Why to avoid < 50 k properties

337 Replies

If a house sells 50 k and rent for 1000, it meets 2% rule. But actually I think it is not necessarily a good investment.

Assuming SFR, 1500 sf, 3 be 2 ba, in small Midwest town. Move on ready. 30 years old. No renovation.

Why?

A typical house cost $150/sf to build.

1500 sf house cost 225k.

Therefore, if a house sells for 50k, the land is worthless. If a house sells for 1 million, the land is with about 700k.

We are investing in land, not house.

The house will depreciate over time. The capital expenses to repair the house will be detrimental to a 50k house. The ratio of repair cost to total rental income would be too high.

A 1500 sf house in Detroit and San Francisco will need about the same repair budget. However, that amount divided by the rental income would be very different.

Furthermore, because the land has no value, the repair cost will be throwing money into water. Since a new house there does not worth much.

To the contrary, remodeling in a tier one market would add value.

Therefore, I intend to believe that 50k houses are not good investment.

It all depends on your investment philosophy. We know a 50K house at $1000 rent should produce positive cash flow for a investor. We also know a 1M dollar home in CA will never produce positive cash flow.

One market is for investing in cash flow the other is speculating on appreciation. Simply a different approach to a common goal of making a profit.

Neither investor differentiates in regards to the allocation of value between land and home although I am certain the insurance company's may have a different opinion on that subject.

Personally I will choose 20 properties valued at 50K per door every day of the week over 1 valued at 1M per door.

groundhog day...CA is awesome and every other strategy is unprofitable...we get it

Originally posted by @David Song :

A typical house cost $150/sf to build.

1500 sf house cost 225k.

Therefore, if a house sells for 50k, the land is worthless. If a house sells for 1 million, the land is with about 700k.

We are investing in land, not house.

The house will depreciate over time. The capital expenses to repair the house will be detrimental to a 50k house. The ratio of repair cost to total rental income would be too high.

A 1500 sf house in Detroit and San Francisco will need about the same repair budget. However, that amount divided by the rental income would be very different.

Furthermore, because the land has no value, the repair cost will be throwing money into water. Since a new house there does not worth much.

To the contrary, remodeling in a tier one market would add value.

Therefore, I intend to believe that 50k houses are not good investment.

 Phew! You had me worried there for a second. I thought you might start investing in good deals out of state and become more competition for the rest of us. I feel better knowing you'll be staying in California!

I invest for cash flow. Part of this reason is the market I live in, part of it is because I don't have a lot of money, and some of it is because I can grow quicker.

For my area, that wouldn't be a good deal. I can buy a $10,000 house and rent it for $600-$750/month. At minimum I could take that same $50k and bring in around $3,000/month. 

What is actual repair and maintenance cost for a 50 k house? Is that really lower than a million dollar house, assuming same lot same interior sf.

New construction cost are not that different between states.

The land value are the difference.

Investing in 50 k houses are like investing in mobile homes, since no value is in land. You will get high cash flow initially, but when you need a roof, or some windows, that cash flow may be reduced quite a bit.

In other words, you are investing in the house structure, which is a depreciating house.

My criteria is that the average sale price per square foot should be at least 150-200/sf, higher than the replacement cost. This way, if you need to remodel, the money spent actually is worth more.

The cap rate may be initially lower than 50 k houses, but you will have better neighborhood, better land value.

Ultimately, it should be a balance between cash flow and appreciation.

High cash flow, and high appreciation. Appreciation is more important.

To be honest, I just recently realized this and want to share my thoughts.

If you believe that 50 k houses are your niche, then keep doing it.

My selection criteria is just different. The land must appreciate based on its location, the cash flow must be neutral or slightly positive. The focus is on location and potential long term appreciation.

50 k houses in a bad neighborhood is a liability to me. Everyone has limited time. Each house need your time and attention. If there is little value in land, I would rather buy an even cheaper mobile home for 10 k. That will cash flow even better than the 50 k house.

David Song.  I agree with your sentiments...but not for the same reasons exactly. (land value argument)

I started investing at the 100K level...but now doing it at 300K+ range in B+ to A properties in B+ to A neighborhoods

it's economy of scales.     it's the argument you can make with multifamily >> single family home in terms of cash flow and less work.

It takes much less work to manage/buy a single 4plex at 400K then FOUR SFRs worth 100K each. You are much more likely to have lower repair costs and definitely less Capex (one roof vs 4 roofs).

Lastly, I've done this with larger SFRs.   I bought A property in A neighborhood in Atlanta - brand new construction for $460K but rent it for $3000.   Due to great rates, I'm able to cash flow $900/month and have $500 principal paydown.   

Compare that to 3 x 120K homes that cash flow $300/month x 3  = $900 and principal debt paydown of $100 x 3 = $300/month.     

