With talks of recession why wouldn&#x27;t I just buy cheap?

OP

New to Real Estate · Vancouver, British Columbia · Member since 2022 · 157 posts · 86 votes

4y

Quote from @Taylor L.:

It is tempting to go for the least expensive property you can find, but there are a lot of risks that come with cheap properties. They tend to be cheap for a reason. Many are older and need a lot more upkeep than newer buildings. The repairs and capital expenditures can get very expensive. When you're funding those with low rents, it's a double whammy. Materials and labor can only get so cheap.

It's also not a foregone conclusion that markets hit by recession will ever come back, particularly if they don't have strong jobs markets with a diverse base of industry. There are a lot of areas around the US that used to be major employment hubs but which have completely fallen off the map. For example, textiles and furniture were huge in parts of VA and NC but those industries largely migrated away. Steel was a big part of PA's economy, but that is largely gone (and with it the jobs).

Economic diversity is going to heavily influence the long term success of any buy & hold real estate investment. If the jobs leave an area, that's it. Economic diversity means one single industry won't drive the ups and downs of your investment.

Thank you for the detailed reply. All fair points that I will take into consideration.

I was more so thinking investing into the cheapest markets in terms of median price. But maybe on the higher end of neighbourhood grade. But very true that alot of these homes do seem to be older.

As for economic diversity. Is there any metrics/resources you use to gauge how diverse/stable the economy is? Im looking at alot of different markets and some are very clearly dependant on a single industry which I would like to avoid. Others seem to have diversified.

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

4y

@Gurjot Grewal

If you go to the cheapest market and buy a $40k property realize a roof still will cost you thousands as will flooring, finishes etc.

I much rather spend $3000 painting my 1,000sf home worth $250k bringing in $2k rent than doing it on a $40k property bringing in $600.

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Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

4y

If you are talking about investing in a city where the average house price is lower, then it can work (eg don't invest in Toronto, ON, but in Medicine Hat, AB). But if you mean buy a cheap house in a bad area-don't. On paper it may look good but as Taylor said, you will have higher turn over, more problems with the tenants, etc.

There are markets in Canada where you can still cash flow and buy a good house that doesn't cost an arm and a leg. BC prices have gone up and you have a property transfer tax when you buy. If you look at other provinces (eg Alberta), you don't have the transfer tax. Property taxes also differ between provinces.

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

4y

13 recessions since World War 2. Real estate prices rose during 11 of them. Why assume they will drop in the next recession? They certainly didnt in the recession of 2020 just 2 years ago.

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Brett Robinson

Real Estate Investor · Medicine Hat, Alberta · Member since 2017 · 24 posts · 2 votes

4y

I have a package of 3-4 properties I’d possibly sell in Medicine Hat alberta. All 2 unit properties around the 300-350K mark.

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Quote from @Gurjot Grewal:

This is my thought process. Am I completely off on this?

Yep....

OP

New to Real Estate · Vancouver, British Columbia · Member since 2022 · 157 posts · 86 votes

4y

I want to clarify I dont mean to invest in the cheapest neighbourhoods, but target cities with a lower entry point like Birmingham, Cleveland, Lawton.

Seems like I have alot to learn. I have ordered “J Scotts recession proof investing” book. Would love any other suggestions or resources.

OP

New to Real Estate · Vancouver, British Columbia · Member since 2022 · 157 posts · 86 votes

4y

Quote from @Bruce Woodruff:

Quote from @Gurjot Grewal:

This is my thought process. Am I completely off on this?

Yep....

Oh man ahah, what do you disagree with?

Mo Karim

Real Estate Agent · Dallas, TX · Member since 2020 · 164 posts · 80 votes

4y

@Gurjot Grewal

You can buy in any economic cycle if your underwriting is solid. Mine has become more conservative last six months. I'm now including higher reno costs, higher downpayment, higher reserves, etc. Make sure you have a good foundation and you'll be fine. Google some excel spreadsheets for rental properties and start there.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

4y

Don't forget currency exchange and FIRPTA risks.

I'd rather spend USD in Europe right now than Canadian dollars here, especially to wade into c class hassles.

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Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

4y

If the economy goes south and you bought properties in a weak job market it could take YEARS to get them back. Strong job markets are the catalyst for everything. If you like quality tenants that pay on time, lower crime, and less damage to property I'd steer clear of C-/D class neighborhoods.

