What Every Investor Should Know Before Buying Cheap Real Estate

Cheap real estate can be a great thing, or it can be the worst investment of your lifetime. The key is knowing what to look for and when it’s a good deal. Cheap investments don’t always mean you’ll make a ton of money on the investment.

The key is knowing what to look for and what factors to consider before you buy cheap real estate. Here’s everything you should know.

The Downsides Of Buying Cheap Real Estate

Like when you go to the store and compare two products - one expensive and one cheap, there are downsides to the cheaper product. Since we’re talking about real estate, we’re talking about much more significant investments, though. Hence, it’s essential to know and understand the downsides of buying cheap real estate so you make sure you’re making the right decision.

The Property May Need a Lot of Work
Crazy low prices could be a sign that there is a lot wrong with the property. Sellers lowball the asking price just to get it off their shoulders. They don’t want to be bothered with the work or paying for it, so they ask a lower price hoping to lure in cash buyers who won’t need financing.

If you don’t need financing, there isn’t a bank telling you the property isn’t in good enough condition to buy. If you’re looking for a fix-and-flip, this could be a great idea for you and the way to save the most money. If you’re looking for a buy and hold to rent and keep for many years, though, the upfront investment may be too steep.

The Home May Be in a Bad Location
Location is everything when you’re talking about real estate. As much as you buy the house, you buy the area it’s in too. A bad location could be high crime rates, bad school ratings, no amenities, or just not a nice area for most people.

If the home isn’t in a good location, you’ll have a hard time renting it out and selling it when you decide you’re done with it. Resale value is a big factor when buying property, so pay close attention to the location and how it stacks up before buying a home.

Fair Market Rent May Be Low
If the house is selling for a low price, chances are the rents are low too. While you may have stumbled across a gem and can make large profits on it because of the low sales price, do your research.

Check out the average rent for the area. Is it close to what you’d need to charge to make a profit on the home, or are the area’s rents low, and that’s why the house isn’t selling for much? 

Crunch the numbers before making a decision, so you know if it’s a wise investment or not.

There May Not Be a Demand for Rental Properties
Continually evaluate the area and make sure there’s a demand for rental properties. Just because you found cheap real estate doesn’t mean people want to live there. Do your research and see what the area is like - who lives there, renters or homeowners? If it’s a desirable location, you may be able to make it work, but if it’s not, you may be stuck with a piece of real estate no one wants to rent.

The Benefits Of Buying Cheap Real Estate

Now that you know the potential downsides of buying cheap real estate let’s look at the benefits, as there are plenty.

You May Earn More Appreciation
If you stumbled across a great deal on a site like Roofstock Marketplace, you might just consider yourself lucky. If the homes in the area sell for more and the area regularly appreciates, you could get in at the right time. Think of it like buying a stock when it happened to drop for a day or two and then went sky high again.

If this happens, you have much more appreciation to earn because your cost basis is much lower than in the homes around you. Even if you rent the home out, you earn appreciation. When you sell the property, you earn the difference between the sales price and what you bought the house for.

Your Cash Flow May Be Higher
Sometimes low purchase prices mean low rents too, but not always. They don’t go hand-in-hand, and as long as you do your research or use a site like Roofstock Marketplace to get your facts, you may find that you earn more cash flow buying a cheaper house.

When you spend less on the house, you have lower expenses, which leaves room for greater cash flow. Finding a cheap house could be the start of a great investment that leads to greater earnings than you thought possible.

You’ll Have Lower Expenses
Spending less money on a house means your expenses may be lower, including:

• A lower mortgage payment since you need to borrow less money to buy a cheap house
• Fewer maintenance costs since maintenance costs are typically 1% - 3% of the home’s value.
• Less ‘keeping up with the Joneses’ if you buy a home in an average area, you don’t have to worry about neighbors making fancy upgrades that you need to keep up with

You Have More Options
If you find cheap real estate using a site like Roofstock Marketplace, you may be able to make your money go further.

