What Makes a "Sub$30k" House?

What Makes a "Sub$30k" House?

Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes

I've started a new "Sub$30k" thread in an effort to step away from the chaos that has become a few of the other threads. While I've reviewed most of the opinions contained in their respective comments sections, I'd like to publicly tell everyone my experience, why I feel how I do, and present you finally with a question: "What makes a "Sub$30k" house?

I first started in real estate in 2005 at 23 years old with a $100,000 home purchase. My agent assured me this would be a sound investment and that it would grow over time. I'd read a lot, done what I considered to be a large amount of analysis, had a degree in business, and figured I should plug my nose and jump. 

This is the approach that many BP users have advocated for newbies: Buy a more expensive property/cash flow is your enemy/look to appreciation/cheap houses=anathema. Since 2005, that $100k house has been my biggest, most constant headache. The construction quality is awful. Like many other recent builds, this one was thrown together. It needed a new roof after only 9 years. It has had many, many problems. A friend of mine purchased a house in Texas that was recent construction that already has foundation issues 10 years later, while a few of my houses that are older than my grandmother are structurally very sound due to what I consider a higher-quality standard in terms of craftsmanship and also better materials.

As a person first starting out, this experience was absolutely devastating. It felt like every other month I was on the hook for a new major repair, a tenant was threatening to move out because of some problem, and I still had a huge mortgage to contend with. I almost gave up investing and sold it off at a steep loss. That is also what EVERYONE around me said to do. Cut your losses, move on, real estate investment isn't for you. Everyone gets out of it. There is no money to be made with rentals. I began to second guess everything I'd read/done and felt defeated, looking at my bleeding balance sheet. Did I just have bad luck? Was there really no money to be made? What could I have done to avoid this?

But what if I'd invested in a "Sub30k" house as my first? What if I'd had heavy cash flow in a solid working class neighborhood? My property manager/agent of course did not want that. No one wants to manage a house that doesn't bring in a large monthly rent. No one wants to sell a $30k house and collect a paltry 3%. 

In my opinion what you have are a lot of salesmen here who push a product. They understand the commission side. If I were selling turnkey properties, I'd be on here telling everyone to let me solve your problems. Let me do all the dirty work and put in the elbow grease. Hand over the lion's share of your profits and I'll gladly make money with your money.

I've since gravitated toward "Sub$30k" houses like this one (Paid $25,000 and did $3,000 in renovation): 

What a dump, right? The eaves needed to be painted, it needed some other work, so what? It has rented for $750-775 every month since I bought it and it always rents the first day it becomes vacant. Property taxes and insurance are a combined $80 a month. 

I WISH I'd started with this house as my first. I wouldn't have become so gun-shy and waited 3 years to make a subsequent purchase. I'd have been in the market when things were cheaper and my portfolio would be much more impressive now. I'd have developed better skills. I'd have understood that with a portfolio of cash-churners, you can absorb operating costs a lot better much sooner. <--I consider this to be one of the most important lessons to be learned in REI.

By the way, I could sell this "junker" for $70k now and I did not buy it at the bottom of the investment cycle. I put sweat equity into it. I refinished the hardwood floors and Art Deco woodwork. Does that make this a "Sub 30k piece of garbage" or did I merely pay sub $30k for a $70k property? How can we really paint all properties with the same brush and say simply because you pay less than $30k it is a bad investment? 

What if someone sold you a Corvette for $5? Would you sell it to me for $10 to double your money? Is it a $5 car? 

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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
11y

I'd rather buy a $30k house than a $100k house because I've just saved $70k.  If the $100k house only needs $10k of repairs over the lifetime of owning it, but the $30k house needs 3x that amount, but I can get the same rent, I'm actually ahead financially with the $30k house.