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Patricia Steiner

Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes

4y

Why wouldn't you invest in a market that is appreciating year-over-year, has high renter demand, and year-over-year rental price increases? Yes, you can buy in an affordable market but it doesn't mean that an affordable entry price will make for a good investment. Maybe start with this question: What is your overall goal? The big "why bother?" If you're all in it for building and preserving wealth then you will want to explore markets that will provide you the best ROI. If it's to acquire doors, lots of doors - West Virginia, Mississippi, and Arkansas are the cheapest dates.

Bottom line: timing the market - including economic cycles - is not what provides for the greatest return and it is ill advised by investment gurus in all sectors. Investing in real estate is by no means passive - it's the building of a business. Build your business where the ROI is the greatest - rather than entry price. Hope this helps...

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Matthew Irish-JonesBusiness Member

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

4y

Quote from @Gurjot Grewal:

With inflation from my understanding two things will happen. Either rates rise to the point where they lower inflation but we risk economic slow down, job losses, deferred debt etc. If the economy slows too much they may start cutting rates leading to more inflation.

If rates rise, sure prices may come down but mortgage payments will still be unaffordable for most, and rents will go up. If they cut rates then more people are likely to park their cash into an asset like real estate leading to an increase in prices.

This is all new to me, im trying to educate myself. Im a Canadian looking at US real estate. My plan is to buy my first place before the end of the year, use the cash flow to finance a car.(Car accident led to my car getting written off)

Theres something to be said about cities with economic diversity, maybe these areas will be more resilient. But why not just go to the cheapest market? Even if it drops by 10-20% if you cash flow long enough you can atleast break even. Not to mention as it gets more unaffordable everywhere else, people may migrate to where it is more affordable at times like this.

This is my thought process. Am I completely off on this?

I don't think you can treat Real Estate like a Commodity.  If you are buying oil futures and the price drops to a 50 year low, sure there is not much room to go down and its worth taking the risk if you can cover the margin call.

With Real Estate price and returns are relative to risk.  There are very, very, very cheap properties 20 mins from me in NIagara Falls NY.  They are high risk and come with a host of issues for landlords. Most of these properties you would lose money on if you were given them for free. My family owned property we sold back to the city for $1 because it could not sell, it was a liability, and it was not worth holding.  It had negative value.

You have a point on migration, with more virtual work opportunities some of the "cheaper" cities are seeing more and more people relocate simply because the cost of living is much less.

Your goal should be to find a balance between risk and return, and look for stable predictable returns.  Those are the best long term investments, and come with less headaches.

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Susan Maneck

Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes

4y

You don't want to buy in a war zone but I have always bought my properties "cheap' but then I was living in a cheap state, Mississippi.

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Quote from @Susan Maneck:

You don't want to buy in a war zone but I have always bought my properties "cheap' but then I was living in a cheap state, Mississippi.

Cool state though...home of the Blues....

Shane Kelly

Real Estate Agent · Cleveland, OH · Member since 2021 · 383 posts · 361 votes

4y

Quote from @Gurjot Grewal:

I want to clarify I dont mean to invest in the cheapest neighbourhoods, but target cities with a lower entry point like Birmingham, Cleveland, Lawton.

Seems like I have alot to learn. I have ordered “J Scotts recession proof investing” book. Would love any other suggestions or resources.

I can say that investing in cheaper cities does in theory lead to lower loss of money. As your point kind of made, if you lose 10% of 100k it's a lot less than losing 5% of 500k. At that, the cashflow numbers make sense a lot lot better at renting for $1000 for 100k purchase price, than renting at $2500 for $500k purchase price. With all of that said, I'm no veteran in the game and I'm a Midwestern boy, so my perspective is limited, but I happily plan on purchasing rentals in my hometown of Cleveland in the near future. Maybe there is a win in the long term for gaining 5% on 500k than gaining 10% on 100k, but I don't plan on playing for appreciation in the short term. Sounds like you might not either.

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Quote from @Gurjot Grewal:

If rates rise, sure prices may come down but mortgage payments will still be unaffordable for most, and rents will go up. If they cut rates then more people are likely to park their cash into an asset like real estate leading to an increase in prices.

use the cash flow to finance a car.(Car accident led to my car getting written off)

But why not just go to the cheapest market? Even if it drops by 10-20% if you cash flow long enough you can atleast break even.

A few thoughts: 1) Interest rates are low right now and they are only relative to other factors in your decision to buy anyway. 2) Get a cheap beater car, don't go all Tesla or anything...you'll need all the CapEx savings you can get. Always. 3) You don't want to 'at least break even'....that will mean you lose eventually 4) Re: the original question, there is really no best market or best time. It depends on too many other things....your financial position, your aversion to (or tolerance for) risk, your actual specific goals in 5/10/20 years....and many others.

