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
- Rental Property Investor · Cleveland, OH · Member since 2016 · 653 posts · 769 votes9y
I think the moral of this thread is the same as the answer to almost everything in real estate... "It depends"
:)
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ 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.
There's nothing to cash out when you are buying so cheap you pay cash for the homes.
- Real Estate Agent · Hanover, PA · Member since 2017 · 4 posts · 2 votes9y
I work for a builder/broker. If we built houses at $150 a sqft we wouldn't be in business.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes9y
Originally posted by @Robert Ellis:
Originally posted by @David Song:
Jd 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.
I'd even argue the guys who invested in 2000-2004 and 2009-2012 are really the winners, not just 5 years ago. big portfolios were built back then, not a lot now.
I would agree with this. I got killed on a new construction in 1999-2000. If I had held on to that property I would be .25mil richer than I am now :(
Skyline Properties - Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes9y
Originally posted by @Joe Splitrock:
Originally posted by @Joe Kim:
@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).
I agree different strategies work for different people. That is the entertaining part about people arguing their strategy is best, because there is no one right answer. I am just saying that to make a blanket claim that cash flow is higher on your $460K property than it would be on four lower priced properties is far from guaranteed. I agree it takes less time commitment. Cash flow is not the only factor either, because it can be manipulated by down payment. For example if you paid all cash versus 100% financing, the cash flow number is wildly different. It doesn't mean paying cash gives you a better return on investment.
You don't need to find off-market deals to find decent houses for $120K. You can find them on the MLS. I put together a comparison using 4.75% as an interest rate because the 3.875 rate you have is not attainable today on an investment property. Here is a simulation of what it would look like:
Obviously, there are many factors affecting cash flow (location and condition being two major ones).
1. I recommend any out-of-state investor use property management. Tenant issues arise at all property values. A class properties have less issues, but being out of state makes it harder for any property type. I would argue you are better buying a $460K condo in California than going across country. The biggest danger for out-of-state investors is not understanding the local market.
2. Anyone seeking conventional financing (even on a $120K property) needs to have 20-25% down for investment properties. There is no difference putting 25% down on one versus four, but you could purchase more gross value on conventional with a higher average price. For example buying ten 4-plex in California versus ten single family homes in Ohio, would net a much higher gross value on low rate conventional.
3. Properties at all values can appreciate, even $120K houses. It really depends more on the location. In my market, appreciation on $120K houses has been greater over the last 5 years than $460K houses. I think there is danger for California investors thinking all other markets appreciate like theirs. Appreciation is only one aspect of an investment, just like cash flow. Cash flow pays you today and appreciation is speculation for tomorrow.
4. Depreciation works the same no matter the property value. In my comparison, you would be claiming similar depreciation. You could argue your net taxable income is lower, but that is because of lower cash flow, not higher depreciation. Keep in mind when you go to sell that you have to recapture depreciation, unless you do an exchange.
So everyone has different goals and different ways to get there.
3 homes (3 x 120K) = 3 loans 1 home (460K) = 1 loan. Fanny/Freddy limits at 10 conventional loans. So power of leverage is better with a more expensive home. Also, I don't know about you but ONE of the biggest time suck is applying for mortgages. (especially as your portfolio grows. each lender is asking for updated everything)
Your calculations miss a HUGE part of wealth building - equity building each month as your tenant pays principle on your mortgage. ($500/month for me on my $460K home, $100/month for you on your 120K home)
Also, you have to compare apples to apples. My home is BRAND New and in A neighborhood with 10,10,10 schools.
If you have 3 homes that are brand new at 120K in A neighbhorhoods (10,10,10 schools) in Ohio or anywhere, let me know I may be interested.
But that doesn't happen.
Also, Why do I buy new? so I can self-manage without too much headaches. I don't like PMs.
My PM in chicago (MACK) just went belly up and stole $4000 from me.
yes,they collected $4000 in rents (2 months) and never paid me. how can they declare bankrupt but keep running and collecting rent but not pay their investors????. MACK probably screwed hundreds of other investors too - I imagine since they were such a big operation.
