We get it – houses are expensive, now more than ever. It’s only natural that investors would turn to low-cost properties. On the surface, there’s clear appeal: less capital upfront for an income-generating rental property. Why wouldn’t you go with the cheapest houses you can find?

If you’re like many people, you like to browse real estate listings. Sometimes, you come across a property with a shockingly low price tag in a great part of town. You might think, “Wow! What a deal!” Then, you start looking at the pictures and realize that the whole thing has been stripped down to the studs, and it would take double the asking price or more to get it habitable. Oof. 

That opportunity might excite some more hands-on, flip-minded investors, but it’s not for us. At that point, it’s pretty evident that the property will cost you far more than the seemingly low asking price. But it’s not always so obvious. Some properties may not look the best – they’re serviceable – or be in the best neighborhood, but they’re affordable, so why not?

Well, we’re here to tell you. Here’s why investors shouldn’t target low-cost properties.

Why Investors Should Avoid Low-End SFRs 

SFRs Reason #1 – Stunted income growth potential.

Cheaper properties rent for lower rates than those more aligned with the market average. Because of this, any rent growth will be proportionally smaller. An investor doesn’t want to be in a position where they need three cheap properties to match the rental income from one mid-range property. 

You may think you can just renovate the property to match the rental income you want to see. However, over-renovating for the area can backfire in terms of rental and resale. Other factors are at play besides the property itself.

Reason #2 – Lower property appreciation.

Cheap properties are often found in distressed areas. While market revitalization could be in the future, you don’t want to put your eggs in that basket. Properties in these distressed areas aren’t as likely to keep up with or exceed inflation. Value added over time will be smaller, period. And for investors with a buy-and-hold strategy, it makes that “hold” part much less worthwhile. Additionally, you may find it’s harder to sell a cheap property down the road. Additionally, these properties will be more volatile with market fluctuations.

Reason #3 – Rougher resident pool.

When we say a “rougher” resident pool, we’re not suggesting the residents will be a nightmare. However, a cheaper house comes with a cheaper rent. Households looking for affordable rent are less likely to be financially stable. You will experience more resident turnover in a low-end property. You may also see more late payments. If you lower your standards for a property, you also lower your standards for residents.

Reason #4 – Greater maintenance demands.

If you find a bargain in a great neighborhood, beware. The price tag could be hiding a wealth of costly issues. Be extra diligent when considering a “hidden gem” property. Get thorough inspections to uncover the deal-breaking problems. Additionally, low-end properties are often furnished with low-end materials. Upgrading is its own cost. Affordable materials also tend to lack the same longevity, so you’ll repair and replace things more often. Over time, these additional costs really add up!

Reason #5 – There are hidden costs to buying cheap.

Low-end properties pose plenty of problems. The most significant cost for the real estate investor might be personal. Because you need more properties to generate solid cash flow, that’s more time spent searching. It’s settling for a subpar portfolio. The upfront cost is less, but so are the returns. Investors, this costs you precious time. Time that could be spent on appreciating a property will have much better long-term potential. 

In short, when you focus on subpar properties because of the alluring price tag, you trade in your true potential for building lasting wealth as an SFR investor. We’ve tried it. Trust us, it doesn’t work!

There’s a difference between finding a good deal and buying cheap properties. At the end of the day, investors must exercise due diligence to determine whether or not a property at any price point best serves their portfolio and financial goals.

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