Are $100K Rental Properties Ever Worth It?

0:00Henry Washington:Should you buy a property for less than a hundred grand? It's definitely tempting because that is relatively not a lot of money to get into the real estate game and start building a portfolio. But on the other hand, anything that's cheap is usually cheap for a reason. It can be the properties with the lowest purchase prices that end up costing you the most in the long run. So let's break it down. Should you scoop up that low cost property or steer clear?

0:31Henry Washington:Hey, everyone. Dave Meyer here, rental property investor, housing market analyst, and head of real estate investing at BiggerPockets. And today, I've got my friend, Henry Washington, with me on the show. Henry, what's going on, man? What's up, Dave? You know, I love talking about properties and answering questions. Yeah, we got some good ones for today. Our producers pick some just, especially for you to get you a little riled up. We're just pushing your buttons today. It's going to be fun. Soapbox Henry. Oh, yeah. Man, could be dangerous. Soapbox Henry is definitely coming out today. We got some great questions, though.

1:05Henry Washington:We're going to debate on whether it's a good idea to buy a property for under 100 grand. We'll weigh in on whether it's unethical for investors to buy properties off the MLS and eventually sell them for a profit. And then at the end of this episode, Henry is going to rant for sure about one of his all-time real estate pet peeves. So strap in for that. Henry, are you ready to help the people out? I don't know, but let's go. We're going to give it a try one way or another. All right. Our first question comes from an investor named Eric Estrada, who asked, Why do some investors purchase sub 100K properties?

1:44Henry Washington:Are these properties really that profitable? When I look at the numbers of these properties, it seems like a few couple hundred dollars in cash flow and thousands of dollars in fees, repairs, and maintenance. Wouldn't it be better to park 40K in a high interest savings account or the S &P 500? Is this more of an income tax strategy? I'm just confused as to why some investors buy these kinds of homes. There's a couple of questions in there, right? It's like, if you're going to buy an investment property, should you buy a cheap one? That's one question. But then there's a whole other question of like, is it better to put your money into a high interest savings account or into the S &P 500?

2:21Henry Washington:Let's just start with the 100K property. What's your take on this? I think as someone who currently owns properties that I paid for under 100K and as someone who also has sold some properties that they paid under 100K for and wanted to get rid of, it depends. It's hard to have a blanket statement that says if it's sub 100K, run away. Like that doesn't make sense. It's totally relative, right, to the market. You know, if you're in Detroit or Cleveland, like, you can buy a decent home for under 100K. If you're just buying it because that's some arbitrary number that you've picked out, then in a more expensive area, you're probably not going to get a lot of value.

3:07So it's not about the price, because I've bought some great homes sub 100K. It's more about what's the age of the home and how much maintenance has been done on the big ticket items. I had one house that was sub 100K that I sold. And one of the problems was that the foundation was so not great. We even went in, we fixed the foundation, but the home was so old, you can't air quotes, fix the foundation. You can stabilize the house, but it still felt like you were walking through a fun house and there was no fixing that. And so I did sell that one to get out because it just makes it hard to rent.

3:49Even though you tell them, hey, it's not going anywhere, it's still a scary, weird feeling to have that kind of a problem. So it's not the price point that you should watch out for. It's what's the condition? And are you underwriting for the things that you'll need to spend in the future?

4:05Henry Washington:Yeah, I guess to me, it just comes down to, it sounds overly simple, but it's just like, do the numbers make sense, right? You could buy a$70 ,000 property. And if it's, you have a hundred K renovation budget and that thing is going to rent for 2 ,500 bucks a month, or you can sell it for two 50, then yeah, go do it. You know, it like, it really just comes down to the math. I don't think there's some arbitrary line in the sand where like properties over this amount are good and properties under this are good because where you are in the world totally depends. Like if you're in New York city or where I live in Washington, like you're just never going to find a property for a hundred grand.

4:48Henry Washington:They just don't exist. Parking spots cost more than that. Yeah, exactly. So you're just never going to find that where Ashley Care lives in Buffalo. Like you probably could find good deals for a hundred thousand dollars. I actually, we've had a couple of guests on the show recently from Detroit and I was talking to an agent there looking at deals. They're good deals. They actually makes sense. And so I think it really doesn't come down to 100K. There is a whole other question here, though, which is sort of my problem with Detroit is like, is it enough to scale? Is it enough for me to like take on a unit and the work that goes into that in order to make 75 or 100 bucks a month, even if my cash on cash return is great, like I could have a cash on cash return of nine or 10%.

