If you are buying lower cost SFH's what is your exit?

[Stuart Udis]

Many new investors gravitate towards the lower cost SFH's because they are easy to finance, abundant in many markets and are the easiest pathway to completing the BRRRR which most new investors view as the ultimate real estate success story. Unfortunately very few who seek out these assets take the time to consider their exit and fail to realize they are the most costly assets to exit, let me explain why:

 Here's how that disposition process to an owner occupant looks:

 -You will incur turn over expenses associated with vacating the tenant in preparation of the sale

-The natural buyer in this price point is the FHA buyer who will normally seek a 5-6% seller assist

-Passing a Section 8 inspection/preparing a home for a low income tenant is very different than the expectations of a home owner, particularly the FHA buyer who cannot afford to take on any deferred maintenance. Therefore expect a 15 page home inspection report filled with corrective measures you must satisfy otherwise the buyer walks.

All in between turning over the home, ordinary transactional costs ( broker fees, transfer tax, loan payoff fees etc.) seller assist, repair addendum repairs its very possible for your exit fees to approach 13-15% of the properties sale price. 

Next the investor: Investors will not pay retail for these assets because there are no barriers of entry and they can complete the same process you completed given the abundance of distressed assets available in these markets. Alternatively they can purchase a portfolio of occupied homes at a discounted price because the seller of the portfolio in most instances first tried their hand at selling the homes individually to the owner occupant and after experiencing 13-15% in disposition fees and expenses realized its not worth the effort and better to package the assets and sell discounted to another investor.

Keep in mind, most of these SFH's are in stagnant markets meaning limited appreciation and if you ever took the time to look at an amortization schedule there's no meaningful principal paydown for many years. Some may say they can pay down the principal more aggressively with cash flow, but reserves are necessary in this asset class because Capex disproportionally impacts these lower priced SFH's and ordinary repairs can easily wipe out months of cash flow.

If you chose to go this route, the home must have meaningful appreciation otherwise you will be running in place and the only people to make out are the transaction fee earners (Sales Agents, PM's, Lenders) and perhaps FHA buyers who get a home with a 3.5% down payment with the benefit of a seller assist and a 15 page corrective report completely satisfied. Unfortunately satisfying a BRRRR & marveling at the spreadsheet cash flow and equity are what lead to purchases in stagnant markets and very few who invest in these assets pay any attention to the fundamentals that lead to meaningful appreciation where a gain can actually be realized.

[Basit Siddiqi]

In my opinion, you can make as much money buying cheap houses as you can buying expensive homes.

Affordability is an issue for a lot of Americans so I will argue cheaper cities performed better over the past 10 years than more expensive markets / houses.

San Francisco, CA, Seattle, WA and New York, NY are considered expensive markets.
If I look at Zillow's price estimate for homes comparing 2016 and 2024

San Francisco - Average Price of home was $1,145,000 and now its 1,262,000(Increase of 10%)
Seattle - Average Price of home was $561,000 and now its $848,000(51%)
New York - Average price was $561,000 and now its $766,000(37%)

Memphis, TN, Indianapolis, IN and Clevlenad, OH are considered cheaper markets.
Zillow is showing more appreciation in these markets over the same time period
Memphis - Average price was $73,000 and now its $149,000(104%)
Indianapolis - Average price was $107,000 and now its $225,000(110%)
Cleveland - Average price was $54,000 and now its $109,000(101%)

Population increases and job growth are two indicators that result in appreciation.
Two of the cheaper markets listed above(Memphis and Cleveland) are not increasing in population. However, there is a big push for investors to chase 'yield'(Cashflow) which is likely pushing these markets even higher.

I purchased about 30 homes in Jacksonville from 2020 to 2022 below the cost of $72,000. I only sold a few amount of properties but the values of the homes have increased.

The government is making less affordable homes(Impacts supply)

A lot of the points you suggested such as selling costs and having to rehab the property before sale apply to both cheap homes and expensive homes