Re: Why I Don't Like Cheap Properties

58 Replies

I don't agree that rent ratio is deceptive.  It's like saying the price or the rent is deceptive.  None of these factors operate in a vacuum, but instead they operate in concert.

And I like C properties but not cheap ones.  You collect $700 rent (hopefully), pay taxes, insurance, and water, then have like $350 left over.  

Oops the furnace went out and now I just lost my profits for an entire quarter!  Oops tenants not paying rent so I gotta pay 1k for lawyers to put them out!

Originally posted by @Andrew R.:

You have to use caution where you buy your inexpensive properties. But yes I would rather buy two houses for 50k each than one for 100k. 

Caution isn't the right word.

You need to understand property; how the property has been built, what replacement costs really are, what repair costs really, what potential problems are, what potential problems could be and so forth.

It's about informed desicion making, and so many people (and a lot on BP) are not informed in the first place, yet call themselves 'investors'.

The number of people who replace things when it's repairable. The house we bought the other day - the investors who dropped out complained it needed a new central AC system. If they knew anything about property, and they call themselves "investors", why didn't they just run a coolant check? Takes 10 minutes to check it. It's low on coolant, so no wonder it doesn't cool anything.

Property investors must be the only 'profession' where the supposed professionals know nothing about the actual subject they apparently invest in.

I like this discussion.  It proves that your real estate business reflects your unique abilities, skill set, strengths, tolerance, and goals.  Some people can make money with cheap properties some can't. 

Originally posted by @Ericka Parrott :

I like this discussion.  It proves that your real estate business reflects your unique abilities, skill set, strengths, tolerance, and goals.  Some people can make money with cheap properties some can't. 

Cheap properties are no different to expensive ones. The water heater in a $300k home is still the same one in a $30k home. The front doors are still the same, they have a door lock, they swing back and forth, but the $300k home will have fancy glass in them, and occasionally the cheap one will have bars.

People think that the cheap properties have lower class tenants in them. Well, they will if you aim for lower class tenants, plenty of them around. If you don't want cheap *** white trash tenants, don't put them in your property in the first place!

However, if you put the right tenant in, you get the experience you're looking for, eg someone who doesn't beat the house to death and still pays their rent first of the month. You want a nice tenant applicant, then your cheap house has to be nice. Nothing says that a cheap house cannot be nice.

It's a mix, nice houses attract nice tenants. Slumlords with slum houses get trash tenants, (and can't work out why!)

@Dooreuhn Cee

If you use rent ratio as a sole metric, I submit in my opinion that it is deceptive...the text was viewing rent ratio relative to ROI..even at that; the latter has several variants used in the industry..

Your points are noted..

Thanks for the contribution.

@Mike D'Arrigo

Thanks for your contributions....while I agree that there could be opportunities in the cheap properties; unfortunately, it is not for me. I do not have the capacity to handle the stress from the distance....PM will not perform beyond the market...

I have a few rentals (YUCK) pushing a 30 to 40 percent return.  If I'm less than a three year recapture assuming a 75% vacancy why not.  

@James DeRoest

  from the sounds of it your very hands on and self manage... that is the optimum way to run "cheap rentals"  out of state its really a crap shoot and the term turn key buy it and let if perform.. is not really applicable to those asset class's regardless of PM or any other individual... your dealing with that asset class tenants and they are generally more transient and subject to lifes ups and downs more than better asset class properties.. there is no question that a hands on local person who knows his or her &%$& can make low value assets work its a job no doubt but hey your working for yourself right.

Now since we know your stance on wholesalers how about us slimmy HML and developer types do we get a some love !

@Michael Quarles

  CA rentals at what you describe are gold... even I who hate landlording would sign up for that one !!

Originally posted by @James DeRoest :

Cheap properties are no different to expensive ones. The water heater in a $300k home is still the same one in a $30k home. The front doors are still the same, they have a door lock, they swing back and forth, but the $300k home will have fancy glass in them, and occasionally the cheap one will have bars.

The $300k house might have a 50-gallon water heater, or a tankless, which are more expensive than the standard 40-gallon water heater.  The $300k house will have a $1,000 front door set while the $30k house has a $150-$200 steel door that may or may not have a little glass area in it.

Generally to rehab a $300k home you're going to spend a lot more than you would on a $30k home.

