While homes range in prices across all spectrums, we’ll focus on investment properties that typically sell in the $20,000-$30,000 range vs those that sell for right around $100,000.(As a caveat, these numbers will obviously vary widely depending on the market).
As a new investor, there is definitely an attraction to the paper returns offered by the lower priced house. The cost of entry is much lower obviously, and the ROI’s often pencil out to +20% (which for an all cash investment is very enticing.) Generally speaking, however, there is usually a good reason why the property was so cheap in the first place.
Homes that sell in that range are moat often in parts of town where values tend to be depressed. Often times there is a higher crime rate. This can make the property tougher to rent, stay vacant longer, or have higher maintenance and Capex (capital expenditure) costs due to vandalism or theft. And at the end of the day, odds are the property is going to be worth roughly what you paid for it several years down the line.
All of these factors can eat into your bottom line. Now, we are not advising against buying these types of properties-indeed we have associates who do quite well with them. However, we want to illustrate the potential pitfalls that come with owning them.
Your decision to invest in these types of properties should focus on the returns you expect to make from the rental income… taken in conjunction with all expenses, expected and unexpected.
In comparison, the $100,000 house generally poses a higher barrier of entry. More often than not, these are bought utilizing bank financing but even then the amount you have to come up with may be as much as you would be out of pocket for on the lower price house, which you would own free and clear. These higher priced homes often don’t pencil out to the same returns on paper in comparison to their lower priced counterparts either.
They do have several advantages though. They are typically in better areas, which means they are poised to take advantage of market appreciation when it occurs. Many investors will tell you not to focus on appreciation to make your money, and there is some truth to that. But if we’re being honest, you make your real money investing from appreciation.
By virtue of price and location you will also command significantly higher rents and generally attract a better type of resident that may stay longer, which in turn keeps your expenses down. Often times these properties can and do perform better than the low priced homes when everything is taken into consideration.
The decision on which makes more sense for you depends on a number of factors. Besides the obvious financial considerations, you should identify your strengths and weaknesses and see how those may or may not fit with investing in either category.