5 Ways to Protect Yourself When Buying Cheap Real Estate

by | BiggerPockets.com

America still has a significant number of inexpensive properties available for investors. How do you stay safe when investing in them?

There can be great profits to be found in buying, remodeling, and flipping or renting out inexpensive properties. However, it is crucial to realize that a low price tag doesn’t always mean a cheap or valuable deal. In fact, you can lose money fast buying cheap real estate if you aren’t careful. Here are some ways I’ve managed to minimize the downside risk and stay safe in the process of buying dozens of homes for less than $70k each.

5 Ways to Protect Yourself When Buying Cheap Real Estate

1. Choose the right location.

There is lots of cheap real estate in America. However, much of it may not be worth a lot. It may not be worth much for a couple hundred years, if ever. The key to success is buying in good locations that have demand and good fundamentals. We’ve all heard it over and over—location, location, location.

Related: Investing in Cheap Real Estate: Is a $30,000 House Necessarily a “Pig”?

2. Buy title insurance.

Getting a buyer’s title insurance policy is important. This is especially true when buying cheap homes from auction or homes that are in distress. Often, agents and auctioneers try to wipe their hands of any liability, which is completely understandable. Still, these properties can have the most title issues. Get covered with insurance.

3. Make smart offers.

I’ve bought auction properties sight unseen and out-of-area properties. I’ve stayed profitable by pricing my offers right. It doesn’t matter if you are bidding on a $2M home in L.A., or a $30k home in Indianapolis. The key is buying undervalued property and locking in profit from the beginning. We’ve all heard it time and time again—you make your money when you buy.

4. Get good inspections.

Where many investors fail is buying “cheap” homes and then finding out they may have to put in several times the purchase price in renovations, repairs, or even tearing down the parts of the property and rebuilding. Always get inspections done unless you’re very experienced with rehab numbers.

Related: The $30k Rental Property: How to Finance & Profit From Cheap Real Estate

5. Make sure your property management is top-notch.

Many investors just aren’t cut out to effectively operate lower-end properties. They don’t understand the quirks, tenants, or the processes. Poor management can destroy even the best opportunities on A-class real estate. Great management can effectively turn a lemon property into lemonade. Beware of trying to manage these cheap houses from afar. It can turn into another full-time job easily. 

life-on-half-income

Summary

There are attractive, low-priced properties to invest in today. Just make sure you know exactly what you are buying, price your offers right, have protections in place, and get great management. This will make all the difference between losing money and positive cash flow.

Do you have any “cheap” real estate in your portfolio? Any tips you’d add to this list?

Be sure to leave your comments below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

19 Comments

  1. Erik Whiting

    Thanks for taking time to post some summary warnings. I invest almost exclusively in these types of “cheap” properties. There is much more that could be said on this topic, but this is a good place to start.

    For anyone wanting to get into cheap properties, I recommend having a high cash flow expectation to help make it worth your while and to minimize alligators eating up all of your profits. I follow the “2% Rule”. For every $10,000 invested (purchase price + rehab), the property must return at least 2% (i.e. $200) in gross rents, and this assumes I’m not paying any amenities for the tenants like utilities, lawn care, etc. If I can’t get the deal to at least that level, I pass. An investor can easily pick up $30K properties in my town that rent for $600, so there’s no reason to settle for anything lower. These are all “Class C” on a scale of A to F. Not war zone neighborhoods, but not placed I’d choose to live. Yes, there’s drama, but I used to be a public school teacher and went into the Army in 1996 so I can manage that.

    There are good low income tenants, but another key thing is screening carefully. Learn to take control of conversations and quickly weed out the “story tellers” and “can you work with me on the deposit?” folks. When someone says, “Here’s my story…” I’ve never had it come out good.

  2. Susan Maneck

    My experience coincides with your advice. 30K properties can work well, but only if you are there to stay on top of things. As for title insurance, I remember when my son bought his first house, 3bdrm 1ba for 23K from HUD. Now, he had learned from car buying with me not to let the loan officer put a bunch of extra stuff like gap insurance on the price of the car. So he figured the same principle applied to buying a house and was going to turn down the title insurance. Fortunately the real estate agent had the good sense to call me so I could tell my son, yes, we do buy Title Insurance. Always. BTW I get $800 a month on my 30K PIGS.

  3. Marcus Auerbach

    I would ad one and probaby put it on top of the list: financial projections for at least 10 years including capital expenditures, short capex. The 30k home will need a new roof, HVAC, windows, plumbing, kitchen, flooring, electrical, driveway or new sewer lateral at some point, to name just a few examples. If you can still show a profit over the next 10 years it might be worth a look. If not, the little PIG can turn into a money PIT really fast.

  4. Nancy Coughlin

    Hi Sterling, great article! If the property has a mobile home on it, how do you confirm who owns the land? I can confirm who owns the single wide trailer home through my local property appraiser’s office, but what if the land is owned by someone else who is renting the usage for a mobile home? Where do I check the “OR” “Plat” info and what should it say if the land comes with the house?

    Separately, my 2 cents for due diligence checks on ANY house you’re planning to invest in: 1.) clean title, property on record accurately, any tax, nuisance or other liens on house; 2.) area hazards affecting insurability (flooding, environmental/leaking tanks, former drug lab usage) 3.) other related crime factors, ie. registered offenders in immediate area; 4.) and finally, school zoning and school scores for the immediate area.

    Speaking as a Florida Licensed Home Inspector, it’s absolutely worth the money to get a top notch, thorough home inspection (takes ave of 3 hrs, 2,000 sq.ft.) and the report may be able to include an investor’s cost estimate on the various repairs needed. If your home inspector does not provide this perspective, try another company!! Ask for a sample report before signing up with a home inspection company. Or just call me 😉

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php