There is a 10 conventional loan max. Yes, you can start portfolio lending etc..
But my goal is to NEVER to have more than 10 loans and never hold more than 10 properties. Right now I only have 8 doors (1 duplex, 7 SFRs) but my gross rents around $16,000/month. Several homes are in a 15 year fixed mortgage and still cash flowing great ($900 and $700/month)
I don't want the headache of owning 20-50 SFRs. I'm not looking to replace my income with "cash flow" right now. I like my job and it's a dream job.
so let's stop arguing. You go buy yourself yourself a ton of great cash flowing 120K or less properties.
I'm proposing something a little different. More passive, less headaches, more control (no PM), more wealth building in the long run. PMs, repairs, capex just suck all your positive cash flow away. That's why I buy brand new homes in great neighborhoods that STILL cash flow.
People who recapture depreciation should learn about 1031 exchange and or keep buying larger and larger homes that have greater depreciation to allow for more deferred tax right offs. If you die while deferring tax right offs, you can make sure dependents/kids don't get stuck with the taxes with the right planning.
- Investor · Honolulu, HI · Member since 2017 · 187 posts · 108 votes9y
Like everything...it depends.
- 9yTroy GandeeBusiness MemberReal Estate Broker · Charleston, SC · Member since 2013 · 794 posts · 454 votes
I also like to make the point that most people can't invest in real estate at all. Even fewer have the capital to be able to buy A/B properties. There is absolutely nothing wrong with investing in C/D/F properties if that's all you can afford. You just have to monopoly your way up and out if you want higher end properties. It's a little elitist to belittle the folks that can't afford a 20% equity requirement on an A/B property if they simply don't have the means to.
- 9ySteve OlsonPro MemberReal Estate Agent · Pleasant Grove UT and Hurst, TX · Member since 2014 · 128 posts · 63 votesHi David Song : Those numbers are insane. You have to ask yourself if those were really the numbers, why would somebody be insane enough to kill that golden goose?! Granted it's possible, but more than likely we don't have the full story here.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yTroy Gandee Agree. If all you got is 10 k, by all means invest in 50 k properties and work your way. If you have a larger capital to start with, where to invest is a real question. Some people like really cheap ones, some people like really expensive ones, some stay in between. Time will tell who is the winner. Land investment is pure speculation for rich people, with no cash flow. Farmland has some small cash flow but still largely speculation. SFR is cash flow and speculation. Apartments, commercial properties, mobile home parks are mostly cash flow. Stocks are speculation with small cash flow, only for dividend. Bond are cash flow only, with limited risk. Junk bond is higher cash flow with greater risk. Higher profit always comes with higher risk. It's anyone's pick.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yJustin Harman What kind of price does retail customer pay per sf in your area? To build a new house? In the Bay Area, we get retail quotes around $250/sf now. Couple years ago it was 150. Remember building cost include everything including architecture design, permit, fees, variances, red tapes, neighborhood meetings, land prep, etc, all the way to final product ready to move in. Most importantly, also the profit for GC and sales person.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yMatt Katsaris I looked at a lot of Vallejo properties in 2010-2013. The south part of the city is better. The city south of vellajo is very nice (benecia?)but of course more expensive. I did not buy at that time since there are also a lot of REOs in Bay Area. I picked peninsula than Vallejo 7 years ago even though peninsula is about 4 times more expensive than Vallejo. Right now, the situation changed. Peninsula is getting too high that cash flow can not possibly positive. Negative cash flow is a little too risky to me. I felt that Vallejo Area, including surrounding cities, might benefit from a better ferry to SF. Who knows, that is just speculation. Vallejo prices also increased, but not as much compared to Bay Area. I am sure you can find cash flowing properties in that area. But whether they will go up or down, that is hard to tell now. As other folks suggested, next crash comes, those areas will be affected first. Everyone has to make his own decision.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yAlso, I bought a apartment in Fairfield, which is not far from Vallejo.
- Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes9y
The ferry has always been good out of Vallejo , you're thinking of the new ferry our of Richmond. Point is the only thing Vallejo has going for it is it's still affordable. It'll go up but it will be the first place people leave once it's no longer cheap. When the biggest selling point of your city is hey we are the last place fo cheap houses and we're within community distance of SF, what's that really say.
- Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes9y
Originally posted by @David Song:
Also, I bought a apartment in Fairfield, which is not far from Vallejo.
That has an airforce base and near retail, unless the base leaves you'll be fine. If the base leaves, look no further than Vallejo.
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
Originally posted by @Troy Gandee:
I also like to make the point that most people can't invest in real estate at all. Even fewer have the capital to be able to buy A/B properties. There is absolutely nothing wrong with investing in C/D/F properties if that's all you can afford. You just have to monopoly your way up and out if you want higher end properties. It's a little elitist to belittle the folks that can't afford a 20% equity requirement on an A/B property if they simply don't have the means to.
That's the boat I am in. I hope to one day make the leap into multi family properties in nicer areas. Right now the only way I could ever get to that point is creating cash flow from the lower end houses.
- Investor · Sheridan, AR · Member since 2016 · 6 posts · 0 votes9yI see the point you are trying to make on making the investment in the land value, but it seems more risky than renting a home you can instant cash flow. sale that home for a little more than what you paid for it in 10-15yrs. There is no way build cost could be 150sqft. We have a build cost in arkansas on new construction down to 85.34sqft on 1300sq ft total cost of 110k including land and development cost. These are single families. Selling at 106 sq ft. They could rent for 1200-1350 month cash flowing 600 month, with everything escrowed. Doubling down on payments you can have these homes paid for in less than 10 yrs. Unless you know or have insider information it would see tough to determine how much your value would increase in areas.
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes9y
Hi all BPers,
This topic comes up a lot. I have 7 single family I purchased in 2014-2015 in Euclid Ohio for an average of $30,000 cash for each all in, including fix up etc... Since then I have had few vacancies and have invested about $8,000 to replace a roof, a few appliances, and a basement flood situation, due to roots in the drain. The cash flow has been consistently over $2500.00 a month after those expenses. We paid cash for them and the fix up for about $230,000 total in up to this date. So far so good!! Plus, I have a 12 unit apartment complex in the same area that we paid $480,000 for in Feb 2016. That one cash flows about $1,500.00 a month. We sold one of these 8 single family for $48,000.00 a few months ago that we paid $33,000 in Aug of 2015. These single family are in Euclid, Ohio and people said they would never appreciate. $15,000 appreciation in a 2 year period on a $33,000 investment is pretty sweet if you ask me!! They also said I was crazy when I purchased 10 condos in San Diego in 2011 and 2012. Then, they said I was crazy when I sold those through the power of the 1031 exchange in 2015, 2016, and my last one 2 weeks ago and traded them all in for Apartment complexes in NE Ohio. I now have $160,000 cash flow, plus 2.5 million in net worth, 5.5 million in equity, and rising moving forward from October.
Go against the herd of elephants and make sure to buy based on cash flow, not losing money, and utilizing dead equity and financial freedom will be right around the corner!!!
When everybody is saying that RE will keep going up, flippers come out in droves, the end will not be too far away. Take that equity and move it to more solid cash flow or hold for a long time and pay off all debt the Dave Ramsey way. That can work too.
My plan is I want to have about 50% debt or less to have some equity when things come tumbling down and I really feel people in "C" class neighborhoods will need to downsize to my apartment complexes if they start downsizing or if an economic crises occurs.
Swanny
Guest Podcast 238!!!
