A good number of new real estate investors start their journey with the same strategy: scoring the cheapest rental property they can find. It makes sense, right?

Cheap house, cheap mortgage, low cost of entry, high returns

On the surface, the math works. You’ll see scenarios like:

House price: $90,000
Rent: $1,100/month
Returns: 12-15%
Projected returns: 12-15%
Investment: Cheap

It’s like the property fairy godmother sprinkled magic on the deal. But let’s face the facts: the majority of new real estate investors don’t notice the problem until it’s too late:

Cheap properties tend to be the most expensive properties you’ll ever own.

Here’s why:

Cheap Properties Tied to Expensive Problems

The truth is, cheap properties rarely stay that way. There’s usually a catch, and the catch usually involves:

Older homes with deferred maintenance
Properties in undesirable neighborhoods
High tenant turnover rates
Aging plumbing, electrical, and HVAC systems
The high cost of property management
Cities with declining populations

The cumulative effect of these problems eats away at your returns. For example, replacing the roof on a cheap property can erase years of returns.

The Tenant Quality Conundrum

One of the biggest problems with cheap properties involves the tenants. For one, cheap properties tend to attract tenants with:

High tenant turnover rates
Financial struggles
Unstable work histories
A history of property damage

This creates a vicious cycle:

Tenant moves in, rent stops coming in, eviction process starts
– Property is vacant
– Repairs and cleanup needed
– New tenant moves in

Round and round it goes. Each step costs between $3,000 and $7,000 or more depending upon repairs and lost rents. Suddenly, that high cash flow property is not so free of risk.

Maintenance of Older Homes Racks Up

Many affordable rentals are older homes that require constant repairs. Common issues include:

– Old sewer lines
– Old electrical systems
– Foundation work
– Roof replacement
– Plumbing leaks
– Termite damage

These costs do not always appear in the deal analysis but do when you actually own the property.

Property Management Gets Harder

Managers often have difficulty with affordable rentals because of economics. They cannot pay for property management with cash flow. For example, if a property is rented for $900 per month and the property manager makes 8-10% commission, that is only $72-90 per month. This is not nearly enough for handling:

– Maintenance requests
– Tenant complaints
– Rent collection
– Lease enforcement
– Evictions

This means less attention, less service, and more unhappy tenants. And more turnover and more headaches for everyone involved.

The Appreciation Problem

Affordable rentals often do not do well in terms of appreciation either. Less expensive neighborhoods do not tend to grow as well as more desirable areas where better neighborhoods offer more benefits such as:

– Job creation
– Population growth
– Good schools
– Upgrades in infrastructure

So while affordable rentals may offer decent cash flow, they often do not do well in terms of appreciation.

What Experienced Investors Do Instead

Experienced investors look for better investments in better markets. They do not look for luxury homes but for homes with:

– Good neighborhoods
– Good demand for rentals
– Good population growth
– Diverse employment base

These are more likely to deliver: good tenants, low turnover, fewer maintenance woes, and higher appreciation. And over time, they are likely to outperform cheaper properties by a wide margin.

The Real Goal: Sustainable Cash Flow

Real estate is not about acquiring the cheapest property. It is about acquiring properties that deliver over time. The best properties are those that deliver on three pillars:

– High demand for rent
– Moderate maintenance costs
– Appreciation potential

The Final Words

Cheap properties may look great in a financial model, but in real life, there are unseen costs that can kill a property’s returns. The smart investor is not focused on cheap properties. The smart investor is focused on properties that deliver over time. The best properties are not always the cheapest properties. They are properties that deliver year after year.

If you are interested in learning more about financing a rental property, investment strategies, building a real estate portfolio, and other related resources, please visit Nuhome.