5:33Henry Washington:But like, do I really want to scale that way? I think that is actually a good question. I don't know about you. Like my last three rental property purchases all bought under 100K, but they're not sub 100K properties, right? Right. Exactly. I'm under contract right now for 80 grand. I'm going to spend 60 on the reno ARVs 250. Right. Yeah. Like that's great. Do that all day. Why wouldn't you do that? I have another one. I literally paid 102 ,000 for it. It needs a 60K reno ARVs to 75, right? So I'm buying properties worth well over 100K. I'm just getting them for 100K, less than 100K. And I think that that's the right move.

6:13Henry Washington:Yeah. And that's just value. That's just a good way to do it. So yeah, I think 100K, not an arbitrary line. I think it really depends what you're going to do to the property and you understand it. I'll also just say that when I look for rental properties these days in the Midwest, I target 100K a unit, not necessarily for a single family home because those are harder. And per my point about scaling, if I'm going to buy properties at this point in my career, I'd rather get four of those all at once, have one roof, one thing to think about, one thing to manage, because then it actually achieves a meaningful amount of cash flow for me at this point in my life.

6:50Henry Washington:So I don't have any problem with that at all. All right. One last thought on this too, though. There is a common error that real estate investors make, especially newer investors, which is totally fine. It happens a lot. But people just buy properties because they're cheap. That I don't recommend. Like, I think if that's the question here is like, you're just buying it because it's the cheapest deal and that's what you can afford. No, I would not do that. It really comes down to what Henry said about your goals, to the numbers that you run and see if this has a profitable rate of return. To me, that's what it comes down to.

7:23Henry Washington:But you should not just buy properties because they're cheap. They are cheap for a reason. And unless you have a way to fix that, the problems that exist with that property, you are just going to be in for a lot of headache and a lot of stress. Agreed. And stop picking markets because you think it's a cheap market. Pick a market based on if you can hit your financial goals. All right. Thank you to Eric Estrada, not of Chips fame, apparently. Maybe it is. Eric, let us know if you were the star of Chips. We would love to know. Thank you for that question. It was a great question. We have more great questions coming from our community right after this quick break.

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12:08Henry Washington:Welcome back to the BiggerPockets podcast. Henry and I are here answering community questions. We had a great question about purchasing inexpensive properties before the break. Now, Debra from Colorado Springs has a moral dilemma for us. She wrote, Some people say flipping distressed properties off the MLS pushes prices higher and makes it harder for first-time homebuyers to compete. They say investors are scooping up homes that should have gone to families, then relisting them at a premium after cosmetic rehabs. On the other side, many investors insist flipping off the MLS is just a smart business.

12:43Henry Washington:The investor takes on the risk, puts in capital for repairs, boosts neighborhood values, and provides a product that buyers want. Some call it market manipulation. Others call it entrepreneurship. Do you think this is hurting affordability or adding value to communities? There's a lot in there. That's a very good, thoughtful question here from Debra. Henry, you want to start? I think there's probably two sides to this coin, right? I think that there are people who buy properties, slap lipstick on it, and then price it high and try to sell it. And there was a time in 2021 to 2023-ish where those things actually sold.

13:25But in the meal estate market that we're in now, it is extremely difficult for people to do that.

13:31Henry Washington:Yeah. Those properties don't sell because there are more listings. There are more opportunities for people to buy. Buyers have more power in this market to ask for things, to ask for things to be fixed. And so that strategy or that philosophy doesn't work in all real estate markets. But I think from a general perspective, a healthy real estate market needs investors to add good inventory back to the market. As an example, if I'm buying a property on the MLS, I'm typically buying properties that have been sitting on the MLS for a substantial period of time. Like I'm specifically looking for properties that have been on the market well over the average days on market.

14:22And then I'm making offers to buy those at a discount so that I can rehab them and sell them. And so is it taking an opportunity from a home buyer? I don't see it as that because it's been sitting there for months. Somebody had the opportunity to buy it. And I think there needs to be some education for homebuyers to do what we're doing. I think the reason investors like myself are able to go in and snag some of these deals is because the traditional homebuyer doesn't go and make an offer at$100K less than what's listed. Either they don't know they can do that or their agent doesn't want to do that.

15:01But they can do exactly what I'm doing, right? But they don't. So the property sits, the investor capitalizes on the opportunity, renovates the property and sells it. Now, I think there's a second tier to this question, which is offering the properties back to the community. And I think what happens is neighborhoods get gentrified because people go buy distressed properties, even off the MLS. They fix them up and then they sell them at these outrageously high price points. I don't know that you can do that now. And what I like to focus on and what I think more investors should focus on is revitalization over gentrification.

15:34So how do you buy a property at a price point that allows you to fix it up and sell it back to the community at a price point that they can afford? And that's a decision that the investor has to make. And you've got to be able to buy it at a price point that allows you to do that.