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yMatt Katsaris The area I was checking a couple years ago was the cities west of Davies, like Nixon. It is amazing that davis, due to UC there, command a really high price /sf, whereas 15 min away, other cities are a lot lower. To the east, Sacramento is also a lot lower than Davis. Kind of weird. Fairfield has an Air Force base, but some tenants work in Vallejo and live in Fairfield. I do not know why, but maybe Fairfield is a little safer. All those areas cash flow. Pick the right location is critical.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9yBrody Different ways. Just like stock market, we have all kinds of options. I always keep my mind open to any new way of investing, and try to learn from other folks. Pick one that fits your own situation.
- 9yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @David Song:
Matt Katsaris
The area I was checking a couple years ago was the cities west of Davies, like Nixon.
It is amazing that davis, due to UC there, command a really high price /sf, whereas 15 min away, other cities are a lot lower.
To the east, Sacramento is also a lot lower than Davis.
Kind of weird.
Fairfield has an Air Force base, but some tenants work in Vallejo and live in Fairfield. I do not know why, but maybe Fairfield is a little safer.
All those areas cash flow. Pick the right location is critical.
Not weird at all. Those are just different micro-markets. I compare it to a thunderstorm. Somewhere, across the street, it isn't raining. The micro-markets you just described are the "scattered" thunderstorm version.
Like I said, it's not unusual at all. In fact, I base all my investing on finding those micro-markets. It's also why you can't compare the same houses in conflicting markets (as your example) as being the same deal. Whether these "same houses" are across the street, blocks away, miles away, or across the country...these are not the "same deals". They are just in different micro-markets.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @David Song:
What I will avoid is areas that has low population density, not much jobs, and a over supply of house stock.
In cities where there are significant population loss, that is a danger for REI.
Absolutely. I definitely would not buy in an area with the metrics you mentioned. Those things should absolutely be taken into consideration. A house that is spitting out cash flow now could easily become a bad investment within a short time in that scenario.
There are areas and markets where the same rent to price purchase is still in a stable market, and will provide steady reliable cash flow. Just because it's cheap and will throw off cash flow now does not mean it's a good investment, and it also doesn't mean it's a bad investment. That's what fun about this chess game of real estate investing.
- Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes9y
Originally posted by @David Song:
Matt Katsaris
The area I was checking a couple years ago was the cities west of Davies, like Nixon.
It is amazing that davis, due to UC there, command a really high price /sf, whereas 15 min away, other cities are a lot lower.
To the east, Sacramento is also a lot lower than Davis.
Kind of weird.
Fairfield has an Air Force base, but some tenants work in Vallejo and live in Fairfield. I do not know why, but maybe Fairfield is a little safer.
All those areas cash flow. Pick the right location is critical.
Davis is high based in the public school system having a strong history of being a top school for k-12. They also have a small strong community with a strong identity. Think Berkeley meets Alameda. Many of the areas around Davis don't have that combination.
Davis is a unique beast all its own... No way you could compare it to Dixon or sac because neither area is similar and it wouldn't be Apple to Apple.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
Originally posted by @Joe Kim:
Originally posted by @Joe Splitrock:
Originally posted by @Joe Kim:
@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).
I agree different strategies work for different people. That is the entertaining part about people arguing their strategy is best, because there is no one right answer. I am just saying that to make a blanket claim that cash flow is higher on your $460K property than it would be on four lower priced properties is far from guaranteed. I agree it takes less time commitment. Cash flow is not the only factor either, because it can be manipulated by down payment. For example if you paid all cash versus 100% financing, the cash flow number is wildly different. It doesn't mean paying cash gives you a better return on investment.
You don't need to find off-market deals to find decent houses for $120K. You can find them on the MLS. I put together a comparison using 4.75% as an interest rate because the 3.875 rate you have is not attainable today on an investment property. Here is a simulation of what it would look like:
Obviously, there are many factors affecting cash flow (location and condition being two major ones).
1. I recommend any out-of-state investor use property management. Tenant issues arise at all property values. A class properties have less issues, but being out of state makes it harder for any property type. I would argue you are better buying a $460K condo in California than going across country. The biggest danger for out-of-state investors is not understanding the local market.
