One of the most common mistakes I see, especially for new investors, is that they fall for cheap deals.

They find a house for $80,000…
A rental property that earns $300 a month…
A distressed property that’s a steal!

And they think to themselves:
“This is great. It’s cheap. I must be safe.”

But the harsh reality that they learn the hard way is that cheap deals often end up being the most expensive deals you will ever make in your life. Not because they’re cheap, but because of all the extras that come with it. So let’s take a closer look at that.

Cheap Often Means There’s Something Wrong

There’s a reason why that property is cheap. Maybe it’s in a neighborhood that’s declining…
Maybe it’s in a landlord market that’s tough…
Maybe it’s in an area that has no demand…
Maybe it’s in horrible condition…
Maybe it’s in an area that’s economically declining…
Maybe it’s in an area with unstable rents.

Most people assume that they’re getting a great deal. But in fact, they’re inheriting someone else’s problem. Experienced investors ask different questions. They ask:
“Why is this cheap?” Not “How quickly can I buy this?”

Cheap Properties Often Mean Expensive Problems

When you’re looking at cheap properties, they often come with expensive problems. For instance:
– Higher tenant turnover
– Higher property damage
– Higher evictions
– Higher management costs
– Higher maintenance costs
– Higher tenant instability

A cheap rental property may seem like a great investment. But once you factor in all the costs associated with it, including vacancies, property management costs, turnover costs, non-payment costs, that cheap rental property can quickly turn into a break-even situation.

Cheap Markets Can Warp Your Returns

Another area where the blind spot can rear its head is capital appreciation.

There are markets that are cheap for a reason:
– Flat population growth
– Flat job growth
– Flat demand

So you make money on rent, and the property appreciates little or not at all for years. Meanwhile, your money could have been working for you somewhere else.

Wise investors consider the following:
– Population growth
– Job growth
– Housing supply
– Rental demand
– Infrastructure investment

Price should not be the only factor considered.

Renovation Surprises Hide in Cheap Deals

Another area where the blind spot can rear its head is when it comes to renovation costs.

Distressed deals make up a big chunk of the real estate market. However, cheap does not always mean the property will be cheap to renovate.

What starts out as a simple $20,000 cosmetic renovation can end up with more costly problems:
– Electrical problems
– Plumbing problems
– Foundation problems
– Roof problems
– Mold and/or water damage

Suddenly the renovation costs increase significantly.

Wise investors consider the following:
– If the property seems too cheap, it probably has more problems than you realize.

Financing for Cheap Deals Can Be Difficult

Another area where the blind spot can rear its head is when it comes to financing the property.

It turns out that not all properties can be financed. The common problems include:
– Minimum loan requirements
– Property conditions
– Appraisal difficulties
– Limited financing availability

So the blind spot can rear its head again when it comes to making offers and considering the costs involved.

Cheap Deals Still Need Good Underwriting

Regardless of the price, all deals require the same underwriting:
– Renovation costs
– Rent rolls
– Vacancy rates
– Operating costs
– Exit strategy

So the price tag does not matter. Good investors do not look for cheap deals; they look for well-underwritten deals.

The Real Secret: Seek Strong Deals, Not Just Cheap Ones

The best deals often have some of the following characteristics:
– Strong rental demand
– Good neighborhoods
– Renovation budgets that are known quantities
– Clear exit strategies
– Stable tenancies

These deals are not always the cheapest deals available, but they are often safer and will ultimately be more profitable.

Final Thoughts

Cheap deals are often attractive at first glance. However, experienced investors realize that it is not “How cheap is this?” but “How predictable is this deal?”

The deals that are cheapest up front are often the deals that end up costing you the most in the end.

If you are investing in real estate:
– Focus on fundamentals
– Focus on underwriting
– Focus on expectations
– Don’t focus on the lowest purchase price