@Jay Hinrichs

Point well made: you can sweat the cheap property if you are hands-on with booths on matter how much success you make out of it, its just a "job".... unfortunately, I am not in RE for a job..If its not passive and gives me time to live the lifestyle I choose, then its just any other job...

Thanks for your  usual deep insights! Most appreciated.

@Dawn A.

  you crack me up.... on the 300k deals we do routinely we put more than the cheap houses cost into the rehab.. Even there in the mid west.. if you have a nice little pocket were houses will retail .. you can buy a cheap house but to make it retail ready you will put 30k to 75k into it...

STeel doors are  a must for tenant security in most low value areas.. just like you need to cage your condenser unit.. or glass block your basement windows etc. etc.

What amaze's me in the Chicago area is what they have to do just to work on the assets.. Not sure if its that intense in Milwaukee but they use these dawg systems to secure the asset so they can work on them. and a steel front door that would take the Jaw's of life to break open..

Originally posted by @James DeRoest :
Any idiot can buy a $100k property and rent it. Thats not investing. That's like buying Apple stock and calling yourself a market expert.

That really depends on when you purchased Apple stock ... when it was $22/share, folks had the same opinion of it as you hear about sub-30K houses/pigs.

@Roy N.

 no correlation.. Sub 30k pigs are not going to buy Pixel works for a song or corner I tunes or the I phone or I pad or any of the other I products.. When I was growing up Cupertino was a small farming town.. Stevens creek Blvd. ended there it then became gravel Hwy 9  ( now De Anza BLVD) was also gravel at this GREAT intersection.. Hwy 280 was not built yet.. And there was a feed store on one corner and a Blacksmith and Catholic church on the other.. now fast forward anyone who has an I phone If you look at the default setting on the map its apple headquarters off of Hwy 280... Stevens creek and Hwy 9 are braced by Apple towers and headquarters.. the home that my parents bought in 1972 for 30k is now worth 1.5 to 1,8 million...  but nice thought thinking Ohio will come back to CA values.. LOL

@Jay Hinrichs

I disagree.  When Apple had sunk to ~$19-$25/share in the early 90s, the only thing that stopped its spiral was cash from its nemesis ... they weren't buying anyone at that point and many of the "experts" were penning Apple's obituary.   Not so different than buying a rust-belt 30K property.

Now, with the privilege of hindsight, Apple at $22/share was a good deal ... just too bad I sold most of it around $100 ;-)    The 30K rust belt house ... one never knows :-)

Come on, everyone likes buying cheap properties. They just don't like them in cheap property neighborhoods :)

@Roy N.

  But One can dream!..

 I had an office in Next computers building... there is no confusing silicon Valley with anything related to small town mid west.. When Jobs bought Pixar that was a little later but that was a huge move

@Jay Hinrichs

 Not to go off topic but it really interesting to hear how Cupertino looked 40 years ago. I live in the area and drive by Stevens creek blvd everyday.

NA Onyido

I feel that to manage the 30k to 50K properties you need to be local or be very lucky with finding the right PM. Not saying it is not possible but very hard. If I ever considering buying out of state I would prefer the B class properties than C. 

Great strategy James with the on-time rent incentive. 

Keep in mind that just because you buy a B Class property, got a good PM to manage it, and a great tenant does not mean everything is going to be easier and less of a headache. There is no guarantees in this buissness and remember that nothing is ever as it seems. Trust no one....well maybe a little trust...but keep your eyes wide open!

I am new to investing and I am trying to learn as much as I can as fast as I can.  I am planning to buy my first property before the end of the year.  Can someone share their Excel docunent with me or list which shows line items needed to analyze whether a purchase is good.

I make my living buying "cheap" properties. Buying cheap properties doesn't mean buying run down C/D class properties. To me buying cheap properties means, buying great, undervalued properties that once fixed up will be worth a lot more.

I am selling a TK property for $70k to a LA investor that I bought cheap and the appraisal came in just fine.

The market is heating up, so it's harder to find good, cheap properties than it was a a year or so ago, but they are still out there if you look hard enough.

@Daren H.

@Sharad M.

Thanks for your contributions but the text was not in specifically calls out the context of the cheapness with respect to the neighborhood...

cheap is good only if it makes sense.

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