For example, you could invest in one property and pay cash for it if you have the total amount, or you could spread your money out over a few properties, making down payments on each and financing the rest.

This is a decision between putting all your eggs in one basket and investing in one property or diversifying and investing in multiple properties. When you diversify, you reduce the risk of a total loss even if one tenant abandons you, leaving the property vacant, you have the other two properties to make up for it.

What Should You Look For?

If you decide buying cheap real estate is the right choice for you, look for the following factors:

• Do your research on the location, making sure it’s safe, profitable, and will hold up its value.
• Know the average rent prices in the area and make sure they aren’t significantly lower than other areas (rent usually holds steady but make sure)
• Make sure the area is desirable for renters.
• Look for houses that have been on the market for a while; the seller will be motivated and may be able to take your lower offer.
• Crunch the numbers and make sure it’s worth the investment

Where Can You Find Cheap Real Estate?

Now the bigger question is, where can you find cheap real estate? You know you want to take a stab at it, but where do you find it?

Is your local real estate agent a good resource?

While you may find a real estate agent with connections to cheap properties, most are in it to win it. They work on commission and want to show you the houses that are selling for much more money so they can make a living too. 

There are possible exceptions to this rule, but there are other ways to find cheap real estate, including the following.

Network
Real estate is a lot about relationships. If you have a good network of real estate professionals, you’re more likely to hear about great deals before anyone else. When cheap houses hit the market, they usually go fast, especially if it’s an area with cash investors. When you have a network, you can be ‘in the know’ and jump at the chance to buy cheap properties when they’re available.

Watch for Short Sales or Foreclosures
Short sales and foreclosures typically offer great deals on real estate, sometimes even in great areas. While they have more hurdles to jump and frustrating time delays, it may be worth it if you can get into a home with a lower investment.

To get into short sales and foreclosures, you’ll need a real estate agent specializing in those areas or who can watch the MLS listings for you. Letting other real estate professionals know you’re interested in these types of homes, too, will help you get more leads.

Use Roofstock Marketplace
Roofstock Marketplace is a platform for real estate investors. You can buy and sell properties on the platform and often get great deals. Since it deals only with investment properties, you deal with like-minded people who have the same goals as you.

What sets Roofstock apart from any other marketplace is the information they arm investors with for free. Anyone can browse their marketplace and see the cheap real estate options they have, but it’s more than that. They offer homes for sale, but each home comes with a complete financial analysis of the home, profits, costs, and rental information.

Some properties on Roofstock Marketplace even come with tenants in them with an active lease. This makes you an instant landlord, and if you got a great deal on real estate, it’s an even better opportunity.

Consider a Fixer-Upper
If you can find a fixer-upper that isn’t too rundown, you may have the best of both worlds - a property you can buy with little money upfront and the property you can force appreciation on by fixing it up and making it suitable for renters.

Be careful with this option, though, because it’s easy to get in over your head fast. Once you start fixing the property up, it’s easy to get into that rabbit hole and keep investing money. Before you know it, you’re in over your head, and you have more invested in the property than you’ll earn when you rent it out.

Work With a Real Estate Agent
Of course, you can always work with a real estate agent, but you need one who will have your back. If you work with an agent that is commission-driven, they will only want to show you the highest-priced properties. You need an agent who will work with you to reach your goals - helping you find multiple cheap properties may earn them just as much commission as one expensive property, but it takes certain agents to realize this potential.

Should You Buy Cheap Real Estate?

So should you buy cheap real estate, or is it a losing investment from the start?

It depends on how much work you put into it. If you find the right property that’s cheap but not wholly rundown, it could be a good investment. But, it depends on many other factors, including the location, crime rate, school ratings, average rent for the area, and the demand for rental properties there.

If you can get into a cheap piece of real estate and realize significant profits, it’s an excellent investment. But if you’ll invest in it and only find yourself sinking further and further into debt, it may not be the best choice.

Do your research and have the proper support, such as Roofstock Marketplace offers investors. With the proper steps, buying cheap real estate could be the best move you’ve ever made.

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