Cheap vs Bargain properties and how to tell them apart
Often times investors are afraid of overpaying for a property. And this is warranted. If you pay too much, you not only erode your margins, but you may never get your money back. But have you ever thought about paying too little?
What do you mean - are you saying that cheaper isn't ALWAYS better? Yes! That's EXACTLY what I'm saying. Some properties are priced low because they are a bargain - you can see something others can't see and you get it for a great price. Other properties are cheap because they are nightmares. Cheap is not the same as a bargain.
Depending on the year built, materials used, foundation style and a multitude of other factors some houses are more prone to problems than others. Some houses cost more in upkeep and the materials are more prone to damage and increased maintenance.
For example, a house with a basement is great because it provides additional storage space among other things. The draw back is dealing with water coming in, mold and more foundation issues. A house on a concrete slab loses out on the space but also doesn't pose the above issues.
I've seen houses in such bad shape that even if you spent the money to fix them up, they would never be the same again. Like a car that's been in a severe accident, no matter what you do, it will always have some problems. And sometimes it will show up later down the road. The important thing is to consider why it's cheap and whether or not you are buying someone else's problem.
Now back to the price - how do you know what the right price is? Look at comparable sales! Most markets have this data relatively accessible - is the home priced right for the market when location and condition is factored in?
I purchased my first home in Columbus for $16,000. It's a 3 bedroom 1 bathroom single family. It's built in the mid 1920s. This house is not in the best part of town nor is it in perfect shape. BUT - it was already tenanted and cash flowing from day one. The home brings in $475 per month with real market rents around $550. Even at the current rent, the gross return on my $16,000 investment is 35.6%!
How did I know this was a bargain? Firstly, most other houses for sale in the area of similar style and size sell for between $25,000 - $30,000. Secondly, those houses are predominantly vacant and need work. This will need some upkeep when the tenant moves, but until then I'm cash flowing every month. And at the purchase price, within 3 years the tenant has pretty much paid it off. Now THAT'S a BARGAIN!
So remember - cheap isn't always good - find out why the price is the price, look for factors such as construction materials, neighborhood and future appreciation prospects to determine if the house is cheap vs being a bargain.