Cheap Equals Cheap
Published on: Monday, May 2nd, 2016
The allure of investment properties is this: buy an investment property with little or no money down and have a tenant pay rent, which will generate enough cash flow to cover the mortgage payment. At the end of the mortgage term, your property will have paid for itself and you have a very valuable asset! In theory, this is exactly how an investment property should work. The problem comes when an investor buys a “cheap” property due to the low upfront cost.
Surprisingly, this mistake is quite easy to make. The owner has a little extra money saved up and has heard that real estate is a great way to make extra money. So they look at properties for sale and find one that seems like a steal. It may need a little paint, maybe some new windows, but it’s a great price, they tell themselves! So they move ahead with the purchase.
The issue with the new owner’s home is that it’s in an undesirable part of town (hence the reason for the steal of a price) which makes it hard to get tenants. And once they do place a tenant, they run the risk of the property being damaged by the tenants who are unable to pay, so the owner is left footing the bill. And the worst part of buying a “cheap” property is that in most cases it’s cheap in quality, too. Many times there is deferred maintenance that needs to be addressed which can end up costing the owner much more than they ever anticipated (keep in mind a furnace alone can cost thousands).
The good news is that by buying right, you are able to avoid the headaches discussed above. When looking for investment property, keep in mind that if it’s cheap in price, it’s probably for a reason. Conversely, this is not to say that just because the price is low, it isn’t still a good buy. Maybe the property itself is in solid shape but just needs some updating. Just don’t overlook major quality issues because you are eager to purchase your first investment.
Again, the old mantra is that “you get what you pay for,” and this cannot be more true when considering an investment property. If you are not willing to invest in a quality property upfront, you will likely pay on the back end through repairs and lost rent due to a high vacancy rate. So buy right, buy smart, and make sure your potential investment meets your own quality standards to keep you from avoiding buying a “cheap” property.