2. Anyone seeking conventional financing (even on a $120K property) needs to have 20-25% down for investment properties. There is no difference putting 25% down on one versus four, but you could purchase more gross value on conventional with a higher average price. For example buying ten 4-plex in California versus ten single family homes in Ohio, would net a much higher gross value on low rate conventional.
3. Properties at all values can appreciate, even $120K houses. It really depends more on the location. In my market, appreciation on $120K houses has been greater over the last 5 years than $460K houses. I think there is danger for California investors thinking all other markets appreciate like theirs. Appreciation is only one aspect of an investment, just like cash flow. Cash flow pays you today and appreciation is speculation for tomorrow.
4. Depreciation works the same no matter the property value. In my comparison, you would be claiming similar depreciation. You could argue your net taxable income is lower, but that is because of lower cash flow, not higher depreciation. Keep in mind when you go to sell that you have to recapture depreciation, unless you do an exchange.
So everyone has different goals and different ways to get there.
3 homes (3 x 120K) = 3 loans 1 home (460K) = 1 loan. Fanny/Freddy limits at 10 conventional loans. So power of leverage is better with a more expensive home. Also, I don't know about you but ONE of the biggest time suck is applying for mortgages. (especially as your portfolio grows. each lender is asking for updated everything)
Your calculations miss a HUGE part of wealth building - equity building each month as your tenant pays principle on your mortgage. ($500/month for me on my $460K home, $100/month for you on your 120K home)
Also, you have to compare apples to apples. My home is BRAND New and in A neighborhood with 10,10,10 schools.
If you have 3 homes that are brand new at 120K in A neighbhorhoods (10,10,10 schools) in Ohio or anywhere, let me know I may be interested.
But that doesn't happen.
Also, Why do I buy new? so I can self-manage without too much headaches. I don't like PMs.
My PM in chicago (MACK) just went belly up and stole $4000 from me.
yes,they collected $4000 in rents (2 months) and never paid me. how can they declare bankrupt but keep running and collecting rent but not pay their investors????. MACK probably screwed hundreds of other investors too - I imagine since they were such a big operation.
There is a 10 conventional loan max. Yes, you can start portfolio lending etc..
But my goal is to NEVER to have more than 10 loans and never hold more than 10 properties. Right now I only have 8 doors (1 duplex, 7 SFRs) but my gross rents around $16,000/month. Several homes are in a 15 year fixed mortgage and still cash flowing great ($900 and $700/month)
I don't want the headache of owning 20-50 SFRs. I'm not looking to replace my income with "cash flow" right now. I like my job and it's a dream job.
so let's stop arguing. You go buy yourself yourself a ton of great cash flowing 120K or less properties.
I'm proposing something a little different. More passive, less headaches, more control (no PM), more wealth building in the long run. PMs, repairs, capex just suck all your positive cash flow away. That's why I buy brand new homes in great neighborhoods that STILL cash flow.
People who recapture depreciation should learn about 1031 exchange and or keep buying larger and larger homes that have greater depreciation to allow for more deferred tax right offs. If you die while deferring tax right offs, you can make sure dependents/kids don't get stuck with the taxes with the right planning.
It seems the $460K property is an outlier in your portfolio. Your other properties average closer to $1850 a month in rent. Getting $900 a month cash flow on a property that rents for $1850 on a 15 year loan sounds better than the $900 you are getting on a $3000 per month / 30 year loan property.
I am not not arguing. I am just pointing out that cash flow is often maximized at lower price points, which your own numbers seem to support. I don't buy $50K properties or even $120K properties. My sweet spot is $150-180K in my market currently. I can maximize cash flow and minimize problems in this price point. Every market it different, as is every investment strategy. Our strategies are probably closer together than you think.
In all sincerity, it looks like you are doing very well. Best of luck to you.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9ySteve Olson What number are you talking about?
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