Why to avoid < 50 k properties
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
Why to avoid < 50 k properties
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Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
9yTypical 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
338 Replies
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes9y
@Joel Owens , great post. I have seen you mention business ownership in other posts as well. I am guessing for $100,000 investment you are talking about smaller absentee owned type businesses? I have been a partner in some small business before (dry cleaning). Just wondering what type of businesses would you recommend that would have less headache than lower priced rentals?
I can definitely see the advantage of owning solid absentee owned businesses especially if you are able to get financing on them..SBA or owner financing.
One issue I see that could affect small businesses in L.A and California at least is the coming $15 hr minimum wage law. In Los Angeles it will be in affect by 2020..which is just around the corner. It seems a lot of small businesses could suffer if they aren't able to raise prices and get customers to pay those increased prices.
- Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes9y
Originally posted by @Lane Kawaoka:
David Song reason you don't want to buy 50k or under homes.
1) can't leverage them with out paying a huge percentage of transaction costs
2) many lends won't give you a loan that small
3) if you aren't leveraging you are missing out on the reason we invest in real estate
4) I have found rents under 800 attract the seediest tenants
5) as much as I don't like investing for appreciation since I am more for cashflow these homes are in the worst part of town and never appreciate nor can they be sold to a retail buyer
6) if you are going to do a BRRRR strategy then you are using up the most value able resource with is time.Just going to debunk the highlights:
3) There are a million different reasons and strategies to invest in real estate. While I primarily flip houses, at this point in my life(51) it sure feels great not to have any payments with gross rents approaching 20K. I sleep very well at night
4) I realize it is unfathomable to many of y'all that sub $50K houses can be habitable. In many areas of this country, law enforcement, teachers, fire fighters and city officials make between $30-40k per year. How much do you think they pay in rent ? A lot pay below $800 per month. I can show additional pictures of sub $50k properties that I have rented to the groups I have listed above. Do you consider them seedy ?
5) 90%+ of the sub 50K properties that I have sold have been to retail buyers and as I illustrated previously are not in the worst part of town
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Greg H.:
Originally posted by @Lane Kawaoka:
David Song reason you don't want to buy 50k or under homes.
1) can't leverage them with out paying a huge percentage of transaction costs
2) many lends won't give you a loan that small
3) if you aren't leveraging you are missing out on the reason we invest in real estate
4) I have found rents under 800 attract the seediest tenants
5) as much as I don't like investing for appreciation since I am more for cashflow these homes are in the worst part of town and never appreciate nor can they be sold to a retail buyer
6) if you are going to do a BRRRR strategy then you are using up the most value able resource with is time.Just going to debunk the highlights:
3) There are a million different reasons and strategies to invest in real estate. While I primarily flip houses, at this point in my life(51) it sure feels great not to have any payments with gross rents approaching 20K. I sleep very well at night
4) I realize it is unfathomable to many of y'all that sub $50K houses can be habitable. In many areas of this country, law enforcement, teachers, fire fighters and city officials make between $30-40k per year. How much do you think they pay in rent ? A lot pay below $800 per month. I can show additional pictures of sub $50k properties that I have rented to the groups I have listed above. Do you consider them seedy ?
5) 90%+ of the sub 50K properties that I have sold have been to retail buyers and as I illustrated previously are not in the worst part of town
Thank you. Exactly. I have nothing against California but I sometimes feel that some posters there live in a bubble, unaware of how the rest of the country exists. These "seedy" tenant ideas make me laugh. I rent to a lot of college students, often with parents making $200k+. One of my homes has a college professor. Another home is out of town retirees, eventually will buy a home but renting for the time being. The idea that everyone who wants to pay $800 is a crack head or has to live in a war zone is something only people who live in skewed areas would think.
For whatever it's worth, for all you people from California, the rest of us sit out here wondering how you even afford to live. What kind of jobs do people have to have to afford $4000 rents?
I'm not saying the California strategy is wrong; it's probably all that makes sense given that market. What I am saying, like most who object, is that there's many strategies for making money, and to declare your way is right and all others are a disaster is laughable (and kind of obnoxious).
