Investing in Cheap Properties Versus Best Value Properties
Make no mistake about it we, as humans, love to find a bargain. Finding a bargain is like hunting or fishing or perhaps winning a board game. It is the thrill of the game and the thrill of victory. It makes us proud, we want to share it with our family and friends and wear the pride in our hearts. Or in the case of finding a great price on an investment property we wear the win in our wallets.
So what is the better investment cheap or best value?
If you like the thrill of the game and the thrill of victory which investment would excite you more. Cheap properties or best value properties? Sounds like a word game right?
On the surface it appears to be similar but there is a massive distinction.
Many people are selling (or buying) property based on emotional indicators of a cheap price point. Everybody wants to buy a property and say “ I bought a property for say, 50K or 60K, only to later discover they bought a 50k or 60k liability.
The properties that sell for the least are typically worth the least and are selling fast and fiercest because the price point tugs at your emotions, fooling you into believing you got a great deal.
Always remember the exit strategy when you make the purchase. Who will buy this property from you? Is it in a family neighborhood that will bring a hefty return when you sell it to a retail buyer or is it in a transitional area that is high density and away from the path of progress. In an area that will only be purchased by an investor? To get the best return you want the largest buying audience available do you not?
So who buys cheap and who buys value...
Do Cheap Properties Really Guarantee Great Cash Flow?
- Do cheap properties automatically translate to great cash flow?
- What are the taxes and insurance which, of course, reduces the net cash flow?
- What is the age of the roof, heating and air conditioning systems, appliances, electrical and plumbing systems? Any repairs needed in any of these areas will quickly reduce or negate any cash flow.
- Is the area you buy cheap houses in rising in value at the same pace a higher priced home is rising?
- Is the cheap home in an area populated by other homeowners or is it in a predominately tenant occupied area.
- Which area will sell during your exit strategy for top dollar?
What exactly is a best value property?
This is an interesting question I get asked a lot. The proverbial “it depends” answer is the best reply here. Everyone has a different set of expectations, but at the end of the day the best value property will be the one that best accomplishes your goals and objectives. This is why I always say you should never invest until you have those goals identified, you cannot possibly achieve a goal until you know what the goal is.
- Consider comparing high cash flow to sustainable cash flow. Which one wins over time?
- Consider comparing low price property for a property that will produce a longer sustained value without having to do capital improvements.
- Consider comparing appreciation rates of cheap properties versus properties that are considered median priced properties. Which one of these is most highly sought after?
- Consider which properties are most highly sought after making it a safer investment.
It is always important to stick to your plan – if you do not have a real estate investing plan, stop everything and make one. Within your plan you need to identify why you are buying the property.
If you are investing for cash flow, you definitely want to run the numbers and make sure at the end of the day the cash flow is indeed sustainable and matching your expectations.
If you are buying an investment property for equity growth, make sure you are purchasing the correct property in the correct location so you can sell to the end user for top dollar.
If it is a combination of cash flow and equity growth then you want to be extra diligent and make sure you have a nice mix of cash flow and an area that can sustain growth. You want to buy in in an area of low unemployment and with solid job growth. Areas where the median prices are affordable in comparison to the median incomes. Plus you want to make sure you are investing within the path of progress.
Remember why you are investing and most often the cheapest properties fit the goal that you have on paper. Ask yourself can this property provide sustainable returns with the least amount of capital improvements while I hold the property.
So what is king to you, Cheap or value? You can get a great price with great returns on properties, that will give you everything you want and they are found by doing your proper due diligence, create your plan and stick to your plan.