Poss. deal but properties are really cheap. Is that a bad thing?

Question

I've read some articles on BP about buying properties that are very low cost. Mainly that they attract certain kinds of tenants and turnover is higher. Well there are 2 properties side by side 2/1 each and both are listed for 34K each. They both are occupied with long term tenants at 750 / month each.

The numbers work at asking price and would net about 330/month each in profits and a 34% CoC ROI each. Now I believe they are both short sales as well so I could offer 30K each or less and I think they would be accepted.

The question is, if the numbers work well would you still shy away from truly cheap properties for the reasons stated above?

Jay Hinrichs · Answer

@Robert Fountain these smaller towns that are not on the radar and have massive turn key operators can produce.. and the properties can be this cheap .. as they will always be that cheap. so you need cash flow to make sense of them.

but that price point in say Memphis.... or Atlanta or Chicago or KC is going to give you some headaches.. but if you live there know it can self manage it .. not a war zone or hood.. then this can be a nice thing

Chris Erwin · Answer

@Robert Fountain I would check with local property managers/Realtors to get a feel for the area if you are not familiar with it. You could check out some raw data in terms of crime reports on Trulia. I would say just because they are cheap, doesn't mean they are bad properties. Make sure whoever is selling them can provide a legitimate rent ledger showing rent is being paid on time. I would also ask to see the lease agreements and make sure there are active leases involved with the properties. You don't want to buy these to find out the seller just put a warm body in the property to claim they are rented and performing. Happy investing.

Mike O'Connor · Answer

I agree with a lot of the previous comments. I would definitely want to see a ledger showing that the rents are being paid on time as in this price point, that is likely not the case. I target this type of tenant with multifamily deals, but there are enough tenants paying on time to hedge against those that are late - with a SFR, you either get paid or you don't, so keep that in mind.

I would also strongly recommend an inspection to make sure that there are no issues that don't meet the eye. It would also make sense to run title to make sure there are no liens attached to the properties.

If all checks out, I say go for it... it will certainly come with headaches, and it may make sense to hire a management company that is familiar with this type of property.

Mike

Robert Fountain · Answer

Thanks everyone for your feedback. I'm going to schedule a showing of the properties and see what they look like.

Mike D'Arrigo · Answer

@Robert Fountain I highly caution against these cheap properties. They look great on paper but that's about it. You can expect high vacancies, rent not paid, a lot of damage and vandalism. Other than that they're great. I talked about this on my show. You can find a podcast of it on my website. Just look for the 11/24/2014 episode. Feel free to reach out if you want some more insights.

Chris Erwin · Answer

@Robert Fountain Just do as much due diligence as possible. I would highly recommend doing property inspections on these as well.

Robert Fountain · Answer

@Chris Erwin thanks for the advice. I'm definitely familiar with the area so that's not an issue. I'll ask the listing agent for the rent ledger and leases. It seems too good to be true that i could possibly get 2 rented properties for about 60K

Poss. deal but properties are really cheap. Is that a bad thing?

Poss. deal but properties are really cheap. Is that a bad thing?

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