SUB30kCLUB: why invest in sub30k properties in the first place?

49 Replies

For Renee and I, it's all about the numbers. We truly believe that the goal of investing is to get the most return on our investment dollar. A 100k duplex that rents for $700/unit is simply not as profitable as a 30k duplex that brings in $500/unit. It's just simple math.

Ive heard arguments that low income tenants are a risk for crime, delinquency, destruction, etc, but I've also heard experienced landlords say that carefully screened section 8 tenants can be their most profitable tenants!

So why are YOU either already investing in sub30k properties or why are you considering doing so?

I'm planning on releasing a new sub30kclub question each day for us to discuss. PM me with topic ideas and let's learn and grow together!

@Douglas B. I currently have 2 duplexes, each cost 30k and the cash flow numbers do generally look good. I purchased them because it was the easiest for me to get into given the low prices.

I admit, I've been lucky compared to other folks, but the cash flow does catch up with you. Just today I was informed that my tenant had a small kitchen fire, almost every month one of the apartments has a water leak, electric outlet issue or something minor. Fortunately I don't deal with it, that's what my property manager is for. Thus far the cash flow is still positive, but it certainly feels like a drama at times.

I've had tenants come and go, complain about drugs in the neighborhood (knock on wood no murders yet)...I was offered crack once driving through the nearby neighborhood to check on the properties...

I hope it's a transition, build experience with a limited investment, then move on to advanced opportunities for me. It really was my 'piss or get off the pot' move.

Good property management helps a lot...I'm fortunate at the moment to have that now.

@Douglas B.

I am an active investor in $30k properties. The reason why I invest in these properties is strictly because of cash flow. Just like you, I did simple math and it just didn't make sense to invest in higher priced properties for what I was looking to do.

Investing in this price range has allowed me to quit my job and do real estate full time and offered me other real estate and non real estate related opportunities.

Some of these properties are actually in areas where I wouldn't mind living myself, not that I would prefer to live in that area, but some of these are middle class neighborhoods.

I have been fortunate to network with right people where I have been able to pick up some properties that no one else was targeting.

It's competitive at this price range, but if you do it right, there is money to be made.

One thing that helped me was that I was fortunate to be buying these properties at the bottom of the market. Prices are starting to come up in my market, but it's still a very good market to build a great rental portfolio.

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In my area these properties require significant remodel costs. They take twice as long to rent as my $70k newer homes and need to be remodeled again once tenant is out. It's monthly drama collecting and constant repair expense. For every year the cash flow comes in at expectation the next is a disaster. I have invested in both types of properties and find over the long term a $70k $1k rental will perform better than the $30k $600 rental. Not saying the strategy doesn't work in some areas but over the long run I will take the newer quality property all day. We are all about the numbers but there is a such thing as phantom returns which only look good on paper. My current portfolio is a mix of both and it is clear now with long term (4 years) actuals that the higher quality has better real life returns.

Douglas I am an avid sub 30k investor. In fact I have 20+ without a mortgage. I am strictly seeking cashflow, and this has allowed me to have no job before the age of 30. Now, being that these were phenominal purchases, there has been immediate appreciation. Most 100% or more, most of which is forced appreciation through light rehab and stabilization.

Now, none of these are in warzones. In fact they are working class neighborhoods with sec 8 and 20 something year old mothers with an SSI or W2 check. No drug dealers, pimps or prostitutes soliciting people.

Anyone who shares a similar investing strategy, feel free to connect with me.

-Ray

I would like to edit and add a few facts. Although older buildings, 90% of them have vinyl windows, siding, etc. The dry in is all updated. 60A service is updated to 100A and knob and tube removed. Galvanized and cast plumbing is replaced with Pex and PVC.

In regards to the comment(s) about lower rent, I do not find that to be the case. The lowest monthly rent in the portfolio is 1050/mo. That is an $18,500 house with a phenominal working class single mother. Duplexes are combined rent not less than 1350/mo.

I have a 4br/2ba in the portfolio I am all in for 24k renovated for rental purposes. It rents for 1195/mo. Now, also have a 105k sfr that rents for the same price. The strange thing is, in my area, the ones who apply for the cheap home will not even try for the higher priced home. Yet, good manageable tenants end up in both when facing a vacancy.

@Douglas B.

