You Get What You Pay For
By Paul Esajian on March 3, 2014
There are many ways to go about your real estate business. Wholesale, rehab, build, flip and buy and hold are just a few of the many avenues you have available. Inside of each of these categories you have questions regarding size, location, style and purchase price. What works for one investor, another may not go near. The best way to go about your business is in the manner you see fit. If you prefer to buy bank owned condos, go ahead and make them your niche. Whichever way you go is fine, as long as you remember that you will always get what you pay for.
There are many investors who either start out or focus on properties priced only under $50,000. They like the fact that they are affordable and can offer a big return in the right location and with the right amount of work. What you will often find in the real estate business is that there are very few properties that you can hit home runs on. This doesn’t mean you can’t make a great profit on a given deal, but if a property has been passed over by everyone for years, there must be a reason. It could be the location, the condition or the structure that has other investors running away from it. If you decide to take a shot on a property like this, you had better be prepared to dig a little deeper.
There must be a good reason why the market is shying away from this home. If you are located in a rough neighborhood, there may be a long history of police activity and decreasing rents making the property unappealing. You may feel that you can rehab the property and give it new life, but the work you put in may not be enough. You will still need to rent or sell. Regardless of what work you do, there may not be enough interest. Your $35,000 purchase may seem like a bargain, but when all is said and done you may be left scrambling just to squeeze out a small profit.
Just by the sheer cost and condition of the property, you know that it needs a lot of work. Even the items that appear in good shape will oftentimes need to be replaced. Once you dig a little deeper, you can be looking at updating or replacing 80% of the property. These costs will start to add up. If you really want to make your investment stand out, you have to do the work right. You could be looking at $60-65,000 in work plus your purchase price, leaving you at $100,000 in an area where the comparables aren’t much higher than $120,000. There may still be some room to make a profit, but your money is tied up for months and there is still no guarantee that you will be able to sell at a price that you need. What you thought could be a quick and easy $40,000 can be knocked down to $20,000.
Buying inexpensive homes can be a very profitable strategy with the right neighborhood and the right plan. Before you buy any property, know what you are getting into and all of the costs associated. What can be a diamond can quickly turn into a lemon if you are not careful.