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  • Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    11y

    I guess this is somewhat location dependent.  I have 4 houses that I am all-in at 30ish.  Good neighborhoods - I would rate them as B-, maybe C+ but with no real crime problems.  But they only rent for about 400 - 450.  It amazes me that some markets rent for 700 or so for a 30K house.  For the renter, why not get your act together and buy a house and have a much lower payment?  In my area we have the USDA rural development loans, so we have a lot of people who can buy instead of rent and get into owning a house with $0 down.  So, the rental market is not as strong.

  • Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    11y
    Originally posted by @Bryan L.:

    I guess this is somewhat location dependent.  I have 4 houses that I am all-in at 30ish.  Good neighborhoods - I would rate them as B-, maybe C+ but with no real crime problems.  But they only rent for about 400 - 450.  It amazes me that some markets rent for 700 or so for a 30K house.  For the renter, why not get your act together and buy a house and have a much lower payment?  In my area we have the USDA rural development loans, so we have a lot of people who can buy instead of rent and get into owning a house with $0 down.  So, the rental market is not as strong.

    A LOT of people that rent simply don't have the financial maturity to buy a house.  They don't have checking accounts or credit scores, they live pay check to pay check and don't think about savings accounts or 401ks for retirement.  There's also risk in buying a house (being responsible for maintenance, not being able to move on a whim).  It's also hard to get financing for a sub-50k house.

    Lots of reasons people rent.  You could always be a good Samaritan and rent to own for those kinds of people to help them out I guess...

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @Bryan L. 

     Primarily I believe it's a fear of commitment. It is irrational behavior to us, but the average person doesn't want to have to worry about replacing an HVAC system or reroofing a house. They can't/won't/choose not to budget for these items. 

    It seems many who do qualify are often caught unawares and lose their house to foreclosure. Some are unable to pay an insurance deductible or cannot cope with a rise in property taxes or insurance rates. I guess there are many reasons it's much easier to be a renter. The rental market reflects these forces at work. 

    I guess the main reason here for the above-average rent is that I didn't buy a $30k house-- I bought a $70k house for $30k? Does that still make it a "sub$30k?"

  • Investor · Raleigh, NC · Member since 2013 · 1k+ posts · 708 votes
    11y

    @Ben Stout 

     Definitely sounds like you have found your niche - congratulations on that!

    I don't really think there are too many people here who tell you NOT to take a cash flowing deal if you can find one.  However, in many parts of the country, the scenario you are describing for Pensacola is not realistically achievable unless you are willing to operate in true war zones.  The debate over what is better, cash-flow or appreciation, depends entirely on personal preference, so I would consider the argument moot.  What everyone will be able to agree on though is that the best scenario is where you have BOTH (as you do in your case with your $30k example).  So the quick answer for you would be: sell your 100k dead weight and buy three more of your $30k ones (assuming they are available).

    It would be interesting to me to hear more detail of your story on the $100K house.  It's of course possible that you stumbled onto a "lemon", but the biggest learning I take out of your story is actually something that folks like @Jon Holdman here keep emphasizing (and rightly so): make sure you have enough reserves to weather significant unexpected expenses.  Then you will always have to option to correct course by disposing of what doesn't work the way you like.  

  • Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    11y

    @Ben Stout I would say that you got a really good deal. If I understand you correctly, your all-in number is about 50% of ARV or less. That's what we need to find to be successful. But many landlords will buy that same house with plans of being all-in at 80% of ARV. Again, it varies by area. In my area, if that house was on the MLS with needing only 3K in work, it would have likely sold to an o-o with one of those rural development loans that require no money down. Those loans do have some minimum inspection requirements (such as requiring porch rails, functioning heat/air, etc), but they are not hard to meet. And an o-o would have likely run the price up into the 50s on that in my area. With the rural development loan, an o-o could get into that house for about $450 per month (or less) including PITI and mort insurace. So, an o-o can get into these houses with basically no money down and with a payment of $450 or less per month. Makes it really hard for us investors to get $700 per month in rent. Yes, there will always be renters who either can not or will not buy houses, but we seem to have enough buyers in our area that we can't get $700 per month on a house like this.

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Location, location, location!

