Why to avoid < 50 k properties

338 Replies

@Matt K.

OOS REI is fine if you know what you are doing. I thought about that and have not invested in any OOS yet. Maybe someday.

Currently, if I invest OOS, I will buy mobile home parks rather than SFR or apartments. I want to invest in land, not houses.

Also, I want to know the area and have some indication for job growth and population growth.

Even though I am a licensed GC, I do not like to deal with daily house repairs OOS, even with a onsite manager. There are too many potential issues associated with that.

I'll ask this over and over.... How is investing oos any different from a research point than what you'd do in state. Modesto Stockton fresno... none of those are documented nearly as well online as popular markets

All depends on the area. In my area you can buy 50K houses all day. 1000-1,200 square foot in b/c areas. They rent for 750-800.00 a month.

You can buy houses that need rehabbed for 25-35K. Put 20-30,000 in them and sell them for 100-120,000. A local investor buys sells 10-12 of those a year. 

Is it like that every where, no! 

@Jay Hinrichs

Thanks for giving out some examples for land value. It appears a lot of folks on BP still have little clue about lot value and house value.

When I pick SFR to buy in Bay Area, I always pick large lot small houses.

For example, the average price/sf in Palo alto is $1200/sf, base on finished sf.

If a small house has only 1000 sf but sits on a 6000 sf lot, it might sell for 1.2 million.

However, there is potential to add another 2000 sf onto the lot, based on 0.5 FAR.

The construction cost for 2000 sf is about 300k, assuming $150/sf.

The finished product will profit about $1000/sf, or 2 million.

That is the value of the lot.

That is also why smaller houses sells for higher price/sf, assuming same lot size.

First time home buyers tend to overlook the value of the land, and focus solely on the house itself.

Can you explain why lots just don't sell well in the east bay then?

@Matt K.

The reason I invest in Modesto now:

1: better cash flow than Bay Area
2: 1.5 hr driving, still can go there if needed
3: we start to see a trend of development in the Hayward toward Livermore area.
4: east of Livermore, tracy will benefit quite a bit.
5: east of Tracy, Modesto area.

I am thinking that BART station in Pleasanton caused significant improvement in Livermore area. Next stop would be Tracy.

I have tenants who moved from Newark to Modesto already, to save on their rent.

I know that a lot of residents in Tracy and Modesto area actually commute to Bay Area to work. This is a fact.

That is why I am investing in Modesto and Tracy areas now.

I do not know any OOS market very well, so I can not comment on that.

Austin might be good, but I have never been there.

John Burtle

If I live in your town, I will probably do the same.

Each market has its own strategy.

I actually got started by flipping a raw land purchase of 90 acres. I was planning to live on it. The farm had been over grown and let go for about 30 years, it was an older couple who listed the property in the wrong listing (twice, I told them about it the first time.)

Long story short, I bought the place for $42,000. I timbered the property for a profit of $12,000. I did a lot of work myself over a year and a half, then sold the property for $60,000.

I totally understand what you guys are saying in terms of land value. Within my own market I will buy one house over another based on the land/location of the property.

it's also fact those people commuting will leave once it's no longer cheap. But I'm not even arguing if Modesto is good or bad, I'm saying that skill set you used to learn about Modesto works the same anywhere.

Now I've said this many times if you are the diy type OOS probably won't ever be a good fit. The travel costs to do work is too expensive for that to make sense. On the flip side many people would use a property manager just because they feel the value of that service is worth it. For those people Modesto may as well be any other city in the entire us (granted travel should be considered). I can get direct flights to kc from sfo or oak for 2-300 all the time.

@Matt K.

SFR Lot in east bay sells for around 150 k to 300 k, depending on its location and zoning.

Larger lots sells well over a million.

The lot value is the finished product value minus the construction cost.

For example, in Hayward, the finished price is around $300-500/sf.

A 5000 sf R1 lot sells for around 200 k.

I have a 7500 sf lot in Newark, bought in 2011 for 150 k. Zoned for medium density.

I have a duplex plan submitted for about 4000 sf, 2000 each unit.

If finished, the duplex should worth around 1.2 million.

The construction cost would be around 600 k.

You can figure out how much is the land worth.

I see them listed at that but they don't seem to sell that well. I actually found one in el Cerrito was ready to build tiny house for nice profit... But river runs under lot and you can't build :(

I've been casually following lots in Oakland to walnut creek and seems same lots always for sale. Plus construction loans are a HUGE pain and not many people care to even try to make it work. 

@Matt K.

The difference between OOS and Modesto:

Personally, the difference is that I know Modesto area much better than OOS area. If I know another market well, I will invest there too. Everyone has different background and social circle, you might know somewhere that I have no clue about. By all means, make your own decision.

Right now, only for land, not houses. Since I do not like headaches.

@Matt K.

When you are looking for lots to buy, you need to pay attention to:

1: location, access road?
2: zoning, residential or other?
3: utility, is there utility hookup close by.
4: neighborhood price for finished house

There are actually very few buildable lot in Bay Area. Many of those lots listed actually can not be built upon.

That is why they are cheap.

@Michael Biggs . It's much the same way in Whitesboro. I own 10 SFR there and the rents are crazy. Down the street from one of mine was a 800 square foot, 1940's 2br/1ba that had a sign on it for 950 a month. I said no way. 3 days later people were moving in. This house probably sold for 40k or less.

@David Song this has been an interesting discussion . It sounds like the bottom line is you are saying to invest in what you know . It sounds like you have done a lot of research on your markets and you are confident in those markets.

