Price is likely one of the biggest factors in any investor’s decision on whether to purchase a property. Whether you’re buying with cash or financing, the amount you have to invest is going to affect your ability on which property you can purchase. “I once was commenting on a post in a well-known online investor’s forum and stated that our turnkey properties in Dayton start at around $65k and that you wouldn’t get a quality property at $30k. Immediately a Dayton area investor said they buy properties all day long at $30k and I had no idea what I was talking about,” Eric Jones, Director of Sales and Marketing for Freedom Real Estate Group, stated. Well. News for you.
There is a difference between the ability to buy a $30k property and the desire and full knowledge of buying a $30k property.
We are fully aware it’s possible to buy a $30,000 property in Dayton. Yes. Even one that has been rehabbed and is rent ready. Granted, the quality and level of rehab may not be that of what we provide at a higher price point. We could buy and sell these low-end properties all day long. However, it is NOT the best use of your money. It is NOT the best investment. It is NOT a great buy and hold property.
The turnkey strategy is all about buy and hold. By hold we mean you should consider holding the property for at least 10 years. Some may only plan to hold on to the property for 5-8 years but the 10 year plan is one in which you will see great results. If you can hold it longer, that’s even better. In order to hold these properties and make profits, it’s important that your tenants are caring for the property and you have consistent cash flow. There are a few reasons why these $30,000 properties are not ones we sell.
Tenant Damage is a Higher Possibility
Its been said by some investors that if you have a B class property, you get a C class tenant. If you have a C class property, you get a D class tenant. With cheaper properties in the $30k range, you’re definitely getting a D class property. Consider this, if the rent is $500-$600 for a three bedroom property in a D class neighborhood, you’re not likely going to get a tenant that cares for the property. “I worked in property management for over 10 years. The cheaper units always, without a doubt, had higher tenant damage amounts when they moved out,” said Eric Jones.
Getting Paid Back for Tenant Damage is Less Likely
As stated above, the possibility of tenant damage is definitely higher. With that, the likliehood of getting those damages paid back are slim. Sure, you can take it to court and get a judgement against your tenant but there is almost no way to enforce repayment.
Evictions Can Really Put a Dent in Your Cash Flow
Along with everything that’s already been stated, eviction risk is definitely higher with these types of properties. Evictions are costly. Not only do you lose a tenant, you have to file the eviction which costs money, you have to go 2-3 months (sometimes longer) without collecting rent, and then you have to get the property ready for a new tenant. In most cases, the property isn’t left in great shape so your turn costs are higher. “One time we had a tenant that decided to pour concrete in all the drains after getting evicted. We had to replace all the plumbing. It was a disaster,” stated Eric Jones. Again, you can file a claim to get compensated for all these damages but good luck collecting.
Appreciation is Slim to None and Could Even Be Negative
Although we never preach appreciation, it can often be a nice cherry on top of your investment. With D class properties, there is little chance you will see any. In some cases, you may even have depreciation. The trade off could be that you collect a higher return on your investment while owning it. However, selling the property could result in a loss. Not always the case – but often.
Lets Compare the Numbers
Consider this. Instead of purchasing a property at $75k, receiving $250 per month in cash flow, you decide to buy a $30k property receiving $450 per month in cash flow. After 12 months, you’ve taken in $3,000 with the higher priced property. The lower priced property produced $5,400. Looking strictly at numbers, the obvious choice is the cheaper property with higher returns. However, with the higher priced property, the tenant is staying another year and there are no maintenance issues. Great! You’ve kept all that income. With the second property, the tenant moves out and caused $1,000 in damage. Now you’re repairing $1,000 in damages, doing a normal turn (cleaning, touch up paint, etc) at $500, and you have to pay a re-renting fee of $400. Now you have racked up $1,900 in expenses. At this point, you’ve only made $500 more than the higher priced property. Please note, we didn’t even consider an eviction scenario which could potentially add $1,000-$3,000 more in expenses. Worth the risk and headache?
At Freedom Real Estate Group, we ONLY invest in B and C class areas. Occassionally we will find an A class property that makes sense but the sweet spot for cash flow and rentals are in B/C neighborhoods. We do not invest in D class areas or “war zones.” They simply aren’t the best investment for long-term, buy and hold strategies. Yes. They exist. Yes. Other turnkey providers sell them. We don’t. We only invest in areas we ourselves would invest in personally. If you’re wanting a quality turnkey investment property, we have them. If you want headache, frustration, lost income and a super cheap property, we’re not the place for you.
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***Disclaimer: We are by no means saying that you can’t buy a $30,000 property in another market that isn’t in a good neighborhood. However, based on our professional experience in our market, Dayton does not provide quality properties at a $30,000 price tag. If you choose to purchase a property at any price point, we always encourage clients to do their due diligence and invest as they see fit for themselves personally.
Contents of this message/blog post are of general nature only and should not be relied upon solely when making an investment decision. We are not attorneys or financial advisors and any advice or answers to questions in these communications to you is hypothetical only. If you need legal or financial advice, please consult an attorney or financial advisor of your choice.