CHEAP REAL ESTATE? READ THIS FIRST BEFORE YOU BUY ONE
Who doesn’t want a cheap purchase right? With the low sales price, you might think that you got a good bargain but in real estate, that’s not always the case. If you’re planning on scouting for investment properties below the average market value, there are a few things that you need to consider. You may be able to purchase a cheap property but end up spending so much more on renovations just to make the property habitable so you really need to be careful. If you’re a first-time investor, it’s imperative to find a trustworthy company so you won’t be tricked. Here are a few of the pros and cons of cheap real estate investments.
It’s below the market value
Of course, this is the number one advantage. Investors are always looking for ways to cut down on expenses when buying an investment property to maximize the returns. These properties are normally those that have been foreclosed on. Banks place a foreclosed property at auction with a below-average sales price to make sure it sells as fast as possible. Distressed sellers in dire need of cash or those who are planning to move out would want to sell their property quickly too and a lower price tag is normally something that they’ll accept as long as it happens ASAP.
Potential for increased cash flow and appreciation
Affordable properties are great cash-on-cash investments that can yield a decent cash flow. Why? These properties are most likely found in low-income neighborhoods. These areas eventually undergo infrastructural development which leads to future appreciation of property values. An investor purchases a property for less than (or half) of the market value initially and waits it out patiently to allow its value to increase over time.
Opportunity to buy multiple properties
With extra cash to spare, this gives you a good opportunity to invest in multiple properties. This means that there’s a good chance to make your real estate business grow and further diversify your portfolio. The average prices of homes vary from state to state of course. A survey of a median listing price for homes in the US indicate a value of $226,800. Detroit on the other hand shows a median home price of only $80,000 – another reason why Detroit shows promise of great investment opportunities when compared to other markets. If you can afford a property in a predominantly class A neighborhood, you’re more than likely able to invest in multiple properties in class B or class C neighborhoods with the same amount of money.
Due to the lower market value of these properties, an investor will find it easier to apply for a loan if they plan to use it as a means to purchase. This leads to lower down payments as well as monthly installments. In cases where you plan to buy a foreclosed property, the bank might offer financing deals in order to close the deal much faster.
Competition is tough
You’re not going to be the only one bidding on the property. Other investors are competing to get their hands on the property before anyone else which might lead to a much higher offer than what you’ve prepared your budget for. Without proper knowledge of how a sales offer work on the current market, a rookie investor might find it hard to close the deal on a property.
Maintenance is costly
The initial capital may be cheap, but the maintenance can be a different case altogether. Distressed properties are often left in neglected conditions prompting the need to make necessary improvements and renovations. It’s true that there’s a chance of high appreciation but there are cases where that might not be enough to justify the high maintenance costs for the property. Everything from mold buildup to broken household systems can happen even when you’re still in the process of acquisition and you still don’t own the property officially.
Possible mortgage complications
There is a high chance that these below market value properties have been foreclosed on. Some mortgages require the property to be in a certain state of quality and demand some repairs before issuing any financing options to a buyer. Not all lenders are keen on offering mortgages for distressed properties either.
Despite the affordable sales price, these properties can be riskier than traditional real estate properties. A minimum capital requirement doesn’t necessarily mean that you’re all good to go. To make the right decision on your investment, consider the following before setting up a deal:
- Check the location
Consider a transitional neighborhood or an urban environment as opposed to those in the suburbs unless you have enough knowledge to deal with those. These areas are usually closer to local amenities such as school districts and public transportation. If you plan on eventually selling the property later on, these areas are the first spot that buyers would definitely look into.
- Consider short sales
This is a great way to get a cheap house. A short sale is usually when the bank agrees to let the homeowner sell the property for less than their outstanding mortgage. The only drawback for this is that the process may take longer than expected since the bank is involved and they’re the ones pulling the strings. This is entirely dependent on the seller’s current mortgage and the bank’s terms.
Everyone wants to make the most out of their buck, and real estate investors are no different. It’s easy to be bewildered by a very low sales tag only to suffer after the purchase has been made. Make the most out of your investment endeavors and harvest the benefits while mitigating potential risks involved.