When Buying Cheap Real Estate Is a Good Idea (And When It’s Not)

Some property investors might think that cheap real estate is a bargain. But is that always the case? Well, sometimes. Cheap investment properties are attractive because of their prices, but the price isn’t everything when it comes to investing in real estate. There are certain factors that make a property profitable regardless if it was inexpensive or too expensive. These include the neighborhood, potential for cash flow, potential for appreciation, etc. So, if you’re thinking of buying cheap real estate for investment purposes, you have to take these factors into account.

Related: What You Need to Consider Before Buying Investment Property

When to Invest in Cheap Real Estate

There’s a Balance with the Location

First things first, let’s discuss the location. When you first think of a cheap property for sale, your mind will probably go to low-income neighborhoods. In real estate investing, this doesn’t exactly translate into a good location for buying a rental property. However, a real estate investor should not link “low-income” with “bad location.” Unlike bad locations, a low-income neighborhood can actually provide good investment opportunities.

Savvy property investors know how to balance cheap real estate with the right location. For example, if a low-income neighborhood is going through infrastructural development at the moment, then there’s a potential for future appreciation. In this case, buying cheap real estate is a good idea because the property’s value will most likely increase over the long-term and you can sell it for a profit.

There’s a Potential for High Cash Flow

This is the single most important factor that would make buying cheap rental properties a good investment. Affordable investment properties are often great cash on cash investments, with the potential to yield a great cash flow. The numbers differ in different cities, but there is always a potential to generate cash flow in low-income neighborhoods. This is especially true if the neighborhood itself is growing. In low-income neighborhoods, a real estate investor can buy cheap real estate for half of what he/she would pay for the same type of property in a class-A neighborhood and charge only 15% less in rent.

Here is where the importance of conducting an investment property analysis comes in. This analysis will tell you how profitable a cheap property for sale is with regards to rental income, cash flow, and cash on cash return. You can use Mashvisor’s rental property calculator to easily estimate these numbers for your target property, or find affordable investment properties in your neighborhood with readily calculated data.

To start looking for and analyzing the best investment properties in your city or neighborhood of choice, click here.

You Want to Buy More than One Property with the Same Amount of Money

Another scenario where buying cheap real estate is a good investment is if you’re planning on buying multiple properties. Property investors should always aim to grow their business, and one of the best ways of doing so is by adding more investment properties to their portfolio. For example, say you’re a real estate investor in Houston, TX where the median property price is $348,675. If you have that amount of money in cash, you can either buy one rental property in a class A neighborhood, or you can buy multiple cheap real estate properties in class B or class C neighborhoods with the same amount of money!

Related: Buy Investment Properties in These Neighborhoods in the Houston Real Estate Market

To find affordable investment properties within your budget, try using our property finder tool. All you have to do is enter your city of choice and budget. For example, I’ve entered Houston as the city where I’d like to find cheap real estate, set my budget from $50k – $100K, and found the following affordable properties for sale with great potentials for real estate investing:

Property 1:

• Listing Price: $64,900
• Estimated Value: $66,423
• Traditional Cash on Cash Return: 10.73%

Property 2:

• Listing Price: $59,990
• Estimated Value: $58,123
• Traditional Cash on Cash Return: 10.58%

Property 3:

• Listing Price: $99,000
• Estimated Value: $98,233
• Traditional Cash on Cash Return: 9.17%

You can buy any of these rental properties right now! Just click here to see more information on these properties and find more just like them in any city across the US housing market.

Why You Shouldn’t Always Invest in Cheap Real Estate

The above are scenarios where investing in a cheap property for sale would be a good idea. However, even then, there are some concerns that property investors face. An obvious concern for most property investors is that cheap real estate rental properties are usually located in high crime rate areas.

Additionally, tenants living in low-income neighborhoods typically live paycheck to paycheck. This means that an unexpected expense in their personal life could cause late payments, which makes collecting rent more difficult. This will further affect your rental income and positive cash flow. So, we highly advise conducting a thorough tenant screening. This will help you find a good tenant who will save you from any future headaches and avoid problems like evictions.

Related: Tenant Screening Process: Red Flags Landlords Should Not Ignore

Moreover, most cheap real estate properties are cheap because they are distressed properties which require rehabilitation. As a result, property investors planning on buying cheap houses for sale need to assure that they have enough capital to repair them. Since the property itself is cheap, the cost of rehabilitation is usually inexpensive as well. However, don’t go overboard with the renovations and reconstruction of the property. Tenants of low-income neighborhoods aren’t expecting anything fancy, so keeping it simple will work just fine.

Final Thoughts on Buying Cheap Real Estate

There are pros and cons to buying cheap real estate. Ultimately, whether investing in these properties is a good or bad investment depends on numerous factors. To make the right investment decision, make sure you balance the benefits and risks of such an investment. Of course, don’t forget to sign up with Mashvisor to search for, analyze, and find affordable investment properties for sale in your city and neighborhood of choice across the US housing market.

To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here. If you have questions about Mashvisor, click here to read our FAQs and learn about our tools.