Skyline Properties - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
Joseph,
Yes absentee owner businesses. There has to be enough cash flow going in though. Typically about 70% of businesses are owner operators. They claim 80k profit but find out they are working the business 20 to 40 hours a week or more. Taking into account paying a manager the cash flow is now 35k to 40k. If the lease is coming due soon big rental increases, machines need replacing, stores needs update of re-image per franchising agreement then there go your expected cash flow down the toilet.
I like businesses where it throw off six figures in cash flow profit and has management and systems in place. The business has been open for over a decade churning out cash like a machine it is just being sold for owner retirement, health reasons, partnership split, owner moving out of state or overseas etc. This creates usually a highly motivated owner that does not want a 2 to 3 multiple but a 1 to 1.5 multiple off of existing cash flow.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yGreg H. If you do not mind, how many property can generate 20 k monthly rent? What is the cap rate in your area? What is the capex per year?
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
What are you talking about here? Do you really believe this? I live in the Midwest and bought plenty of houses for between $30-80k that are all worth between $150-$250k now. I am not investing in land, I am investing in REAL ESTATE. I have a lot of houses in B and C class areas that gross rent $1200-$2000+. The cash flow is great and in no way is the cap ex to rent ratio too high. There is so much more that could be said. To each their own.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
@David Song, @Greg H. said $20k gross. My lowest rent single family gross rent is $15,000, with my highest at $27,000. Out of my 50+ 1-4 unit buildings not 1 is under $15,000 gross. Now not all I have purchased for $50k, but I have not purchased one single family rental for over $100k. These are all in the dreaded mid west. They are all worth over $130k right now, but even if they didn't increase one bit, that $400/month+ cash flow on each one is doing alright.
I put $100/month away for cap ex on a single family. Cap rate? I don't care about cap rate on a single family. With a mortgage they cash flow over $400 each and my cash on cash is infinite. For my mid west multi-family, I shoot for 9%+ cap rate
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yJd Martin I do not believe one strategy fits all. However, REI is all about location, even within a small area, in my view. Actually, I lived in Midwest for about 5 years. Columbus, oh. Looking at the RE prices in Columbus, the sub 50 k properties are all in pretty rough areas. Around OSU, price/sf is around $150-200/sf now. There is no more bargain left. East of highway 70, the prices drop to < 50k in many occasions. But I know that area well. That used to be a war zone. Five years ago, if you invested around the university, you win big. If you invested east of 70, your profit is less. Therefore, there is nothing about ca versus other states. Every state has its own regional characters and investment strategies. Even in Tennessee, the current prices have rebounded quite a bit. I do not know which town you invest, but if you can find <50 k properties, with cap rate (not gross rent) above 10%, that will be a nice find. Even in Texas, the available commercial properties are only around 8% cap, some even 6%. That is really not that higher than ca.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
@David Song. Right now investing in under $50k houses may not work. The market is close to or above 2006 prices in most markets, so $50k and under today in most markets will be rough areas. You can still find cash flowing apartments in Columbus that are in B class areas, which is not the case for a big portion of California.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yTodd Dexheimer Your properties appreciated because the underlying land appreciated, not the house on top of it. I think you picked the right areas in your city. In ca Bay Area, a lot of 100 year old crap house are over a million. But the structure only cost 200k -300 k to build new.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yTodd Dexheimer I think you made more profit from appreciation than cash flow, based on your description. Is that right?
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
@David Song I have made all my money on cash flow, since I have not sold. Making money on appreciation alone is a fools game.
And on the other response, the houses gained the value. The land in say 2010 on a property I bought for $50k was worth $20k, now it's worth $50k, the house is now worth $100k. I did over 150 flips and sold for more than I bought for even as the market was crashing. The land did not gain value, it was the house that gained the value.
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes9y
@Joel Owens , yeah that makes a lot of sense. I see a lot of businesses where the owner is working there and the net isn't that high so it's basically like buying a low paying job. Doesn't make much sense to buy something like that. That does make sense to focus on those established business with management in place being sold by a motivated owner.
- Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes9y
Originally posted by @Joshua Wild:
Why do some hate California so much?
