Will Buying Cheap Homes Make You Money?

New real estate investors often get infatuated with the idea of the passive cash flow that real estate can bring in. So it’s not surprising when you see many new investors throw caution to the wind to chase cash flow and end up buying super cheap homes (in oftentimes questionable areas) thinking they will reach their investing goals faster.

But this can be a big trap if you aren’t careful.

Why Not Buy Cheap?

Cheap houses tend to:

1. Be in areas of town that are most likely on the decline rather in the path of progress.

2. Have higher tenant turns and higher turn costs due to lower pride of ownership

3. Have higher CapEx/maintenance costs in relation to the rents impacting your cash flow.

4. Be harder to insure for a reasonable cost, since the cost to replace the property is often much higher than the actual value of the property.

5. Have fewer exit strategies due to fewer qualified buyers at that price point.

6. Make it harder (or impossible) to secure lending, since banks have a minimum up loan amount they will underwrite.

7. Have lower depreciation, impacting your ability to use one of the most powerful tools of real estate to keep your cash flow tax-free, especially if you purchased all-cash.

What To Do Instead

Before you commit to this strategy of investing, step back and take a moment to follow the steps below to build a comprehensive investing plan.

1. Take a deep introspective look to understand:

- Your true investing goals. Do you need cash flow, equity growth, or a balanced approach of both?

- What investing strategies line up with your investing goals?

- What kind of time can you dedicate to your investing plan?

2. Research your markets/submarkets that will tip the investing cards in your favor and that you can afford to invest in. Look for markets where there is:

- Population growth

- Job growth

- Job diversity

- Income growth

- Affordability (asset prices and rents)

3.Once you have narrowed your market and submarkets, pick two to three to do a deep dive analysis of the various assets that meet your investing goals.

These three steps are the three toughest steps to get right in real estate and are the steps that many investors shortcut. Once you have these three steps dialed in, then you are off to the races to set up your team, build your deal funnel, and start making your deals happen.

This isn’t an exhaustive list of all the steps you need to get started to investing in real estate, but it is a great start to building a plan to keep you out of one of the most common pitfalls new investors face: the temptation to buy super cheap investments.