I invest into these properties because of cash flow. I try to get a area that I would be willing to live in and find houses that need work but I can get in an repaired for under $30,000. I try to purchase them with cash and repair them myself but buy the materials to repair them with a Lowes credit card. The things that I purchase I try and purchase them at the time of the month that they offer 18 months free interest. Then I pay on it through the year with rent and then pay it completely off with my tax return. Usually I don't go over the $20,000 mark but that does not include me paying me for my own work.

@Douglas B.

In addition to the math looking good, I shop for less expensive houses because I'm new and don't have a lot of capital.

I'm too new to have dealt with an eviction yet or to have been burned by bad tenants, but as @Serge S. suggests I'm going to watch my spreadsheets closely to make sure my long term profits match my projections.

In the end, I think the same way I will transition my traditional retirement vehicle from higher risk stocks to lower risk bonds as we near retirement age, I imagine I'll trade up to lower cash flowing B and A class properties the older we get.

I strongly recommend @Lisa Phillips YouTube video blog series about sub30k rentals. Search for AFFORDABLE REI 0000 (that's the first episode where she explains WHY she invests in sub30k).

It's a fantastic series. She also did an excellent podcast interview with the BP PODCAST recently, I think it might be episode 54. It's worth your time.

I'm also going to begin a blog explaining our journey from planning to making our first purchase. Feel free to check it out. It'll be a work in progress, hopefully growing daily.

Good question.

Capital constraints is the short answer. Honestly, if I could afford A properties that is what I would buy.

But the math can be solid. Being that you can get the 30k home to 60k in value and get 2% in the process. This kind of math allows for mishaps and still be profitable.

Hi @Douglas Brundin, I love this thread! I will check in everyday.

My 2 cents:

Capital constraints, as well as an instinctive feeling that all the negativity and bad-mouthing surrounding this just COULDN'T be that bad, and I thought there was a level of bias in them. I just wanted to prove that it could work, really, since i grew up in the safest neighborhood people on the other side of town thought was crime infested. I knew there was an air of unreality since I lived it. And lastly, using my Leveraged Analysis Technique I came up with to vet the properties...the rents were too d*mn high to pass it up! ;-)

However, as to the repair problems: That's more to do with how you fix the place up when you first acquire it. I have been very clear that since I bought this at a low price, I take care of my homes during the original renovation as if it was my child. WCNs are older homes for the most part, and most times I have completely re-plumbed, installed new roofs, and sometimes new HVAC systems. These are big ticket items but ESSENTIAL Key Items any home needs to be comfortable. New flooring tops it, so at the end there are VERY little repairs need it, with the warranties lasting at least 10 years. Good quality up front and all. Very few maintenance problems over the years.

My motto is: If its going to cause problems in the next 3-5 years, I rip it off and get a new one. Most of these homes have strong bones, so rehabbing shores it up so it can last 20-30 years.

@Greg Brown Thank you so much! I hope my Leveraged Analysis Technique I created helps others getting into this niche! I've gotten email response, and a lot of people are finding key properties this way, so I am extremely happy about it. I think we're entering into a new era of investing, one where we are really empowered to make better decisions, and cut down on mistakes. In many ways, the internet generation is amazing, with what we have at our fingertips!

As far as homeowners insurance policy for your sub30k properties, what companies or types of insurance would you recommend?  What would it cost to insure these properties yearly?

Thanks!

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@David Martin

 You use the same insurance you would use for any home. I use Affinity GM since they are investor friendly, and I pay about $45 a month. I have not had a chance to use them, but reading the fine print, it does seem they cover most disasters (just not theft and vandalism). If anyone knows anyone better to use, let us know!

Great! Im editing a series of videos now, so make sure you're on the newsletter, so you can be the first to hear the announcement!

Lisa

I think 90% of the DRAMA associated with "sub 30K houses" comes down to tenant screening and how picky you want to be. 

I have two houses that I bought as a package for 46k. So 23k a house. They were turn key from another investor. I have not had any issues or repairs to be done. 

One tenant was a divorcee who is on her own for the first time. She wanted little things fixed at first but has never been late or had any issues.

Other one is rented to a retired vet with an 800+ credit score. He has only paid me early. 

Each home cashflows $350+ a door. Even setting aside for everything and being conservative. 

That's an ROI I can live with.

Homes are in a C+ neighborhood right next door to a large church and police department. I would love to "buy up the block" out there. I probably will.

I have 17 properties (26 units) in Milwaukee that were purchased as a portfolio just over a year ago at a price per property of roughly $20k each.
Here's my 2 cents...
Reserves
Tenant screening
Maintenance
Management

These "sub" properties can eat a newbie investor alive that is in the mindset that they will be as easy or should be treated the same as a $100k property.

