Do low cost homes make sense to buy?

Question

Hello,

I'm looking to buy my first rental but I have a question.  Does it make sense to buy some of the lower $100k homes that you see on sites like roofstock?  My gut feeling tells me that at some point in the near future you are either going to get hit with a massive repair bill or the market in that area is about to tank but I was just curious if anyone else has had any success going this route for their first property or two?

Matt M. · Answer

It all depends on the market. I bought two in 2019, one for $40k and one for $60k. I put about $15k into each. They are currently rented for $1400 and $1500, they are worth $140 and $180k currently.  So it all depends on your market.

Marshall Leipprandt · Answer

@Kurt Guldi Hey Kurt, it really depends on your goals and what your analysis shows. I looked a few years ago in a market where SFHs and duplexes where $50K-$100K. I am glad I did not buy and here is why...

-Property management in the area was unreliable / few and far between. Contractors/handymen in the area I was searching were also unreliable.

-Although I would have cash-flowed a couple hundred $ per month, that would likely be completely eaten up (as you mentioned) for a big repair since the properties were built in the early 1900s. Even if you set aside 10% towards repairs and 10% towards capital expenditures on a monthly basis, a roof or HVAC issue could not only eat up your reserve, but require you to dig into your cash-flow as well.

-Properties in many of these areas appreciate SLOWLY. Even if they appreciate 5% which would be great for these low-cost areas, 5% of $100K is a lot less than 5% of $500K in more desirable markets.

With that said, there are investors/owners in every city in every state who are probably making money on these properties, so I think it ultimately comes down to what type of asset you want to own and if the juice will be worth the squeeze.

Aaron Montague · Answer

@Kurt Guldi

I don't use a percentage for Cap Ex, I use a whole number.  This means that the math of my property makes sense no matter the purchase price or rent roll. We take all the repairs we expect to make in the next 30 years, add them all up, and divide by 360 months.

If you know you are going to have to fix something straight out of the gate, add that to your cash outlay, not your Cap Ex.

The actual price of a home doesn't mean much beyond giving you a monthly mortgage payment number. The math surrounding the purchase will tell you if it is a good investment.

Kurt Guldi · Answer

Thanks, that makes sense.  I appreciate your insight!

Sylvia B. · Answer

It makes sense for us. We currently own 10 SFR, and the purchase prices ranged from $15k to $83k, with total investment ranging from $40k to $102k. Once we finish renovations, these are good, solid, B class homes in our small town.

But our situation is not yours, so what works for us is very unlikely to work for you.

Edited to add: Please note that "total investment" is not the same as current market value. We acquired these properties over the last 10 years and our RE market has gone bananas in the last 18 months.

Julie Williams · Answer

I have analyzed dozens of distressed properties in the $79,000 - $230,000 range in Vermont and Western MA. I have gotten good at looking at pictures and videos and If it looks OK, walking through, making a laundry list of things that would have to be repaired before renting it out so I could get a good rent, attract a quality tenant and have fewer repairs while it was occupied. As the market heated up, there started to basically be almost none that were worth buying. Purchase + closing + repairs was over the ARV, sometimes far over, in almost all cases. When that wasn't the case there was some other deal breaker like backing on a highway (since I intended to house hack and live in it two years before renting), a failed septic, on the flood plain, etc., etc. I have only paid a contractor to look at three properties in a year and a half. (This is a great thing to do since your real estate broker or agent will push you to submit a "clean" offer, with no contingencies.) Of course, now I wish I had bought ANY of those dumps because in all but the most drug ridden towns in Massachusetts and Vermont, homes have gone up 25%-100% in value depending on the home and the town! If ONLY I had a crystal ball! If you can do the work yourself, you have a contractor in the family or you can find an off market deal you might come out fine even now. One thing to do is look at growth in the market (although that will probably slow way down soon it does indicate a place is in demand) and the quality of the school system. Don't buy in a place with bad schools, as appreciation will likely be poor and the cost of repairs will outstrip your equity building up. Good luck!

Kurt Guldi · Answer

Thanks for the reply!  I appreciate it!

Do low cost homes make sense to buy?

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