Would you pass on a 20k house that rents for 500 a month?

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Would you pass on a 20k house that rents for 500 a month?

Aaron Hollingshead
Flipper/Rehabber · Roswell, NM · Member since 2014 · 74 posts · 65 votes

I wanted to get some feedback.  I've been doing flips and buying rentals for three years now.  I currently have 7 rentals and am closing the sale of my 5th flip.  I feel like I've got my flips dialed in but I haven't developed a criteria so to speak for my rentals.  

So here's my question...there's a small 1 bed, 1 bath on the side of town where I'd previously thought I didn't want to buy.  Values are low, crime is higher, etc...the thing is, this house is off market, being offered at 20k and is currently rented for 500 a month.  So I'm a bit torn.  It's hard to walk away from a place that is in good shape (new roof, new service, stable renters) with those numbers.  On the other hand, it's in a part of town that is questionable.  

Will jumping on this versus walking define my criteria?  Thoughts?  

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y

Rent means nothing.  What's the cash flow.  If the CF isn't at least $300/month, I'd say this is nothing more than a shiny object of distraction.

Now, onto the real question here.  What you need to do is develop a criteria for buying hold properties.  Base it on your financial needs (i.e...monthly bills)...and stick to it.  Once it's set, don't rationalize your way into a lower number just because.  If your number is a minimum of $300/month, and a property comes in at $299/month...go onto the next one.

Lack of discipline resulting in a REI negotiating against himself is a big problem...and I see it way too often.

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  • Roger Medina
    Specialist · Livonia, MI · Member since 2018 · 24 posts · 10 votes
    7y

    Did you do a solid property analysis to determine the NOI? Knowing your actual market cap is the difference between taking a crap-shoot for 9% and taking one for 14%.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y

    Rent means nothing.  What's the cash flow.  If the CF isn't at least $300/month, I'd say this is nothing more than a shiny object of distraction.

    Now, onto the real question here.  What you need to do is develop a criteria for buying hold properties.  Base it on your financial needs (i.e...monthly bills)...and stick to it.  Once it's set, don't rationalize your way into a lower number just because.  If your number is a minimum of $300/month, and a property comes in at $299/month...go onto the next one.

    Lack of discipline resulting in a REI negotiating against himself is a big problem...and I see it way too often.

    13Reply
  • Eric Schultz
    Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
    7y
    Sounds like this property and location are a C- at best? You might want to evaluate deferred maintenance some more and how you will handle property management with this tenant class. Exit strategies may be limited too, such as investor buyers only.
    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    So your picking up a potential 6,000 in gross rent minus ongoing costs and heavy management of tenant types in a higher crime area.

    I do not touch anything low end anymore. I do commercial though. Just do not want the headache I do not care what the anticipated yield is. I like easy cash flow. I only want hard cash flow if it is a property with huge equity growth potential. If it is just an area with expected higher cash flow due to nature of tenants and lower quality area then no I won't touch it.

    The other factor is how much time this might take away for that expected 6,000 gross cash flow versus your other business practices.  

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    5Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    7y

    What makes the part of town worrisome to you?  You'd be surprised how many good people live in less desirable neighborhoods and how neighborhoods gentrify and become real gems. If the renters are stable, good tenants, and law abiding, then it would indicate the neighborhood is not as bad as its reputation. Spend some time in the neighborhood at all hours of the day and observe.  Low income properties are fine as long as the people are good and the area is not overrun by shootings, drugs, and gang violence.  $20K purchase price, good shape, stable renters and $500 monthly rent sounds peachy!

    5Reply
  • Thomas Ayres
    Rental Property Investor · Council Bluffs, IA · Member since 2017 · 6 posts · 11 votes
    7y

    Don't let everyone spook you off. I have grabbed several properties in that price and rent range. I can tell you most if not all are winners if your looking for just cash flow. I run them with below market rent, self manage, auto rent payments and only rent to tenants with long term rental history and they stay forever. I have several homes like this with several 10 15 and 20 plus year tenants. 

    5Reply
  • Robert Biggerstaff
    Contractor · Pensacola, FL · Member since 2018 · 303 posts · 240 votes
    7y

    Make sure you screen your tenant really well

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    There is more to it then just a return. It is a philosophical choice as an investor what type of investing you want to do. I learned over the years for myself that I do not enjoy residential real estate with tenants in low to middle end areas. I just do not want to deal with it no matter what the yield is.  It's just not my personality. Other investors seem to enjoy that kind of stuff like it's a personal challenge to make it work.

