all our mistakes, tools, tips, tricks if you are interested. Do not hesitate to reach out, connect, and DM me if you want.

Randall Alan · Answer

"Good Price" is relative to the income each property will generate.  When we first started (4 years ago) we were buying units for $75,000 per door.  (So a duplex would be $150,000.)  This worked out really well for us.  We were able to rent them for about $1,000/month/door.  Those numbers, when using financing, worked out really well.  We were netting about $500 per month per door after all expenses plus a $100/month maintenance reserve per property.  But say for a moment that you can only rent it for $600.  Now you might only be netting $100 per month.  That's NOT GOOD.  So run your numbers to determine your all in (average) monthly costs, and compare that to what things are renting for in your area.  Everyone has their 'number'... what a property needs to make per month to make it worth it.  When we started, it was at least $300/door/month after Principle, interest, taxes, insurance and maintenance reserve.  We have bumped that number up as time went by... but obviously the closer to zero you get, the worse the deal is.  It is a really good way to compare multiple properties... like if you have two properties you could purchase, which one is better?   We run that analysis on every property we consider.  Below $300/month its not a winner (for us).  We have some units that net $800/month on a single door - and that is after a cash-out refi on a BRRRR!  That's a winner - but much more rare!

The challenge with remote investing is you are going to instantly give away 10% of your net rent to a PM.  It will put a real hit on your typical rental.  Your $300 just became $200 net due to the increased expense on a $1,000 rental.

At those lower prices you also have to really evaluate deferred maintenance.  Like - does the house need a roof immediately?  How long will you have to rent it to recover that $10,000?  The answer is 33 months at $300 net... or 50 months if you have a PM at $200/month net.

Hope it helps!

Randy

Curtis Mears · Answer

@Lionel Thomas

Really depends on your goals and expectations. Are the properties in high crime areas, and if so, are you prepared to manage lower income properties? Or are the properties in decent areas but need work? If so, are you prepared to do the necessary work to get it up to neighbor hood standard?

Lionel Thomas · Answer

Thanks, everyone for the prompt response and recommendations. All the responses were very informative and will help me determine my next course of action prior to purchasing my first property in a few months. I will continue to keep everyone in the loop.

Best Regards,

Lionel

Eliott Elias · Answer

What do you mean by good price? Run your numbers and see that the cash flow is worth the investment you put up

Joe Garretson · Answer

Hey @Lionel Thomas, I see this is your first post. Welcome! Why did you land on Memphis? It looks like you've been located in Albuquerque so are you doing this remotely to buy and purchase your investment property? I'm planning a similar venture living in the Denver area and purchasing in the Green Bay region but we've got a ton of family in the area and will have boots on the ground to help.

Buy and Hold. Is it Okay to purchase cheaper homes as Rentals?

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