Approaches To Making Investments In Cheap Real Estate That Investors Should Know

Many investors ponder about buying a cheap house. They could resell it for a bigger price after renovating or lease it to tenants at a lower price than costlier houses, still gaining nice income. But is it always a good strategy? We’re considering in this article why it can be good and why it can be bad. Also, we take a glance at other options to invest at a low cost.

Is cheap real estate always good?

That depends on such factors as location (and its perspectives like uprising or decline), condition of the real estate object, a criminal situation in the hood, and a possibility of appreciation & depreciation.

Cheap housing has the biggest cost rise percentage on the market (compared to mid-market and high-market offers) on a yearly basis, it is completely understood that buying something at lower cost now to resell it at a higher cost in the future is a nice idea. But thinking of such an opportunity, you have to consider several more factors:

• What are your expected cash flow and gross yield? When a price drops at some property that does not mean rental rates drop equally. You could win bigger cash on cash return by holding and renting such property than costlier options if you buy it in a good neighborhood and in a nice condition.
• Appreciation potential. If you calculate it as a positive one for a particular object, then buying some of the cheapest houses for sale would be a good idea. Otherwise, in the case of depreciation, it will be hard for you to resell the property to gain profit, so you should refrain. Appreciation is feasible the most when you buy an undervalued object or one located in a fast-growing location.
• Could you buy more than one property? Sometimes, instead of an object with a cost of $300,000, you could buy three objects with a cost of $100,000 each. While you also have lower rent in each, the total cash flow can be higher than if you held one property. Also, you do not hold all eggs in one basket. If you take a bank loan to buy, you’d pay lowers sums of monthly installments in the case of temporary vacancy of some of such objects compared to paying one in a high-cost object.

What are the cheap property cons

On many real estate investors’ websites, you can find a list of cons of investing in a cheap property. Most often, when its price is below the market, it means the following:

1. A property is a fixer-upper. Whilst it is often possible to live in such a real estate without any renovations (for a while), the condition of requiring repairs can avert many good potential tenants and generally lower the cost of living in it. That’s not speaking of such extremes as shaky and dangerous property, which cannot be rent without serious renovation done upfront. So when you’re thinking of such an object, you should always calculate its full cost – that would include the renovation cost and time. Also, a fair share of fixer-uppers might be too expensive in routine maintenance, which’s why their price has been dropped to sell them simply to get rid of a bad asset. On the positive side, don’t forget that you could deduct from taxation thanks to capitalization and further depreciation.
2. If the neighborhood or town is depressive or criminal, buying even a cheap property there is a bad decision. Firstly, the price is likely to decrease further. Secondly, you will have a problem with finding reliable and timely paying tenants.
3. If a neighborhood is only under development and it has nothing but newly built houses, it may take years to gain a solid infrastructure to attract no less solid tenants there. Are you ready to pay for the house through all these years?

Other options of low cost investing besides of buying

If you're interested in the issue of how to buy land cheaply to resell it, you might consider other investment options, too (because holding land might be too expensive). Such ones are REIT and ETF.

REIT is a real estate investment trust. Basically, you invest money in a pooled fund, which uses this money to buy various objects of real estate to gain profit on them. This can be done by means of renting, house flipping, or simply holding-and-selling. Most modern REIT organizations in the US have a very low entrance threshold (starting with $500) and pay 90%+ of the income to their investors (because of the features of their taxation). Basically, you give your money to someone so they use it to run and manage properties. Yet, you’re fully freed from any of such daily hustle and bustle. This is another type of passive income, like received from a bank deposit, only with bigger profits. ETF (exchange-traded fund) is an organization that buys, holds, and manages assets of REITs through their shares. Investing in ETF is feasible on par with REITs, as their most part is publically traded organizations.

Surely, you could invest in various securities or valuables besides ETF or REIT but this won’t be investments in real estate anymore (we’re talking in this article only about real estate investments). What REIT and ETF are attractive for is that you can spend from no to little money to enter this market. In addition to gaining a passive income by receiving dividends, you could also gain on reselling these securities at a higher price.