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When looking to grow your portfolio, cheap real estate can seem incredibly tempting. After all, the ability to purchase multiple properties for the price of one may sound excellent in theory. However, by chasing after these cheaper houses, plenty of investors are making the mistake of buying properties that are not profitable in the long term.
To help you avoid making these same mistakes, let’s take a look at the downside to cheap real estate and where you should consider investing your money instead.
But first, if you want to learn how lenders try to protect you from buying cheap real estate and dragging down your portfolio, click the link below for a free strategy call to discuss how lenders qualify properties for a loan.
What is Cheap Real Estate
Before you can understand why cheap real estate can be a massive financial pitfall, first you need to understand what qualifies as cheap real estate. This will vary across markets, but typically a cheap property is one that is selling significantly below the market average. While on paper these properties may sound like an excellent deal, there are usually underlying causes for these low costs that make the property a poor investment.
The Downfalls of Cheap Real Estate
When you see a property listed noticeably below the average market value, you need to ask yourself one very important question. Why? While it is possible that you are simply stumbling onto a great deal, there is usually another explanation. Below-average prices are often a sign that something is wrong, whether that is with the local market, or the specific property. So, as a smart investor you need to be asking yourself what the problem is to determine if the property is going to be worth your time and money to invest into.
One of the first things you should check when investigating a piece of cheap real estate is take a look at other properties in the area. Are they also listed below-average? How long have they been listed for? Often you will find that cheap real estate pops up in regions with very low demand. Which means that it is possible that the property you are looking at is going to lose value before it ever begins rising again.
Even if a property appears to be selling at a massive discount, that does not guarantee that is will have the potential to earn you money in the long run.
These can be properties that are selling for low prices, but the average rent in the neighbourhood is too low for the property to generate a reasonable amount of cash flow. In this case, there is potential for the neighbourhood to eventually bounce back, but you cannot be certain if or when that will happen.
For flippers, you need to beware of properties that are generally cheap, but when compared to the local market are roughly average priced. These properties yield little potential to experience significant enough appreciation during a limited period of time.
Poor Condition and Structural Issues
While many investors enjoy a good fixer-upper, some properties are too far past their prime to be worth the investment. When you are looking at a property, make sure you have it properly inspected for any problems that you should be aware of. That way you can assess if the damages are reasonable enough to remedy.
For example, if a home is sitting on a cracked foundation, or major supports have begun to rot and break down, it will not matter how cheap the property is. Homes like this are frequently one inspection away from being condemned and their owners are often looking to get it off their hands before it is too late.
Even if the property is not entirely hopeless, you should always do an analysis of a property to estimate how much it can appreciate after being renovated. Sometimes, despite having some potential left, houses can be too expensive to fix while still turning any degree of profit. In this case you need to remember, there is no shame in walking away from a bad deal.
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What You Should Be Looking For
There is a key difference between cheap real estate and ‘affordable’ real estate. Sometimes, a property is listed at a lower price than it normally would be and in these cases you will want to jump at the deal.
Undervalued Real Estate
Occasionally, a property is listed onto the market at a much lower price than it is worth. In this case it may be a solid strategy to try to buy it quickly and with little hassle in order to take advantage of the opportunity.
Discounted Real Estate
Sometimes properties are listed for sale at a discounted price due to outside circumstances. This can range from pre-foreclosure sales to families selling inherited properties that they do not want to take the time to properly handle. If the property makes sense for your investment strategy, feel free to go ahead and try to purchase the property.
Sometimes a property for sale has more potential than the seller initially realized. For example, a four-bedroom house can have the potential to be converted into a legal duplex in order to generate multiple streams of cash flow. Or maybe someone’s previous home can find new life as a student rental in a busy college community.
Not every discounted piece of property is a diamond in the rough, but that does not mean you should not take the time to take a closer look. There is a fine line between a cheap property and a great deal, and if you can learn to walk that line, you stand to find great success as an investor.
If you are ready to take the plunge into the world of real estate today, let us help you. Visit us at LendCity.ca or give us a call at 519-960-0370 today. Alternatively click the link below to book a free strategy call today.