    I had a 15K house that went for 45K with less than 4K in it and some labor (not so much my labor but overseeing it).

    Here, there aren't any 20K types in the city limits I know of, and I'd bet I'd know where the dumps are, the city has been cleaned up and while there are still slumlord properties, they aren't sub 30 really and I'd say rents run at the very best at 12% cap rates on a SFD.

    It's claimed that half, 50% of all SFDs in town are rented!

    The house pictured above looks to be in the 65-75K range in many areas here, rent would be about the same.

    Seems the OP got a good deal on a particular property, not so much to the price range so much of the housing inventory but to that property. Not the norm but the exception. :)  

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    I just emailed my agent out of curiosity and asked him a question: 
    "If I'm doing all cash deals, how many sub $30k properties do you think I could buy a year that would rent for $750/month if I'm all in at $35k or under?" 

    His answer was "6-7." Obviously supply and very limited financing are at play here too. I definitely got a good deal, but there have been lots of those. This one just sold for $37k (not sub 30k, I know) and I missed it. 

    What's that saying about how in real estate the deal of the century comes along every couple weeks? I just think the posts I've been reading that say all sub30k houses are garbage do a serious disservice to readers, especially newbies. 

    If I were a betting man, I'd wager my year's salary that this property will still be standing after 27.5 years if there is no major disaster. 

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @Andrew S. I completely agree with what you said about having significant capital reserves. What many of us forget (after doing this for a while) is that when you are brand new/wet behind the ears you see your hard earned dollars flying out the window, it's VERY HARD to understand that the loss is temporary. There are good times and bad, but when you start with heavy expenses, it is much more devastating and you question your abilities/choices. 

    I've now had shingles blow off roofs, pipes break, sumps malfunction, hail damage, fire, etc. It doesn't have the same effect on me mentally that it used to--especially when I didn't have multiple rent checks to absorb the blows. I do my very best to mitigate damage and control such circumstances, but I can also see the big picture. Most new guys can't and think the losses will continue until the end of time. I guess it's in our nature and that's why so many people unloaded their stock portfolios in 2008. 

    The emotional response from losing money is far greater than making money. 

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Location, location, location!

    That would/could be another 75K here.

    This all really has to do with your housing inventory, location and rent levels.

    So, Ben, are you trying to go into the "turn key" business? :)

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @Bill Gulley  You're right on the money as usual. It is definitely something that I'm considering in the future if market conditions hold up and I could provide a premium service to investors. 

  • Rochester, NY · Member since 2014 · 83 posts · 19 votes
    11y
    Ben, did you find your current "sub30k" house through an agent/mls or your own personal marketing to distressed sellers?
  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @Greg Baker I have a few exceptional agents I work with. Most of my deals come from them because they know what kinds of properties I'm interested in and that I can close quickly. 

    It all depends though... last year I was working on a house and the neighbor popped in and asked if I'd be interested in buying her house (which happened to be the same exact layout.) I asked how much she wanted for it and she said $58k. I told her that I'd just paid $23,000 for the one I was working on, but if her price came down to call me. I ended up buying hers for $23,000 and it's been rented ever since @ $700/month. 

    There are many, many people on here that are far more successful than I am at this. These are just a few deals I've done. I've also had a tenant cause $7,000 in damage before too. (That wasn't a sub $30k house.)

  • Rochester, NY · Member since 2014 · 83 posts · 19 votes
    11y
    Originally posted by @Ben Stout:

    @Greg Baker I have a few exceptional agents I work with. Most of my deals come from them because they know what kinds of properties I'm interested in and that I can close quickly. 

    It all depends though... last year I was working on a house and the neighbor popped in and asked if I'd be interested in buying her house (which happened to be the same exact layout.) I asked how much she wanted for it and she said $58k. I told her that I'd just paid $23,000 for the one I was working on, but if her price came down to call me. I ended up buying hers for $23,000 and it's been rented ever since @ $700/month. 