    Take the return out of it and ask yourself if this property for tenant type and area really meets your investing style and goals.

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    2Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    7y

    Depending on the renter , I would buy it and offer to sell it to them and hold the paper 

    4Reply
  • Greg Earnest
    Real Estate Professional · Oakland, CA · Member since 2016 · 11 posts · 3 votes
    7y

    @Thomas Ayres always good to see an optimistic perspective. With properties like this that could pose more risk, do you typically undergo a longer/more in depth due diligence period before closing? Would you be willing to have a unit vacant for a few more months to get that ideal tenant?

    Thanks

    1Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Joel Owens:

    There is more to it then just a return. It is a philosophical choice as an investor what type of investing you want to do. I learned over the years for myself that I do not enjoy residential real estate with tenants in low to middle end areas. I just do not want to deal with it no matter what the yield is.  It's just not my personality. Other investors seem to enjoy that kind of stuff like it's a personal challenge to make it work.

    Take the return out of it and ask yourself if this property for tenant type and area really meets your investing style and goals.

    You make a good point and I'm going to vote for your post for the second part of the last sentence!

    Some investors may take on properties in low income areas for the personal challenge, but I venture that's not the reason most do. If the property is manageable and generates a good return, it would fit well with many investor portfolios.  Management style is key, as well as investment style.  For myself, I value providing good homes to decent people with low income at a rent rate they can afford, while still generating nice cash flow and as a sound investment for my own future.  At the same time, I live and work in the community where I invest.  I'm doing my part to bring run down properties back to life and improve neighborhoods. That provides me with a great amount of satisfaction.

    You're absolutely right. It's a philosophical choice.

    4Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    I’d do deals like this but I’d only pay 15k to get 500$ rent over here so it’s a bit expensive for my tastes 

    3Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Aaron Hollingshead. 20k at 500 doesn’t get me excited. You pay 12-15k and maybe it’s a deal. I’m also leery of just the single unit. Lower income can be fine but I typically would stick to multi family at say 20k a door (if that’s what it goes for in your area )

    0Reply
  • Jared McCullough
    Member since 2019 · 122 posts · 44 votes
    7y

    For those that suggest they are buying lower tier cost (i.e. $10-30K) are you using the BRRRR method or are these just straight cash investments. I am trying to do some researcher to determine if it makes more sense to do option 1 or option 2:

    Option 1: Out right purchase a property for say $25K and make gross revenue of $650/month ($7800/year) which would equate to about a 3-4 year payout before your in the green. This being said all investments from day one would be turned around to go towards buying additional properties. (Estimated $5-6k per/year)

    Option 2: Do a BRRRR and get my $25k back to do another. Depending on loan terms this could mean a gross revenue of anywhere from $500/month ($6000/year) on a 30 year or $330/month ($4960/year) on a 10 year.

    If you are doing a BRRRR what loan terms are you typically going with for these cheaper houses and are you applying any of your profits to paydown the loans. My biggest struggle at the moment is trying to realize the benefit of having to pay a 30 year loan versus making smaller profit up front and having more assets performing at full profit in a shorter time frame.

    Jared

    0Reply
  • Michinori Kaneko
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    @Aaron Hollingshead As most folks said, You need to consider more info.  Seems like this property is not in a real nice neighborhood.  Will this unit be more vacant than a typical units in B area? tenants will most likely be lower quality, will they trash the place that requires lots of maintenance? Are you managing the property yourself, if so you have lots of headaches dealing with lower quality tenant. If not, you may have hard time finding a good PM for the property.  Hope that helps!

    1Reply
  • Tim Pritchett
    Member since 2018 · 17 posts · 4 votes
    7y

    @Marcia Maynard that’s a good answer. I will look at that my self.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    • Cap ex would take a significant bite out of the rent.  Maintenance, vacancy, misc expenditures would result in a property that likely does not achieve $100/month actual cash flow to deal with a property/tenants in a higher crime area.
    • The house would not appreciate and has no value add.
    • The rent would not appreciate which in effect means that it depreciates at the rate of inflation.

    I would not purchase any SFR, even in a low crime area, with rent that is not greater than $500 unless the area is expected to have either rent or market appreciation. A unit takes time to own, purchase, etc. The return for effort on low rent units does not meet my expected compensation criteria.

