Why do some investors purchase sub-$100k properties?

Question

Are these properties really that profitable? When I look at the numbers of these properties it seems like a few couple hundred dollars in cash flow and thousands of dollars in fees, repairs, and maintenance?

Wouldn't it be better to park $40k in a high interest savings account or the S&P 500? Is this more of an income tax strategy? I am just confused as to why some investors buy these kinds of homes?

Patrick Roberts · Answer

I get a ton of calls from clients wanting loans on these. It's almost always one of two reasons - either that's all they can afford in their current financial position, or it's because of underwriting/analysis that's entirely theoretical and ungrounded. Stuff like "I underwrote 10% for capex" which is $700/yr on a $70k property, or "cash on cash is 22%" which translates to barely $100/month. Sounds good on a line-itemed spreadsheet, but this is detachded from reality. The vast majority of sub-$100k properties are traps.

Caleb Brown · Answer

Many investors that's all they can afford or they are playing the volume game. Stack more lower price properties but have more doors. The lower price points on paper do look better but those margins can get wiped out.

Mike Tremblay · Answer

I did it to get my feet wet. Bought a property for $35k, spent $9k to fix it up. Used a portion of my HELOC to pay for it all so my HELOC payment was like $300 a month. Rented it out for about 4 yrs. Unfortunately covid happened so the tenant stopped paying for a year and a half before I could evict thanks to the state I live in. So as soon as he was gone I sold it for $70k+. Paid off the heloc and deposited the difference in IRAs. I wouldn't have borrowed money to put into the stock market as the bulk of my net worth was already in stocks, so it was kind of a diversification play...and I wanted to see if I could make money not using any of my money...since the HELOC was revolving credit.

I learned that I won't ever buy a rental house in my state again. If I had bought an expensive property and had to actually carry a real mortgage for a year and a half I would've been screwed. My next rental will be in another state and I'll just pay cash.

Alan Asriants · Answer

They Buy these properties because the hope that you can cash flow off of a small investment and start with just 20k down payment is an easier barrier to enter. Its a lot harder to keep saving up a DP for a 400-600k asset than it is for a 100k one. The hopes are quick and profitable returns with little investment.

Ultimately most learn that it is not the best asset to buy

Steve K. · Answer

Because "Spreadsheet Magic"

Crystal Smith · Answer

Here are some of the reasons I know why some investors purchase sub $100K properties

1. They are not buy and hold investors- They fix it & flip it for a profit with target ROI's of about 35%

2. They are BRRRR Investors- We have a few clients that purchases properties in sub 100K with ARVs of $200K and can be rented for ~$2000 per month or more. They will pay cash or use private $ to acquire and renovate. Then rents it out & refnaince with the objective of pulling out all of her mone. When successful in pulling out all of the $ the target ROI is infinite. There are times when this is not possible but the ROI is still off the charts

3. I know a few people that are purchasing sub 100K properties, then selling the  property with owner financing. The owner occupant purchaser makes a  downpayment & fix the properties.  In this strategy the investor may borrow private money to purchase the property at X%, then seller finance at a rate X+% along with getting a downpayment on the home.  The ROI is fairly high here as well

Bottom line it's all about strategy, location & condition of the homes.  & in many cases the ROI is better than just parking $ in the S&P 500 or high interest savings account

Erik Estrada · Answer

Isn't it better to just put your money in an index fund? It just seems like such a small return factoring all the expenses, and potential repairs.

I guess I can see how it can help a high W2 earner offset their income.. But still it just seems like a nightmare for a few hundred bucks.

Erik Estrada · Answer

It just seems like it is much less work and less of a headache to ride the stock market than to buy these homes LOL.

I guess it can teach you RE investing, small scale.. But is it worth all the trouble?

Greg Kasmer · Answer

@Erik Estrada - I've bought a few sub 100k properties a while back, but they are now +200k or so. I think most buy attracted to the cash flow and price point (based on the capital they have available), but over time investors realize they are harder to manage, have higher turnover/expenses, as well as lower appreciation. My guess is that most investors "graduate" to higher priced properties over time rather than accumulate 25-50+ of these 100k properties. Perhaps "bundling" a few of these properties together would be the right thing to do from a lending perspective. Would you be more apt to lender if an investor brought you 2,3,4 or 5 to finance as opposed to one?

Rick Pozos · Answer

Here is a different perspective. How about if you live in the area where there are some sub 100k properties. Maybe you have lived there for 15 years and renting. You are now 35 years old. You have seen prices go from 30k for a house to 80k for a house. You want to get in now. You see some rehab type houses go for 50k because they need work. Get your cousin who does sheetrock work, your wife's cousin who works for a foundation company, your other cousin who paints for a contractor and you have a team.

If low income housing is all you know, it might be the thing that is the biggest thing in your life. And the question, "Is it really all worth it for $200 or $300 per month?" $300 might be a newer car payment for someone. It might be what changes their life!!

$200 might be what some people pay for dinner tonight, it might also be someone's month's grocery bill. $200 might be nothing to you, but might be the WORLD to someone else.

Why do some investors purchase sub-$100k properties?

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