TBT: Ask Marco – Should I Invest in a Cheap Property?

Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.

Well, I wanted to do an Ask Marco episode. I haven’t done one in a little while, and I went to my folder where I get emails that come in from the website on the Ask Marco form.

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And one of the ones that came in just recently here was one that I used to get fairly often. I haven’t seen it in a while, which is surprising given how much property values have increased over the last three to four years. And the question is basically this, should I invest in a cheap property? Interesting question. So the question came in from, I believe it’s Yair, I’m not sure if I’m mispronouncing your name – YAIR, and Yair writes in and says, hi, I’m a 22-year-old looking to invest and you said at the end of your podcast that you’re happy to help. Of course, we’re all happy to help here. I currently have around $60,000 and I’m hoping to buy and then rent a property out. I have looked into Jacksonville and maybe North Carolina. If I could have a call or conversation with one of your team members, that’d be greatly appreciated.

Absolutely. So y I’ve already emailed you back and connected you with my operations manager so she can connect you with one of our available investment counselors and you can have a conversation and then they’ll help point you in the right direction. And we’ll just answer whatever questions you have. And if it’s something we can help you with, we will definitely let you know. Let’s answer this question. Should I invest in a cheap property? Well, the first thing we need to do is define what we mean by cheap, because cheap can mean different things to different people. The thing we don’t want to do is confuse cheap by absolute price. And the reason I say that is this cheap depends on where you’re looking. It is relative to the market and it’s also relative to the neighborhoods. So for example, if you were looking for a cheap quote unquote property in the San Francisco Bay area, that might be a six, seven, or $800,000 property.

Whereas if you go to let’s say Memphis, Tennessee, or let’s say Indianapolis, Indiana, something that we will define as cheap might be a an 80,000, 90, a hundred thousand dollars property. So it really depends on the market and more specifically the neighborhood. You see, every market has a price range. There’s the low end and the high end. So if you look at all the properties in any given market, you will see properties that start at a certain price and top out at a certain price. And if you really just cut the top 10% off of that range and the bottom 10% off of that range, what you’re left with is essentially the effective price range for a market. So in a market, this is a hypothetical example, but we could look at Memphis, Tennessee or Indianapolis or Kansas City or something like that. You might see that properties generally speaking will start in the 80,000, 90,000, a hundred thousand dollars range on the low end.

And we’ll certainly go up to the multi hundred thousand dollars price range on the high end there. There’ll be a million dollar properties in certain neighborhoods. But effectively speaking, you’re looking at properties that will range from about a hundred to, let’s say 200,000, $250,000. There’s gonna be properties that are below that and above that. So if you look at a bell curve, you just cut the the bottom 10 and and the top 10% of those properties off. And that’s really the bulk of the real estate in that market. And then the center of that bell curve is gonna be your median priced home. So it’s relative to the market, but it’s also now relative to the neighborhoods because you’re not necessarily gonna be investing in a high-end neighborhood like an AA plus neighborhood, more premium type properties where the numbers don’t make sense all that much.

Nor do you want to invest in, let’s say a lower end C class neighborhood where you have no retail sales, no good comps or comparable properties. It’s not an ideal place to be living. I shouldn’t say living, renting in as an investor or purchasing as an investor is really what I should say. So you want to be mindful of where you’re investing and have your criteria in hand. For me, like I said, in many times in past episodes, I look for neighborhoods that I would grade essentially as a b plus or an A minus, meaning that it is a bread and butter community. It’s got a mixture of white collar and blue collar demographics or tenants. So there’s always gonna be a large pool of prospective tenants for my properties. And I like that. And these are working class tenants or people, they care about their income, they care about their credit, they want to live in a desirable neighborhood.

And so there’s just strength in those areas. So for me personally, I like the B plus and A minus. Also, in terms of sales comparables, it’s strong. So if I wanna buy more property there, I know that it will appraise. I shouldn’t have a problem with appraisals. Also, if I ever wanna sell the property and do a, let’s say a 1031 exchange, that shouldn’t be an issue because there’s a lot of sales turnover. There’s what we call retail sales and that’s what you want. So I focus on those types of neighborhoods. So when you identify the type of neighborhood you want to invest in, you will look at that neighborhood and you will see that there are properties that will range from a low to a high end. Now, if you can find good deals in those neighborhoods, great. You know, now how you define cheap really comes down to that range within that neighborhood, within the market you’re looking at.