Find a State/City that you like, that has good Landlord friendly laws, and that your research shows will do well in the long run. Then you can choose STR vs LTR vs MF....

Just my .02

Caleb Brown

Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes

4y

I'd avoid the cheapest areas, would most likely be a war zone or D area. Those often will put you in a hole with the tenant pool, maintenance repairs and area. Sure you can "cashflow" but if a place is trashed all that monthly cashflow is wiped out then who cares. If you picked a C/B area you'd be in a middle of the road area. People make money in any neighborhood class but being OOS I'd avoid rougher spots.

Ricardo Hidalgo

Real Estate Agent · Member since 2019 · 569 posts · 257 votes

4y

Quote from @Gurjot Grewal:

With inflation from my understanding two things will happen. Either rates rise to the point where they lower inflation but we risk economic slow down, job losses, deferred debt etc. If the economy slows too much they may start cutting rates leading to more inflation.

If rates rise, sure prices may come down but mortgage payments will still be unaffordable for most, and rents will go up. If they cut rates then more people are likely to park their cash into an asset like real estate leading to an increase in prices.

This is all new to me, im trying to educate myself. Im a Canadian looking at US real estate. My plan is to buy my first place before the end of the year, use the cash flow to finance a car.(Car accident led to my car getting written off)

Theres something to be said about cities with economic diversity, maybe these areas will be more resilient. But why not just go to the cheapest market? Even if it drops by 10-20% if you cash flow long enough you can atleast break even. Not to mention as it gets more unaffordable everywhere else, people may migrate to where it is more affordable at times like this.

This is my thought process. Am I completely off on this?

Location location location. Going after the cheapest market you may be pursuing lower income areas, people with less job stability and higher crime rate than the affluent neighborhoods. Investors want security and a higher probability of resale in the future with no issues.

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@Mo Karim @Steve Vaughan @Jaron Walling @Patricia Steiner @Matthew Irish-Jones @Susan Maneck @Shane Kelly @Bruce Woodruff @Caleb Brown @Ricardo Hidalgo

OP

New to Real Estate · Vancouver, British Columbia · Member since 2022 · 157 posts · 86 votes

4y

Thank you all for replying. Everything mentioned has been very helpful. I will absorb all this information and try to filter out some of the markets I have been studying.

4 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Quote from @Gurjot Grewal:

@Mo Karim @Steve Vaughan @Jaron Walling @Patricia Steiner @Matthew Irish-Jones @Susan Maneck @Shane Kelly @Bruce Woodruff @Caleb Brown @Ricardo Hidalgo

Thank you all for replying. Everything mentioned has been very helpful. I will absorb all this information and try to filter out some of the markets I have been studying.

Good for you! Hint - this is not that hard, it just seems that way....mostly common sense, you will do fine!

@Mo Karim @Steve Vaughan @Jaron Walling @Patricia Steiner @Matthew Irish-Jones @Susan Maneck @Shane Kelly @Bruce Woodruff @Caleb Brown @Ricardo Hidalgo

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Gurjot Grewal:

Thank you all for replying. Everything mentioned has been very helpful. I will absorb all this information and try to filter out some of the markets I have been studying.

why not look at Kelowna Kamloops Vernon Penticton those areas I bought in Kelowna and did very well.

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OP

New to Real Estate · Vancouver, British Columbia · Member since 2022 · 157 posts · 86 votes

4y

@Jay Hinrichs
I would love to invest in any of those areas. But feel im priced out of all those markets. Kelownas median price for SFH is over 1 million now. Around okanagon im looking at 700k+. I could go more rural in BC and get into a lower price range. But feel my money would be put to better use across the border.

Are you currently holding your kelowna property ?

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Gurjot Grewal:

@Jay Hinrichs
I would love to invest in any of those areas. But feel im priced out of all those markets. Kelownas median price for SFH is over 1 million now. Around okanagon im looking at 700k+. I could go more rural in BC and get into a lower price range. But feel my money would be put to better use across the border.

Are you currently holding your kelowna property ?

I wish.. I bought a home on the Oakanogan golf course across from the airport Golf course frontage paid 260k CDN for it brand new 2500 sq ft. LOL sold for a profit but that is a big woulda coulda shoulda story for me.. I could have bought condos in the strata there at the same time for 50k each and ski in ski out at the ski area above Vernon for under 40k CDN.. OH well. I love the area and prior to coivd we went up twice a year to the Douglas Ranch for fly fighing staying at the lodge.

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