The “Cheap Rental” Trap That Destroys Real Estate Investors
Many new real estate investors believe that the first step to becoming a successful real estate investor is to buy the cheapest home they can find.
They browse through Zillow, find the cheapest homes for sale, and think to themselves:
“I can buy this for $80,000.”
“It rents for $1,000.”
“This is amazing cash flow.”
From a mathematical standpoint, it looks like a home run.
But in reality?
These kinds of deals will get you into the quickest way to lose money in the real estate world.
After 25+ years in the business, owning dozens of rental properties and flipping hundreds of homes, I can tell you that cheap rentals are never cheap.
They’re just expensive problems that hide behind a cheap price tag.
Let’s talk about what I mean.
Cheap Price = Expensive Problems
When a home is extremely cheap, it’s usually not because the seller is a nice guy.
It’s usually because something is seriously wrong with the home.
Some common problems with cheap homes for sale include:
High crime rates
Poor tenant base
Deferred maintenance
Old infrastructure
High vacancy rates
Poor management
These problems don’t factor into the simple math that most people do when looking for a home to buy.
But trust me when I tell you that these problems will factor into your life when you own the home.
Bad Tenants Destroy Cash Flow
One of the biggest problems with cheap rentals is the quality of the tenant.
Cheap rentals tend to attract people that:
Move frequently
Pay late
Damage the home
Require a lot of management
One bad tenant can destroy your entire year’s worth of cash flow.
For example:
Rent: $1,000/month
Annual Rent: $12,000
Then:
$4,000 eviction
$6,000 repairs
3 months vacancy
Your $12,000 income just became a net loss.
This happens much more often than you think for the new investor.
**Maintenance Is Usually Worse**
Cheap properties are often older properties.
Older properties mean older systems such as:
Roofs
Plumbing
Electrical
Heating and Air Conditioning
Foundations
Repairs such as these can be very expensive.
Older homes also require constant maintenance.
Rather than collecting your checks and moving on with your life, you are constantly dealing with:
Service calls
Contractor issues
Property inspections
Your “passive income” becomes a full-time job.
**Property Management Becomes Harder**
Cheap properties also tend to exist in tougher management markets.
Property managers charge higher management fees for these locations because:
Tenants require more management
Turnover is higher
Evictions are more common
Rather than the standard 8-10% management fees, you could be facing:
12-15% management fees
Leasing fees
Inspection fees
Maintenance markups
Suddenly the deal that looked so good on paper doesn’t look so good anymore.
**Appreciation Is Usually Limited**
The other problem you’ll have with cheap properties is that appreciation is typically lower.
Better neighborhoods tend to have higher appreciation because:
Schools get better
Local businesses get stronger
More demand for the neighborhood
The lower neighborhoods tend to stagnate.
So you may have positive cash flow, but you won’t necessarily gain much wealth.
And that’s what real estate is for: wealth.
**Financing Is Harder on Cheap Homes**
Finally, you’ll also find that financing cheap properties is much tougher.
Some lenders simply will not finance properties that are below certain price thresholds.
Others may require:
Higher down payments
More documentation
Even higher interest rates
It’s not an easy thing, but there are some things you can do:
Higher interest rates
Additional inspections
So the deal that looked easy to finance becomes complicated.
The Hidden Math Most Investors Ignore
Let’s compare two rental properties.
Cheap Property
Purchase Price: $80,000
Rent: $1,000/month
Sounds like a great deal, right?
But when you consider:
Higher Vacancy Rates
Higher Maintenance Costs
Higher Tenant Turnover
The return on investment might not be nearly as high as you thought.
Better Property
Purchase Price: $300,000
Rent: $2,400/month
You might enjoy:
Better Tenants
Lower Vacancy Rates
Lower Maintenance
Better Appreciation Potential
In many cases, the better property will yield better results.
Cheap Deals Can Still Work (If You Know What You’re Doing)
This is not to say that cheap properties don’t work.
They can.
But only if the investor:
Has Strong Property Management
Purchases Well Below Market Value
Makes Proper Renovations
Carefully Screens Tenants
Experienced investors know how to manage these risks.
New investors tend to underestimate the potential costs.
The Real Goal in Real Estate
The ultimate goal of investing in real estate is not simply to buy property.
The ultimate goal is to buy good properties.
Properties that have the potential for:
Consistent Income
Long-Term Appreciation
Predictable Expenses
This means that the investor must look at the quality of the deal, not the price.
Final Thoughts
Cheap properties look great because of the price.
However, in many cases, the costs will outweigh the benefits.
The successful investor will look beyond the price and consider the quality of the deal.
The truth is that the cheapest property is rarely the best.