Every real estate investor wants to buy property at the lowest possible price. Even better, investors want cheap property that will earn a good rental income or can be developed on and sold at a profit. But is buying cheap property really such a good investment?
Let’s take a look at the advantages and disadvantages of buying cheap property.
Pros of Buying Cheap Property
The best part of buying cheap property is obvious: It’s a bargain! You get a lot of bricks and mortar for your money. It offers good value—or at least, it appears to.
Cheap property is perfect for cash investors. The price may be low enough to make a cash purchase possible. That way, no mortgage is needed, and no lending criteria must be met.
Lower Taxes and Fees
Purchasing cheap property minimizes transfer and recordation taxes, as well as property tax bills. In addition, a low purchase price means a low deposit, low repayments, and low interest.
And if bought with a mortgage, the mortgage will be smaller, meaning that the cost of financing the project will be less.
Less money invested broadly means less risk for the investor.
Cheap property is often, by association, located in less prosperous areas, where fewer people can afford to buy. This typically equates to plenty of property to choose from but less competition when buying.
Good Rental Prospects
Less prosperous areas where few people can afford to buy often have very strong levels of rental demand.
More Profit Potential
This is probably the most important advantage of buying cheap property: High and even super-high rental yields are possible. Since prices are much less than “expensive” areas but rents are not comparatively much less (and may even be the same), yields can be excellent—sometimes double or even quadruple those in higher-priced areas.
Property is always cheap for a reason. Buying cheap property is a different investment proposition on several levels.
Frequently, property is cheap because the area in which it is located is economically disadvantaged, has higher levels of poverty, or may have social problems. This is probably the most significant disadvantage of cheap property.
Property values in disadvantaged areas can be volatile. They may appreciate slowly in good times—or
maybe, not at all—peak late, and then depreciate quickly in bad times.
Hard to Sell
Property in these kinds of areas may be difficult to sell. In some circumstances, it may even be impossible.
Cheap property in less-than-stellar areas generally offer poor prospects for capital appreciation.
Smaller Tenant Pool
Renting prospects may be limited to certain types of tenants (e.g., Section 8 tenants, problem tenants, etc.), limiting the rent that may be charged.
The area, type of property, and tenant pool could require more management, therefore increasing
Less Value-Add Potential
The scope to add value with renovation or development may be very limited. Improved or developed property may only increase in value by the cost of the work—or potentially, even less than that.
How To Invest in Cheap Property the Smart Way
So, what should you do if you are looking to invest in cheap property?
Do Your Homework
Firstly, investigate and beware of the drawbacks. Know why the property is cheap.
Acknowledge the Facts
Next, recognize that cheap property is often a proposition for income rather than profits. Be realistic about:
- Prospects for future capital appreciation
- Prospects for future resale potential
- The renting potential
- The rent that can be charged
Calculate Yields Accurately
Also, where the possible yields make the property seem like an attractive investment, ensure that this far outweighs the drawbacks (such as a lack of capital appreciation).
Most important of all, never confuse cheapness with value. Cheap property can offer an excellent opportunity to investors. However, it can also offer the worst possible false economy.
Before jumping in, do your research, get advice, and know what you are getting involved with.
Should I Buy a Rental Property in a Bad Neighborhood If It’s Cheap?
If you have the opportunity, always choose the best possible location to buy a rental property. If you can’t, understand that not all bad neighborhoods are equal.
So, where should you invest in real estate? Make sure you choose a location that is on the way up and has a lot of potential.
How To Identify a Good Location
When buying an investment property to rent out in a bad neighborhood, ensure that the location:
- Is close to public transportation
- Has public facilities
- Has recent business investment nearby
- Is close to a more popular area
Moreover, make sure to look at the population. If the neighborhood has many working residents, there is a chance of having high occupancy rates.
Together, these characteristics will give your “bad” neighborhood the opportunity to turn out as one of the top investment property locations in the future.
How To Determine the Best Real Estate Markets for Investing?
The best rental investment locations will have a healthy economy and display job growth. Look for newly developed companies or other successful companies that are moving to your location of choice.
This type of development would help the population growth, as well as the demand for investment properties. Thus, your rental properties will enjoy a higher occupancy rate and a lower vacancy rate.
Buying cheap property involves risk—just like all investing. But that’s not to say there isn’t profit potential. The key is understanding the advantages and disadvantages prior to purchasing. Do research, consult other investors, and know your numbers to ensure you are making a sound decision.