$1400 vs $1200 and less work managing 1 home vs 3 homes.   Lastly much greater appreciation potential in a A property in A neighborhood than C class home for $120K.

In some parts of the country $50,000 can buy you a pretty decent house. Most likely not a brand new house..but it doesn't mean a $50,000 is a total dump. 

Another thing you hear all the time that "Midwest properties don't appreciate" but as BP member Michael "Swanny" Swan has mentioned on his recent episode , his Ohio properties have appreciated pretty significantly. 

https://www.biggerpockets.com/renewsblog/biggerpoc...

I have also seem that many other parts of the rust belt have appreciated as well. Many downtown neighborhoods in various cities across America are undergoing a revitalization as more people want to live in walkable areas of cities. Cincinnati is a great example. Pittsburgh is another. 

Historically California has been high appreciation. It's possible that prices might go even higher and higher in the near future but it's really speculation. 

I see homes in L.A is areas many consider "'ghetto" going for $500,000 or more...makes you wonder.

Personally I think there would be a better chance of a $50,000 in a gentrifying neighborhood somewhere in the Midwest going to $100,000  versus a 'low priced' property in CA going to $1,000,000 . 

The numbers are bigger but it's the return that is important. 

The mainstream media is focused so much on what is going on in CA or New York but there is a lot happening in the country that never makes news ....until it's too late. 


@David Song

I guess I should start by saying it does not cost $150 a square foot to build the average home in North Texas.

Every market is completely different.  Believe me in my market every investor wishes they could have bought more $50,000 houses three or four years ago.

Here are the reasons...

Say I bought 20 $50,000 houses in my market 4 years ago.  That would be a total $1,000,000 for total purchase price.

The houses would be worth about $3,000,000 now.  Yes... I said the homes would be worth $150,000 each now.

Unlike California, our rents keep up with values, so a total rent collection would be around $144,000 the first year, $180,000 the second year, $260,000 the third year,  $312,000 the fourth year.  That is a total of about  $896,000 over the four years including vacancies which are better measured in hours than weeks and certainly not months.

Why do you assume appreciation and cash flow are mutually exclusive?

PS In my market, we hope people break the lease because it allows us to raise the rents faster.  

If you invested in a single $1,000,000 home in San Francisco home four years ago what would you have now? 

Originally posted by @Joe Kim :

David Song.  I agree with your sentiments...but not for the same reasons exactly. (land value argument)

I started investing at the 100K level...but now doing it at 300K+ range in B+ to A properties in B+ to A neighborhoods

it's economy of scales.     it's the argument you can make with multifamily >> single family home in terms of cash flow and less work.

It takes much less work to manage/buy a single 4plex at 400K then FOUR SFRs worth 100K each. You are much more likely to have lower repair costs and definitely less Capex (one roof vs 4 roofs).

Lastly, I've done this with larger SFRs.   I bought A property in A neighborhood in Atlanta - brand new construction for $460K but rent it for $3000.   Due to great rates, I'm able to cash flow $900/month and have $500 principal paydown.   

Compare that to 3 x 120K homes that cash flow $300/month x 3  = $900 and principal debt paydown of $100 x 3 = $300/month.     

$1400 vs $1200 and less work managing 1 home vs 3 homes.   Lastly much greater appreciation potential in a A property in A neighborhood than C class home for $120K.

Hey Joe. I like your strategy and agree with your content. I have one exception...$900 in cash flow appears to be inaccurate. On the $460k house, your expenses (including management fees), vacancy, and cap ex reserves should be at least $1000 per month (likely more) and the P&I payment has to be around $1700. Management fees should be included whether your self-manage or not...you never know when/if you will need it, plus you should be compensated for your time managing the property. The house is new but will need cap ex over time, especially a nice house like that....needs to stay modern to meet $3k per month renters expectations. A house like that can be a great investment and the IRR comes from principal reduction and appreciation but not from the cash flow.

@Michael Biggs you seem to know your market well, and Texas is a state that I have been heavily focusing on. Would you be available to chat about your area a little bit?

Your region plays a big part in your philosophy. Where I live I can purchase a $50k to $80k house that needs $20-30k in repairs to make it "like new", and have a house worth $130k - $160k, so I have anywhere from $50k - $80k in equity from day 1. There is virtually zero risk that the market will crash to the point where my property value will drop by 50%. In California, if you invest $500k in a fixer that needs $100k in rehab (higher price requires higher quality finishes for similar scope of work), that home needs to be worth $1.2 million to have that same security. My $50k houses will have a higher return on my initial investment, and have lower overall maintenance costs. Your house may appreciate more in dollars, but it could also, just as easily depreciate and leave you underwater. Real estate investors that went bankrupt in 2008 were all investing based on appreciation, not cash flow. I learned from their mistakes, and invest based on cashflow.

Jason DiClemente, AIS Properties LLC | [email protected] | (267) 520‑0454

@Jason DiClemente I'm with you man. 