    Good luck

    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @Aaron Hollingshead at that level of rent on a SFR your fixed costs are likely to consume all your cash flow

    1Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    Funny what a different view many folks have in hot markets on the west coast when it comes to lower income properties . By listening to some of these guys on this site you’d think you’ll never get a tenant , ...you’ll be fixing and replacing so much that you’ll never make a penny ...That your tenant will never pay you or worse ;pistol whip you when you try to collect rent ! I suspect most of the people saying these things have never actually bought or managed these properties before themselves . As an affordable housing manager aka -slumlord ,I find it very comical

    7Reply
  • Walt Bassett
    Investor · Durham, NC · Member since 2017 · 7 posts · 3 votes
    7y

    I didn't see anyone post about the market conditions.  Is the "other side of town" trending up, down or stable?  Obviously if the trend is moving up, you may have a diamond that can cash flow, while waiting for appreciation.  If not, you've got to assess the risk/reward.  Getting a 2% rent ratio is a must for borderline neighborhoods, but if you can show a year + of cash flow, you might be able to flip it to a passive investor as a turn-key.

    ALSO - talk to a property manager in the area and find out lease price trends.  If they are flat, you might want to take a pass.

    0Reply
  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    7y

    @Dennis M. While I don't speak for all Californians or West Coasters, I will say I looked at the low cost affordable business model in depth and didn't see how I could make any substantial money with the same level of effort for what I do now.

    What most of us Californians or West Coasters see is on one property I can make more in one year than the typical $20,000 property will make in your lifetime.

    I have an REO property purchased for $200k added $28,000 in upgrades, with market appreciation 15 months later had $134,000 in equity when it appraised at $334,000

    On a $20,000 it typically is in a non-appreciating area and you're just relying on the cash flow. Take the $500 gross monthly or $250 Net monthly, it will take you 44 years to make what I did in one year, and that's if you had Zero vacancies in those 44 years, and I haven't factored in rental income yet.

    This is where I get stuck when trying to compare the two different property classes.

    I also know you operate in a specialized property category that requires a special skill set to succeed so my props to you, I don't have what it takes to operate in that category.

    A little insight into what we Californians/West Coasters are thinking when comparing those $20k properties

    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    7y

    @Aaron Hollingshead  In PA there are plenty of $20K houses that rent for $500.  If the neighborhood is sketchy or C-, I wouldn't touch.  It will have little to no appreciation, it will be in a tenant area with few owner occupants, the rent may not be steady, and when you go to sell the buyer will be an investor who beats you down in price, and no owner occupants will be interested.

    That said I bought a $20,000 house a couple years ago that was on the market for over 180 days.  But it had previously been sold the last time for $108,000.  It needed a little cosmetic work, and I rented it for $795 to a tenant for a year, when they moved out I sold it for $74,900.  That kind of $20k house I'll buy all day, but that's not the typical $20K house, or a @Ben Leybovich says a $30,000 pig.

    2Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y

    The difference is in the distinction - is $20,000 the entrance or the exit?

    A pig is a house you can buy for $20,000 to you will need to sell for $20,000 because its' intrinsic value is $20,000. Not a pig is an $80,000 that you can buy for $20,000.

    Makes sense?

    5Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y
    Originally posted by @Dennis M.:

    Funny what a different view many folks have in hot markets on the west coast when it comes to lower income properties . By listening to some of these guys on this site you’d think you’ll never get a tenant , ...you’ll be fixing and replacing so much that you’ll never make a penny ...That your tenant will never pay you or worse ;pistol whip you when you try to collect rent ! I suspect most of the people saying these things have never actually bought or managed these properties before themselves . As an affordable housing manager aka -slumlord ,I find it very comical

    I find it interesting as well.  There are more then one way to make money in real estate.  Any property (even low income ones) is a deal at the right price.  People, even lower income people have to live somewhere.  People tend to forget that.  If you can understand the tenant class (at least on some level) and scale large enough, you can make it happen.

    1Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    The best part in my view is that you can get in it at a very low price point .often with just cash or a banks unsecured line of credit so it’s a freed up asset . A guy can actually have a chance to get into the game without going into to debt up to his eyeballs . Of coarse there are unique challenges and yeah it’s not going to to appreciate . Comparing a 20k to a 200k Cali house makes no sense to me . So Let me buy ten of them then we can fairly compare cashflow . I’ll make 3,000 +in cashflow while in California you are lucky to clear a hundred bucks . Then the market tanks and that 200k + house is now worth 140. My point is it’s relative and there’s money to be made on cheap properties 

    3Reply
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