Investing in real estate comes with a dizzying number of options. Passive or active? Residential or commercial? Single-family or multifamily? Which market? While many decisions come down to personal preference or investment strategy, some are less subjective.
…Like your property price point.
Unfortunately, this is where a lot of green investors make mistakes. They believe cheap properties –low-end houses for their specific market – are the best option. After all, lower upfront costs surely mean lower risk and bigger profit margins. Right?
Not so. The truth is properties in and around the median range for the market are your best bet as an investor – both in terms of risk and reward. Like Goldilocks, investors must look for that “just right” balance. Here’s why they tend to be better than cheap or high-end properties:
Midrange Properties: These are typically affordable for a wide range of people in the middle class. This demographic often consists of stable, reliable renters who prioritize good schools, safe neighborhoods, and proximity to jobs. They’re also more likely to want to put down roots and renew leases.
Cheap Properties: Cheap properties attract lower-income people more likely to have financial instability, leading to higher turnover rates and a greater risk of non-payment. These rentals likely aren’t anyone’s first choice, either, so even those with stable rent payments may be looking to move as soon as they can.
High-End Properties: Luxury properties appeal to a narrower, wealthier pool of residents. This niche market can result in longer vacancy periods and higher sensitivity to economic downturns simply because there’s less demand.
Midrange Properties: They offer a good mix of cash flow and potential for property value appreciation. These homes and neighborhoods tend to be stable or moderately growing in value over time. It’s a balanced, multi-pronged strategy for building wealth.
Cheap Properties: While they might offer higher cash flow percentages, appreciation potential is often limited, and maintenance costs can be disproportionately high. Properties can’t disassociate from their location. If a property, no matter how well-renovated or cared for, is surrounded by a low-end, poorly maintained environment, it will limit how much appreciation those efforts yield. It will only ever be worth so much, and investors can only reasonably charge so much.
High-End Properties: Generally, these have lower rental yields because the purchase price is significantly higher than rent. And the rent is still high! High-end properties may appreciate more but are riskier during economic downturns because of a more precarious supply/demand balance. Those tighter margins mean little room for such volatility.
Further Reading: What Makes Low-Cost Properties a Bad Bargain?
Midrange Properties: Typically newer or better maintained than cheap properties, midrange properties reduce ongoing repair and renovation costs because there is a strong balance between the cost of materials and their durability. They also attract residents who tend to take better care of the property.
Cheap Properties: These may require substantial initial renovations and ongoing maintenance, cutting into profits. Because lower-cost materials are often used for these properties (remember, there are diminishing returns for renovation work on cheap properties), they may not stand the test of time.
High-End Properties: Though high-end properties are often well-maintained, they have higher standards for finishes and amenities. That means expensive repairs and upkeep! These properties are usually larger as well, meaning more things to maintain and manage.
#4 – Market Resilience
Midrange Properties: The middle-income sector often remains steady during economic shifts. These properties are less likely to experience significant vacancies or rent drops because your household remains relatively stable.
Cheap Properties: You may face challenges as renters in lower-income brackets are more impacted by job losses and economic downturns. Late or unpaid rent, broken leases, and other issues are more common.
High-End Properties: Luxury housing is often the first to see demand and prices drop during recessions as people downgrade to more affordable options.
Midrange Properties: Easier to finance as they fit within conventional loan limits and appeal to owner-occupants and investors alike. A more liquid resale market makes for more practical exit strategies for investors.
Cheap Properties: These struggle to qualify for conventional loans, often limiting potential buyers to cash investors.
High-End Properties: Financing can be more complex and carry stricter terms, reducing the buyer pool. Obviously, fewer people will have the income and savings necessary to secure properties in the upper range of market prices.
Focusing on midrange properties provides stability, manageable risk, and consistent returns, making them a sweet spot for passive SFR investors. As you invest, be sure you’re targeting the properties with the greatest long-term potential!
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