Because many people in "the rest of the country" see Californians as smug, self important, arrogant buttholes whom are intoxicated with deficit spending, both personally and with regard to state government.
Pelosi, Boxer, Feinstein, The Governor, The "bullet train", $100k public employee pensions, High VerbalVolume/Low intelligence actors, Housewives of Orange County, and on and on and on.
In polite conversation here in Cincinnati, when people learn that I am a Californian, they often treat me with "Forrest Gump Like" pity. It usually begins with "Oh, I visit Los Angeles on business... the traffic, the smog, the congestion, the overcrowding, no one speaks English..." and then they quickly follow up with how smart I was to move my family to Cincinnati.
For better or for worse, Los Angeles IS California to most people. They seem to forget that while the Los Angeles basin is pretty much a toilet, San Diego, Monterey, Paso Robles, Santa Barbara, Temecula, Palm Springs do in fact exist...
California was very good to me and continues to be good to me, month after month. But the reality is, for how much longer can the State of California continue to pay police officers and firefighters $100k annual pensions??? I retired 6 days after I turned 50. I don't smoke or drink. Both my parents lived to almost 90. So I worked for 25 years and they are going to pay that pension for 40 years??? And then after I die, my wife gets 50% of my pension until she dies???
I seriously doubt it.
DL
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Larry Turowski:
The difference in cash flow will be a direct reflection of the difference in acquisition cost and the difference in expectation for appreciation. This is true of stocks, too. If neither are appreciating they should cash flow at about the same rate relative to acquisition cost. If appreciation is anticipated in one, this will be reflected in the cost of acquisition and will reduce cash flow.
At least initially.
For two properties, one acquired for $50K, the other for $500K, but otherwise alike in every other way, the difference in cost of ownership will narrow as decades pass by and maintenance and repairs costs mount.
And this is your point @David Song, I believe. If the cost of ownership narrows, then the more expensive property makes sense as a better investment as it is an indicator of likely future appreciation.
But one thing this misses is one thing. Many investor buy below market. I know investors who buy those $50K properties at $30K. Or less. They'll rent for a few years then reap in built in equity.
Some good points ... many investors buy below market in appreciating markets too ... I know investors who buy those $500k properties at $400k ... so that works well in both kinds of markets and is an excellent strategy IMO in both kinds of markets. The difference from there as you mention is that the guy that bought for $30k something worth $50k, that $20k very well may be the only appreciation he gets on that property, but will have better initial cash flow to compensate. The guy that bought for $400k gets $100k in forced appreciation, and if the long term historical trend of appreciation continues (with some ups and down along the way) then he also gets market appreciation in both prices and rents, though his initial cash flow is lower but grows over time. If the long term trend suddenly reverses itself in a sustained manner, and the $50k property shoots like a rocket to $500k and the $500k property tanks to $50k and stays there permanently, then obviously all bets are off. This is possible but in practice rarely happens (like with Detroit in the '50s for example) ... and when it does, it doesn't happen overnight ... the writing is on the wall for many, many years. Population declines, vacancy rates skyrocket, crime rates skyrocket, long term blight sets in, properties get boarded up and stay that way ... lots of writing on the wall for a very long time. There is always short term volatility that you need to be willing and able to ride out, and buying below market helps here too ... and if your focus is short term and you are not willing and able to ride out the volatility, then IMO flipping may be a better strategy.
I agree with others to say money can be made both ways to somebody that has deep familiarity with the market they invest in and can best control their operations ... and the market that is easiest to become expert in and control operations in is the one nearest to your own front door.
- Investor · Joplin, MO · Member since 2017 · 15 posts · 9 votes9yBuilding price is about $70 a square foot in my Midwest city and lots sell for 10 grand or less. Don't buy for the land but for the house. Things change depending on where you are and what you're wanting to accomplish. 50 grand house with $1,000 in rent is pretty solid numbers, no question.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yTodd Dexheimer Unrealized gains are equity, which you can refinanced out and expand. Why you only think cash as profit? If you have nice cash flow, appreciated, that is what these BRRR strategy is all about. Cash out and buy more.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yDL Martin The government just print money. No need to worry about that. One thing for sure is inflation will come soon, diluting the value of paper money. REI is one of the best way against inflation. The fed printed a lot of money in the last 9 years. They are very good at that. The minimum wage is going to $18 in San Mateo soon. The police officer are paid over 100 k -150 k here for sure.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yTodd Dexheimer It is amazing that you did 150 flips. That is a heck of a job. Super man!
- Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes9y
@joe splitrock All real estate is local and everyone has a different strategy. I put 25% down and rate is 3.875% and so PITI is $2137.43 on the 460K home.
Anyway, if you put a lot more sweat into a deal, sure you can make more than $300 positive cash flow on a $120K but I was basing my numbers are REAL experience with turnkey providers.
If I found my own off-market deal, or some disaster that needed a ton of rehab etc to allow me to buy a property really cheap, sure you can hit the 2% rule (or 1.5% for 120K property), but I'm not playing that game.
So when all of us have a message/advice for different people. My experience is most helpful to the following people
#1 busy full time working people living in California who want to be "passive" and be able to manage doing REI out of state.
#2 Have some cash to pay 20-25% downpayment for conventional loan instead of time-consuming creative financing methods.
#3 Investors who realize that cash flow alone does not create longlasting wealth but appreciation has to be part of that strategy.
#4 Tax advantages are better with more expensive properties (higher depreciation).
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
@David Song I think you missed the point on the flips. The point was that the land value didn't increase. The house value increased. The only time land value appreciates over inflation is when it's use changes or it's location becomes more or less desirable.
I own properties that essentially have $0 in land value, because the cost to build new is greater than the area values. Right now the house is worth $130,000, but you take a bulldozer to the house and I would be lucky to sell the land for $5000.
- Property Manager · Columbus, OH · Member since 2012 · 309 posts · 275 votes9y
If you buy SF homes for under 50k and have generated a good return (so far), you are lucky. It is not sustainable unless you are putting in a lot of sweat equity (both in terms of working on the property and managing it yourself). We have managed hundreds of them and seen the true numbers at scale.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
Originally posted by @David Song:
Todd Dexheimer
Unrealized gains are equity, which you can refinanced out and expand. Why you only think cash as profit?
If you have nice cash flow, appreciated, that is what these BRRR strategy is all about. Cash out and buy more.
Ok, let's use an example. I have a house I bought in 2009 for $28,000 and put $26,000 into it. I financed it for $65,000. I have been consistently cash flowing at $7000-$7500/year. That gives me $56,000 in cash flow and $19,000 in principal reduction for a total of $75,000. If I sold it today I could sell it for $130,000. My profit on the sale after commission, taxes, closing expenses, etc would be approx. $48,000.
By the way, if you had read my post before you would have realized that I did pull all of my money out of the properties - something you can do when you buy properties under value.
- 9yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
After reading the initial rationalization, I can't figure out the "why?" at all. The first statement made seems to be a contradiction to the base argument.
"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 comparison is not an apples to apples comparison.
To me, that tells me that if I buy the same house for $50k that someone else is paying $200k+, I'm getting a better deal. If the replacement cost is $150k/sf, then don't tear down the house and rebuild it.
Also, if I can buy the property for $50k, I will cash flow much higher than someone that bought that same house in a market where they cost $225k.
There are three very important reasons why the entire position of "no buying $50k houses" is wrong:
1 - The original statement is a casserole of entrance and exit strategies which don't go together. For example, replacement cost of a house you are using as a rental is immaterial.
2 - Markets are different.... quite often different where the same 2 houses across the street from eachother aren't worth the same because they are in different markets. You can't compare two identical houses, using a market in California and compare it to a market in the Midwest, and treat them both the same.
3 - Probably the most important reason this whole thing blows up is this. Not every house is a good investment everywhere, and not everywhere house that is a good investment is such by using the same investment strategy. Typically, the more expensive property would most likely be used as a flip, where the $50k house as a rental. This means, and this is critical, you would be buying these two different, examples different ways. This, in the end, is what tells me the original comparison is not comparing apples to apples.
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