Learning on Cheap Real Estate Is Costly

[Stuart Udis]

New investors often start with the cheapest properties, thinking they can learn with less financial risk. The problem is that these properties have no margin for error. Even if bought below market value, one major capital expense—like a roof or water service line—can erase all perceived equity. Mistakes are inevitable in real estate, whether it’s a missed repair in underwriting, a contractor who walks off with a deposit, or poorly executed work. That’s fine—but you need to own real estate that can absorb those mistakes. 

Guidelines to follow:

1. Only buy in low-cost markets if your costs stay under 75% even after paying for two major capital improvements, such as a new roof and a new water service line.
2. 
   Make sure you can eliminate all obvious safety and health hazards—like broken sidewalks, missing railings, lead paint, or poor lighting. A premises liability claim or any avoidable law suit is not worth the hassle balanced against limited upside these properties can generate. 
3. The property should still cash flow after accounting for realistic vacancy and turn over expense, professional management, and  utilizing licensed, insured vendors.

If a property doesn’t meet these standards, the cost of learning will be high. It’s understandable that not everyone can afford real estate that checks all these boxes. But in that case, it’s smarter to wait. Buying entry-level properties without the financial capacity to handle repairs or mistakes often puts investors in a worse situation than if they had held off and saved until they were better prepared.

[Steve K.]

“Cheap is Expensive”