There are definitely many ways to invest and do well .
Personally I've seen from looking at sales prices that it's not just CA and NY that can appreciate a lot .
I mean how many people in CA probably laughed that Portland , Austin and Seattle would of appreciated so much . I hear about the prices there now and they are similar to L.A prices and sometimes higher .
At one point people wrote off New York when there was high crime and many problems there and people were able to brownstones in Harlem for next to nothing they are now worth millions . The city was just looking to basically give them to people that would maintain them
But who was "crazy" or "stupid" enough to buy them ?

@Joseph M.

I think I will mostly invest in areas within driving distance. Does not matter where you live.

I lived in Columbus, Philadelphia, north New Jersey, Boston and sf Bay Area. I think there are opportunities anywhere you live.

As for bad neighborhood, I always invest in relatively bad neighborhood, that I will not like to live.

However, that does not mean I am willing to invest to too low price market.

If a large city has average sale price under replacement construction cost, that is an alarm to me.

If one part of the city is low, but next neighborhood is way higher, I consider that an opportunity.

You have to know the areas really well.

I started buying REOs on the peninsula in 2009. At that time, I knew very little about REI nor construction.

3 years later, got my broker license.

2013, got my GC license.

We have looked at hundreds of REOs in Bay Area at that time. Recently we moved our focus to east bay, and further east.

I make my own investment decisions based my gut feelings. Without knowing the area, it will be difficult to make those decisions.

I was a newbie 8 years ago, and stumbled into REI. At that time, I wish there was a site like BP to help me.

I made a lot of mistakes looking back. However, we fought through it.

I learned a lot from seasoned investors on this site like @Jay Hinrichs .

There seems to be a high percentage of newbies on BP now.

I hope that they can avoid the mistakes that I made.

REI requires time and gut. It's not for weak person. Every decision you make will change your life, win or lose.

Every purchase is a fight with the seller, the agents, the city, and ultimately yourself. Did I make the right decision? For me, that is the case until today.

Even though every purchase we made was profitable, I think I had made some major mistakes, due to lack of knowledge.

As we move from SFR to apartments to mobile home parks, there are still a lot of things that needs to be learned.

I just recently learned a new trick from an old guy on mobile home flips. Not traditional fix and flip. But switch the mobile home.

Anyone knows how they do that?

This is a good debate; ultimately, I think it boils down to individual preference. There are a lot of ways to make money in this game.

I have five ~$50k and under SFR in my portfolio, and they each rent for more than $1000/mos. All but one of these properties have appreciated nicely as well. Further, I have found the maintenance expenses similar to my $100k+ investments.

I'm one of those who invested in Harlem when you could buy for nothing and saw my investment quadruple - that was my first real estate purchase. That early lesson taught me that just because a place is "cheap" or deemed bad by others, doesn't mean that it doesn't have value.

It's a combination of gut feel and data analysis. If you go to an area and see a ton of great attributes, dirt cheap prices, solid schools, solid rents/tenant stock, close to public transit/desirable areas, whatever...why wouldn't you jump on that? But that's just me. If I had millions to work with, perhaps my strategy would shift to the stuff the OP is talking about.

I think $50,000 houses are fine. It's generally when you get down to around $20-30,000. But of course, the main question is how is the neighborhood? If it's a war zone, it's going to be very tough to cash flow.

@Ericka Grant

Is there any place with good school, nice neighborhood, and under 50 k SFR?

If there are any, please let me know. I will jump in.

That's an interesting point about land appreciation. I've read articles mentioning the same thing, it's all about "location location location", land appreciates and the building depreciates. However, is it really true that these plots of land in the midwest, south, Detroit, etc. are worth nothing? If you buy a $20k house in the midwest and if your house burns now, I wonder how much you can sell the land for...

@David Song ironically, very near the area you dismissed. There are some awesome deals to be had in SUBURBAN Detroit. The areas we focus on have good housing stock for ~$50k, solid schools (5 and above for elementary, middle, and high school), and the areas are safe with plenty to do: malls, airport, movie theaters, and restaurants within 5-10 mins. I won't mess with the city of Detroit as an out of state investor.

Also note I said solid schools, not good schools. I've found that as long as the schools aren't red/below 4s or 5s, good renters will still consider an area. Our latest addition was a short sale- 3/1 for $53k, all appliances included, needed $1k of minor cosmetic work to be move in ready. we had 5 applications at $1,050 within 2 weeks. 100% of our tenants in this area are airline employees.

The downsides of this area: insurance is very high in MI and because it is cheap to buy, most renters with good incomes have lackluster credit. If they didn't, they would be buyers. Our niche has allowed us to mostly avoid bad credit folks but it is definitely a concern in these less expensive markets. We'll see how it goes. Our focus has recently shifted closer to home but the MI properties have been good investments thus far.

@Liwen Gu

You can check the land price in those areas, e.g., Detroit.

The city is demolishing the house and turning them into public parks.

If the city used to have a large population, like Detroit, and has a huge stock of houses to accommodate that large population. When people moved out, there is a surplus of houses than people. This is when REI turns dangerous. You can lose everything. The city is actually demo the houses and turns those land into parks.

If the city can keep doing that, it might turn around. But you needs to be local to know which part is turning. If you are OOS, it will not work.

@Ericka Grant

You might be doing the right thing.

I just do not have the time to travel OOS to figure out the local economy.

If the areas are turning around, that will be a good deal. As long as it cash flows a little, not negative.

I would pick areas with at least $150/sf finished product range, or with the potential to reach that in near future.

Some suburb of Detroit might be better choice than downtown, even with lower cash flow.

Why do some hate California so much?

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