    There are many, many people on here that are far more successful than I am at this. These are just a few deals I've done. I've also had a tenant cause $7,000 in damage before too. (That wasn't a sub $30k house.)

    Thanks for the additional detail.  Have you paid all cash up to this point, and looking ahead, do you plan to continue to pay cash, or explore other options?  

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Something is distressed for someone to give up $750 a month for 23K!

    Ben, I'm fairly good at spotting agendas, strategies and opportunities, been around awhile, LOL.

    What I also sense are Realtors and brokers allowing such deals to hit the streets with such prices, not really good representation on the part of any listing broker.

    Take advantage of the market while you can, I've seen this before and what may likely happen is that the brokers will have a light go off realizing they are dropping the ball with owners and missing out on higher commissions and they will begin to influence the market, to higher prices. :)  

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @Greg Baker 

     My pleasure. My personal approach is a mix of everything. I have some that are more plays on appreciation, but I also have some that are mostly for cash flow. If it's a deal it's a deal. 

    I believe it's disingenuous as well how some harp on appreciation when many people don't understand depreciation recapture and what that entails in terms of taxation and strategy. Numbers that work great for me as a Florida resident might not work well for someone in California in a different tax bracket and vice versa. 


  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    11y

    I'd rather buy a $30k house than a $100k house because I've just saved $70k.  If the $100k house only needs $10k of repairs over the lifetime of owning it, but the $30k house needs 3x that amount, but I can get the same rent, I'm actually ahead financially with the $30k house.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Bill Gulley 

      location location location.. that little brick house in Portlandia would be 300 to 400k

    In my old Neighborhood in Palo Alto CA  it would be 1.5 million.

    In some little rural mid west town its priced about right.  I don't know if these are in Pennsecola or not being that is the tag line here... But remember Florida got hammered pretty good.. You could buy 10 year old homes in Fort Myers a few years back for 25 to 45k all day long at auction I know I bought 7 or 8 of them..

    Locals that live and work these types of properties can hit these numbers all over the US mid west area not hard to do.. were people fall down is trying to do it from their arm chair in CA. or off shore then it gets a little tougher and riskier

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Ben Stout 

      buy a company airplane that you use for building your RE empire that will take care of deprecation recapture :).. as well as many that have large appreciating assets  ( us west coast investors as you mentioned) we use 1031's... this is how many start small and end up owning big apartment complexes... over time they keep doing 1031's but they are buying assets that can actually be sold for more money than they pay for them.

    Most sub 30k SFR's that are bought at market value.. IE what an investor is willing to pay and back into the 2% rule .> NOT some ARV that is just a figment of everyone's imagination... these will not rise in value significantly enough to create any kind of value play other than long term drip cash flow at a few hundred a month.. you just need to own a 100 of them to really make any kind of money... And 5 to 10k a month in cash flow to me is not going to cut it for most folks 10 to 20 years from now you will need at least double that in my mind once you pay tax's and live the lifestyle you deserve being a RE investor.. At least that's what the gurus' tell us right ?

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    @Ben Stout - as @Bill Gulley called it so eloquently, which is usual for him, let's call things what they are.  You commented on my blog article accusing me to be a salesman and not wanting to take the time to sell $30k pigs.  No - I have experience with those, and wouldn't wish them upon anybody - specifically not people who want stable CF.

    Turns out, you are aiming to be the salesman after all.  And to boot, you are aiming to peddle old dilapidated, functionally obsolescent crap to unsuspecting fools who don't know how to find/manage their own.  You can put lipstick on that pig all day long, my friend - it is what it is...

    I wouldn't use my license to sell this crap to anyone.  Why - cause I wouldn't buy it for myself!

  • Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    @Ben Stout You touch on a lot of interesting topics in this post.

    First, I don't think there's anyone on BP that would tell you not to buy a property with a 50% equity position after repairs in a stable market.

    The problem is -- and what I assumed with the title to this post -- is that you are talking about distressed markets.  With many D properties in cash flow markets, the properties are only worth what the next out-of-town newbie is willing to pay.  In other words there is no true and liquid equity at any price.  If you could realistically sell your first example for $70K in under 90 days, you are talking about a different market than what "Sub$30K" evokes.