And of course, when you’re looking at that market and neighborhood, the numbers have to make sense. You don’t want to invest somewhere where the numbers don’t make sense. It has to pencil out, it has to generate cash flow. That cash flow is the glue that holds your deal together. That means that the property will pay for itself, it’ll cover expenses, it’ll pay for the debt service, which is your mortgage. What’s left over is your spendable cash flow. Not to say that you should go out and spend it, you know, maybe save it, bank it, and then reinvest it. And of course have reserves for your property. So if maintenance and repair issues come up in the future, you’ve got that covered. But cheap can mean something that is in the lower end of the effective range for that neighborhood and that market. That’s how I would define cheap.

This is my big piece of advice to you. Don’t go looking for property based on price, because to you that’s considered cheap. What you should do is take that top down approach. Again, my sixth rule of my 10 rules of successful real estate investing. Identify the markets and the neighborhoods that you want to be investing in that you know you’ll feel comfortable with, that you will help assure your success. And then look for those cheap properties or cheaper properties within that neighborhood and market. That way, you know, you have your risk mitigated, your upside potential maximized again, based on what you can afford at the time for investible capital. But cheap should be within the confines of a good market and good neighborhood, not cheap, based on the absolute price of what you’re looking for

You wanna have the right neighborhood with strong tenant demand, high desirability, the right tenant demographic. And of course the numbers need to make sense. So what I often have done is in order to get to cheap, I basically work it backwards as I just described. And I start by looking at again, the markets that I can find properties based on the investible capital I have for a down payment. And then I refine that to the types of neighborhoods that I’m looking at. So invest based on, I guess, the average price in the markets where the numbers make sense. So again, don’t look for the cheapest property, look for the best deal you can get in the market where you’ll find the right location and the right returns. And that’s really what it comes down to. So I guess that summarizes it all. I know in the past people have come to me saying, Hey, I only have, you know, 20,000, 50,000, whatever it may be.

And they start looking for anything they can find based on the investment capital they have. And they are focused on price, not focused on the market, and more importantly on the neighborhood. They just, you know, start off backwards by thinking that they’ll solve their investment problems by focusing on price. And don’t do that, that that’s just asking for trouble. So that’s the long and the short of it when you know, I think about investing based on down payment available to you or what is a cheap property. Hopefully that answers your question. If it did not, you know, maybe shoot me a follow up question and will certainly help you. But I appreciate you submitting the question. And if anybody else listening has a question about real estate or real estate investing or finance or wealth or whatever it may be, just send that to askmarco@passiverealestateinvesting.com or go to the website passiverealestateinvesting.com and click the Ask Marco link and just submit it through the form and I would be happy to answer that for you.

One thing I forgot to mention before, I’ll just say real quickly, is the price to rent ratio or rent to value ratio, however you wanna look at it. In the past, you know, 1% was at Target. That’s much harder to do today because property values have appreciated so much and they’ve surpassed the rents for that area. So that rent to value ratio has dropped. It used to be close to 1% in many places around the country, in the neighborhoods, the areas we wanted to invest as real estate investors.

But today, that’s not the norm anymore. It’s more like 0.8 or 0.9% in similar or the same neighborhoods and markets. So just keep that in mind as well. This is just a follow up to, you know, the rest of the stuff I just told you about in terms of investing in a cheap property. So, you know, when you’re looking at those numbers and you divide that monthly rent into the purchase price, if you’re getting 0.8 or 0.9%, that’s good. That’s, that’s okay. If you’re at 1%, that’s even better, that’s great. But just keep in mind, you don’t want to be in bad or undesirable neighborhoods, and I’m generalizing when I call them C class neighborhoods because there’s a lot of, you know, nice areas that are considered C-Class neighborhoods and it has nothing to do with the people there, it’s just based on the amenities and the price and what’s going on in those neighborhoods. So again, you have to define what your investment criteria is, and we can help you do that by just be clear on what it is you want and what you’re looking for.

I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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