Price for a new home in my area is around $80-90 sq ft.

I bought a nice house for $30,000 and now rent it out for $800/month. Should have rented it for more.

This same house would easily be a couple hundred thousand out in California.

I also learned to invest for cash flow and that's all I invest for now.

Typical perception from the West Coasters that all Sub 50K properties are dumps in the ghetto.  My worst rental exceeds 2% and some exceed 5%

Purchased 2017 for less than $30K

22K Purchase in 2016

14K Purchase in 2016 on 3 acres rented for $850

I can go on and on.  Blanket statements just do not work in real estate investing

Classical valuation is very simple, the quality of the underlying asset is important to some extent, but the real issue is the value of the cash flow. To the extent an investor is really just acquiring streams of cash flow, I would recommend focusing on scrubbing your proforma numbers down to expected cash flow for any level of investment. If you think substantial capex will be required for the cash flow to be reliable include it in your proforma.

Most of the time I find people that don't like smaller investments are mostly taking issue with the amount of time they are spending on administration for the volume of profit. I think the best way to bake this into the analysis is putting an honest number in for the value of your time. Going about it this way will build in a "hurdle" the small projects have a harder time making.

Originally posted by @Jason DiClemente :
Your region plays a big part in your philosophy. Where I live I can purchase a $50k to $80k house that needs $20-30k in repairs to make it "like new", and have a house worth $130k - $160k, so I have anywhere from $50k - $80k in equity from day 1. There is virtually zero risk that the market will crash to the point where my property value will drop by 50%. In California, if you invest $500k in a fixer that needs $100k in rehab (higher price requires higher quality finishes for similar scope of work), that home needs to be worth $1.2 million to have that same security. My $50k houses will have a higher return on my initial investment, and have lower overall maintenance costs. Your house may appreciate more in dollars, but it could also, just as easily depreciate and leave you underwater. Real estate investors that went bankrupt in 2008 were all investing based on appreciation, not cash flow. I learned from their mistakes, and invest based on cashflow.

 Very good point. There just aren't those type of deals in CA now. You're talking about $60,000 or so equity on a purchase price of 50-80k . I'm hearing about people flipping properties in CA making less than $60k but they are putting up $500k or more like you say. 

I think there are definitely going to be some people 'holding the bag' when the music stops. 

Originally posted by @Greg H.:

Typical perception from the West Coasters that all Sub 50K properties are dumps in the ghetto.  My worst rental exceeds 2% and some exceed 5%

Purchased 2017 for less than $30K

22K Purchase in 2016

14K Purchase in 2016 on 3 acres rented for $850

I can go on and on.  Blanket statements just do not work in real estate investing

 Exactly my point and why I focus on the homes under $30,000. 

Those homes would be $250,000+ homes out in Cali. In some parts they would be over $500,000.

I realized how lucky I am to have the market we have. It's one of the main reasons I dove in.

@Greg H.  I'm definitely not one of those West Coasters that thinks sub 50k properties are ghetto dumps. I have purchased some nice Sub 50k homes out of state before. But I agree this mentality is prevalent. I guess that's not really a bad thing since it means less competition. 

The photos you posted look really nice and a lot nicer than many of those 'cheap'  $500,000+ homes I see in L.A hoods. 

What area those homes located in? 

I have family that recently moved to Killeen,Tx, not too far from Austin.  I was looking at property there. Prices seem to be very reasonable there but not sure how good a market it is for investing. It sounds like there is quite a bit of turnover due to the main employer being Fort Hood. 

A $1,000,000 home in CA could go up in value . But it could also go down to let's say $800,000 pretty easily (a 20% drop) after being purchased and stay below $1million for years. We saw housing prices go down more than 20% the last crash. Even a 10% drop would be $100,000 underwater and that would still hurt pretty bad. 

A $50k home doesn't have that much to drop. 

Threads like this always seem self-serving to me, ie "why I'm smart and you're not". Unless the OP has massive experience buying 50k houses all over the country and then losing his shirt, I fail to see how he could accurately project that his California strategy is better than my Tennessee strategy. 

All real estate is local. There's no such thing as "one size fits all" in real estate. When I see people making 50k on flips in California, on properties they have 750k in, I think they are crazier than hell, when you can do that or more in Atlanta, KC or Dallas and have 1/4 of the equity invested. When I see people owning 800k houses that they are renting for $3500, I think they are crazier than hell. 

I don't think there's anything wrong with that California strategy if it works for you, but don't be so smug about it. Two things I know for sure:

1. There are a lot more people that can afford to rent my house for $800 than can afford your house for $3500;

2. I can lower my rent and stay afloat far easier than you, because I need less to be solvent.

You know that big, vicious recession from about 10 years ago? Where I live, no one even noticed. Everything continued on as usual, property values never dropped and there were hardly any foreclosures.

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