    In our market in northern Utah, the typical problem with 75+ year old houses is not the original construction, but all the ill-conceived home owner improvements since.  We love old houses that haven't been butchered, but they are very hard to find.  Or worse, in the last decade we've seen a lot of horrible aborted rehabs that left the property worse than when they found it.  And I agree, if it's solid after 50-100 years, it probably will still be standing a decade from now.

    I myself have been puzzled by the large percentage of comments here preferring new construction because it has fewer problems.  We've managed plenty of properties built since the mid-nineties that are by no means worry free.  New developments go up here that sell for under $80/sq ft.  At these prices, everything going into these properties is low-end from concrete mixes to fixtures.  And when you get moisture behind a poor stucco job in our climate, you could have a $50K problem between the mold and the rebuilt exterior.

    One wonders if these new subdivisions will look just as dated as the 70-80's split-levels or the 50-60's ranches in thirty years.  The difference is pre-war through the sixties were better construction.

    In any case, I think you should broaden your post title.  I buy 80 year old properties like the ones that you are talking about, wind up with 40-50% equity after repairs, but have never picked one up for under $30K in our market (or $45K for that matter).  But because our market is super stable, I know these properties are liquid at fair market value.  Can you say the same?  If so, and you are hitting the 2% rule, @Bill Gulley 's suggestion may be a good one.

    Wm

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @Jay Hinrichs  Great idea on the airplane. I'll think about that. :) 

    As far as 1031 exchanges go, they're great. But what if you ever want to get completely out of real estate? There is no way out unless you want to take a major, major beating on that appreciation AND depreciation. I guess this is why some people end up doing questionable things like investing in TIC commercial properties.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Ben Stout 

      If you have substantial equity you refi out ... and pass the asset down to your estate at stepped up basis.. but for me I would rather pay tax then be saddled with a bunch of 30k homes that have little to no exit strategy you don't have to worry about sheltering profit because there won't be any  :)

    And your right many got fubared going into TIC's I for one am not a fan of pooled investments unless its a very closely held type transaction.. or the Promoter is GOLD and the assets are identifiable.. I have seen far to many of those go under for sure and they are a mess when it happens.

    I flew my plane into Destin one time now that was fun  military air fields all around and take off right over the ocean... an aircraft in your neck of the woods if your buying in other states would be a handy tool... just buy the one with the parachute like I have... its a life saver if you need it.  LOL

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Ben Stout 

      did not realize you and Ben were such close friends... Not sure what the under tone here is.. are you setting up to be a turn key dude.. I wrote an E book on the do's and don'ts of buying out of state through TURN key dudes..  having financing turn key operators for over 20 years I know the good ones and the bad ones and what to look out for.. and I certinaly know ghetto dogs

  • Real Estate Investor · Pensacola, FL · Member since 2012 · 136 posts · 83 votes
    11y

    @William Hochstedler I completely agree with you. It will be very interesting to see how newer construction performs over time. Fortunately I know some guys that can still worth with lathe and plaster and do fantastic jobs. I have even purchased old glass doorknobs after they've been stolen from houses etc. I love to go to the old architectural salvage places in New Orleans. 

    @Ben Leybovich I don't sell real estate. Thanks for your comments. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @William Hochstedler 

    William fine points about this mid west ARV's it always amaze's me when folks talk about instant equity and your buying this asset from me for 50k when its ARV is 75k..

    I mean if its worth 75k no one in their right mind is going to sell it for 50k right.. ? no matter what type of spin they put on it.

    And it goes back to my post about 2% rule killing values or stagnating them.. In the know investors are going to know that if our going to by low end you need 2 to 5% rule because the risk factors are so much higher ... thereby stagnating values.. rents in these markets have been the same form when I started funding turn key guys back in 2001.. they have really not gone up and some have gone down...

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