15:45Henry Washington:I personally agree with you about the MLS. If people put something out onto the MLS, they are asking for bids. And they get to choose whatever they want. And if they want to sell it to a homeowner, they can do that. So I think that there are always trade-offs with these kinds of things. Are you going to ask a home seller to make less money? Maybe you believe in that. But I think for me personally, if you're putting something out on the open market, then you're entitled to choose who you want to sell it to and who has the highest bid. And a lot of times when you have distressed homes, ordinary homeowners don't want to buy it.

16:22Henry Washington:When I go around with James, James Daynard here in Seattle and look at the properties, like no one's buying those properties. Like even if they're on the MLS, like homeowners don't want to buy them a lot of the time. And then I do agree with what Deborah said here is that if the investor is going to take on that risk and put into the work, they are entitled to a profit. I personally believe that. Now, I agree. I don't believe in price gouging or creating a situation where it's making entire neighborhoods entirely unaffordable. But what you have to ask is in sort of a free market economy like we live in, where is the demand?

16:59Henry Washington:And oftentimes the demand from the homeowner is for a fixed up house. And if the seller has the capacity to fix it up and sell it, they have the option to do it. If not, they're essentially hiring a flipper to go out and create a new product that is of higher demand in that market. And if there was no demand for that higher price thing, flippers would not be doing it. So I understand that investors do play a role in the market that some people don't like. But I think when you think about it holistically, from the seller's perspective, from the buyer's perspective, flippers do play a role that is currently in the way the housing market works today needed to provide the housing that we need in the U.S.

17:42Henry Washington:100%. Let's move on to our next question, which is from Abdul in New Jersey, who wants to know if it's worth it to use a higher down payment. He said, I've been running numbers and come to the conclusion that with a conventional loan in today's market, it's better to put 40 % down and self-manage to generate cash flow. Does anyone else run into this situation? Yes, absolutely. Yes. I think that is always the case regardless of market conditions. The more money you put down, the better your cash flow is going to be. Now, that is in absolute terms, right? The total number of dollars that you take in is always going to be better the less debt you have because you are not paying the bank interest.

18:26Henry Washington:And I personally think that putting more than 20, 25 % down is a perfectly good strategy depending on what you're trying to accomplish. If you are looking for cash flow, yes, do that. That is why my personal goal, and I think, Henry, you're similar, is like in 10, 15 years, I hope to have no debt. Like I want to just owe my properties free and clear because that's the timeline in my head where I'm thinking I just want cash flow. I don't care if my total return 10 years from now is optimized. I want to cover all of my living expenses and then some and just to chill and not worry about things. So it really comes down to you.

19:02Henry Washington:I think when people use debt, it's often to scale or for a short hold period. If you're going to do a BRRRR, you probably want to put less down because then you can use more of your capital to renovate the property before you refinance. But if you are concerned about cash flow, yeah, I think putting more down does make sense if you have the capital. Agreed. I just did a whole exercise yesterday with my portfolio spreadsheet where I highlighted the properties that are lifetime keepers for me. And then I highlighted the properties that are – I'd keep them, but I'd also sell them if it made sense.

19:37And then I highlighted the properties that's like, I'm going to sell these. And then I did an exercise on, all right, if I sold these at market value, how much cash would I get? Which one would I pay off first? And then basically starting the debt snowball to paying off my properties, right? Because each one that becomes more cash flow positive because it doesn't have debt produces more cash flow. You take that additional cash flow, use it to start paying down the next one, yada, yada, yada. So like I just did this exercise. So absolutely, paying down less is just accelerating you getting to where you want to be in the future anyway, which is having a paid off asset, 100%.

20:14Henry Washington:One of the things I'm thinking about doing, I was looking at this, is putting more money down on a rental property, but putting it on a 15-year note instead. So it doesn't actually improve your cash flow, really, because you're on a 15-year note, but you're paying way less total interest. And I want cash flow, but I'm not living off my cash flow. So it's not important to me. what's important to me is like, I know 15 years sounds like a long time. I've already been doing this for 15 years. So I don't feel like it sounds that long to me. In 15 years, I'll be 53 and I'll own these properties free and clear.

20:45Henry Washington:That's retirement. You know, like that's a great retirement that I can look forward to. So I think that's another good sort of caveat to this. You could do it with a 30 year too, but if you're not as concerned about cashflow, putting a little bit more down on the 15-year note will ensure that you're at least positive cash flow so you can carry the property and you'll pay less lifetime interest, which is always good. All right, let's take a quick break. But when we come back, Henry, I have one that is going to boil your blood. So if you want to hear Henry cook a little bit, stick around. We'll be right back.

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