I planned on 18 months of potential losses on this portfolio knowing that each one would need some form of major to minor repairs.
I planned on losing each tenant due to the "gentrification" process of each asset.
I planned on management that could be sub-par, quit on me, or lose interest in this type of high maintenance investment.

Ultimately the acquisition has turned out pretty much as I expected.
Several months of loss due to losing tenants, replacing them, repairing during turnover.
City inspectors mandating unexpected repairs.
Cans of worms opening up during each aspect of the process.

My Property manager stuck with me and believes in the long term goal...
(Happy about that)

Typically my losses were "about" equating to my income, minus 2 months where I paid fees for major repairs that I needed to do, and physically cut checks to contractors for more than my income those months.

This month, March 2015, 1 year after purchase, I collected a check for $8300 which makes me slightly positive over the last 12 months of ownership.

At this point, we have 1 more unit that needs "major" attention which is being repaired in the coming weeks and we have a tenant ready to move in April 1.

Depending on the locations/neighborhoods/rental amounts these CAN be lucrative investments.
But don't plan on steady positive cash flow in the same ballpark month after month, and if it's your first investment, or you're newer to the business...
You may need to really consider options that suit your risk level.

My situation was a plan to stabilize a risky portfolio and sell it in year 5.
Again, my 2 cents.

I love $30k and under but like a few in better areas for a bit more also. I just signed a purchase agreement on a triplex for $19,000. The two smaller units are currently rented, tenants said they are happy and don't have anything they want me to fix. The third unit was recently renovated and is the biggest of the three. It also has a basement and storage area as a bonus. I'll slowly raise rents on the 2 current tenants and start the empty unit at $500-550 a month (so it will get to $1500 a month total soon). One of my favorite houses I bought for $8,500 next door to where I was living. A friend rented it from me, I tried to sell different times for $15,000 but he wasn't interested. He rented for almost 5 years which covered all my expenses plus thousands in the bank. When he moved I had it sold it for $25,000 within a few hours. A lot depends on the area but I'm able to buy decent houses for $30k or less and still find decent tenants, in some areas that mix doesn't exist.   

@Joe Mueller

 Hi Joe, I would say caution is needed, but not necessarily more than any caution a new investor faces with going in new to a business just not having anyone successful to bounce problems off of. 

However, the houses are older, so my upfront costs tend to be on major repairs. However, once they are done, there are very, very little headaches after that. I have a retired veteran in one, mechanic, insurance adjuster, dental hygienist in them. Those are hourly professions, but when the property is fixed and looks great, you're going to get great tenants putting in applications. Regardless of price, those are fundamentals I think, for any investor to discover.

Lisa

Originally posted by @Douglas B. :

I in in the Sub30kClub.  I started out doing that because that was what I could afford AND the numbers proved that it could be successful.  I could probably exceed $30 with my next investment, but most of what I'm looking at is below $30.  I figure that by the end of the year, I can purchase one $45K investment, or two sub $30K investments.  The $45K investment might rent for $850-$900, but the two sub$30K investments will rent for a total of $1300-$1400.  The numbers tell me which way to go.

Originally posted by @Christopher Schmidt :

@Douglas B. I currently have 2 duplexes, each cost 30k and the cash flow numbers do generally look good. 

...

 almost every month one of the apartments has a water leak, electric outlet issue or something minor.

Christopher, with my sub$30K properties, so far I've replaced the plumbing and electrical every time.  The entry price point is low enough that this isn't an onerous expense.  Besides, the houses I buy were built 70-90 years ago and haven't been updated in decades, if ever.  

That way, I never have to worry about repeat calls for electrical and plumbing problems.  It's great to not have to worry about that.  I feel I need to do it, but it also brings me peace of mind when I rent to the first tenant.

Originally posted by @Sharad M. :

 One thing that helped me was that I was fortunate to be buying these properties at the bottom of the market. Prices are starting to come up in my market, but it's still a very good market to build a great rental portfolio.

 The same for me in my market.  When I got in, I was sad because there were a lot of properties at that price point that lingered on the market for months but I didn't have the money to buy more often.  Now, any house listed at that price point sells very quickly, and sometimes for more than list price.  It's very competitive now!

I'm ready to buy two more properties and it's proving difficult to find and get a contract on the right ones.