What I Think About Cheap Rental Properties
In this article I discuss my thoughts on cash flow markets and a couple of do's and dont's. I also give my experiences in buying rental properties strictly for cash flow.
Did you know that you could buy houses for $10,000 and no, I'm not talking about the down payment. I'm talking about actually buying the house for $10,000. In fact, I once bought a property in Pennsylvania for $12,000 that I rented out for $1300 a month. I'm going to go into whether those properties are actually a good deal or not.
Back when I started my journey of acquiring rental properties, I decided to try a bunch of different asset classes. At first, I bought some rental properties here in Las Vegas that I had as normal long-term rentals. Then I decided to go into Big Bear California and buy some Airbnbs.
The third part of my diversification plan was to go buy these super cheap houses in these random states and see how they would perform. Mainly I just wanted to see for myself as a newer investor, which way was actually best.
Obviously I'm going to share with you my experience in which way I think was best out of them, but let me break it down from a big level of how to build a rental portfolio, you need to realize there are two different things you can go for when it comes to rentals. You're either going for cashflow or you're going for appreciation. Most markets are one or the other. Take a market like Las Vegas. There's not a ton of cash flow out here. Traditionally, the rent was right around what my mortgage was going to cost. I might've been lucky to cashflow a couple of hundred bucks a month. The benefit of Vegas has been that it's appreciated like crazy in the last five years, properties have essentially doubled in value and sometimes even more.
On the other hand, there are markets in the Midwest like Kansas City. You can get a house for $100,000 and potentially rent it out for $1500, depending on the area. Now, even though that's more cash flow, it has not appreciated the last five years like Las Vegas has. This is why Airbnb is becoming so popular because it finds a way to get you both. If you can go into an appreciation market where you know you're going to get long-term growth, you can now get cashflow if you use it as an Airbnb as well. This is exactly what has happened for my Big Bear properties. Over the last few years, I've gotten a ton of cash flow from renting them out and they have also doubled in value.
Here's the thing: I don't believe that rentals need to be an either or thing.
I think it's good to be diverse. You should have some properties and appreciation markets and you should have some properties and cash flow markets. This is exactly what I'm doing right now with my portfolio. Most of my single family homes are in appreciation markets. With my fund Pineda Capital, we're buying apartments in cash flow markets. If you want to invest in my deals with Pineda Capital click here.
Let's talk about all the cheap homes I bought. Most of these properties I bought back in 2017, 2018, mainly from Facebook groups. At the time I joined all of these wholesaler Facebook groups, and I was just scouring the page for cheap rentals. I found a bunch of people posting homes for as little as $7,000 or $12,000.
I thought, “Man, how do you even lose on these? It's impossible. They're so cheap.”
I'll give you a quick preview of the end. I was wrong. But nonetheless, I kept looking on that page and started to buy up properties all over the nation.
I bought a triplex in Pennsylvania for $12,000. I ended up putting $13,000 into it and I was renting it out for $1300 a month between two units. I legally was not even allowed to rent out the top unit for the triplex. I don't remember why I couldn't do it, but it was something to do with the code enforcement.
Another cheap property I bought was in Saginaw, Michigan. It was a duplex. I paid $15,000 for it, and it was already in pretty good shape. That home was renting for about $700 to $800 a month between the two units. Now, those were examples of super cheap properties, but I ended up buying some that were a little more expensive.
I got a 20 unit apartment building under contract for $50,000 in Arkansas. At the time I got contractor bids, because I wanted to fix it up. It was just an amazing deal or so I thought, but after talking to contractors and thinking about the headache of trying to fix it remotely, I ended up wholesaling it and making a $20,000 fee. I also ended up doing a bunch of seller finance deals in these random towns. I bought a really nice brick house in Arkansas for $90,000, with less than $5,000 down. I also bought a property in Buffalo, New York with less than $5,000 out of pocket as well.
Now here's the shocker of the story. I don't own any of those properties anymore. I ended up selling them all for little to no profit for one the cash flow. It wasn't what it seemed.
This was caused for many different reasons. If you're buying houses that cheap, all it takes is one big repair to wipe out your cash flow for years. Think about it. That triplex in Pennsylvania that I paid $12,000 for was 2,400 square feet. It was huge. Replacing the siding on that place and the paint and everything else was far more costly than the building itself. So repairs just ate up the cash flow.
Another thing was the maintenance. I remember the Saginaw Michigan property I was paying about 200 bucks a month to cut the grass. I asked my property manager. I said, “Why do we have to cut the grass? This makes no sense.” They said it was standard out there. I still to this day, don't even know if that's true or if the property manager was just making money off me.
The other part that was tough was that the tenants were not very good. How good of a tenant can you expect on a house that cheap? So we had tenants that we had to evict. We had many tenants who didn't pay. They wrecked the house, which then increased our repair costs. It just was not good.
The main reason I got rid of all of those properties was because it was too much headache to manage multiple properties in multiple locations. Every time you buy one rental property in some new place, you've got to build out a whole new team in that place. You need a property manager, a contractor, handyman, you've got to get boots on the ground to go check on the property. There's a lot that goes into it. I can tell you, I'm not doing all that for a $12,000 property today.
Now here's what I'll say from that whole experience. The properties that I had that were in the $50,000-$100,000 range actually were much better. The tenants were better. They needed less repairs and the properties were going to be worth more. So it wasn't too bad if your repairs were high also.
I would make sure that you get all of those properties in the same location. If you're going to buy a one $50,000 property in Arkansas, then another one in Georgia and another one in Pennsylvania, that's a bad idea. You should just try to buy three of them in Arkansas or whatever that market is. This is the whole part of the reason why at Pineda Capital, we're buying big apartments in these places.
Once you get to that level, you can hire in-house management onsite and it makes it much easier and much more profitable. So for those reasons, I think if you do want to go for a cash flow market, pay a little bit more for the house and make sure you're going to acquire many in that market. You don't have to get a bunch of moving pieces all across all these different markets.
But personally, if you had to ask me today, I prefer appreciation markets over cash flow. I don't really need the cash flow because my businesses provide me more than enough cash flow. I would much rather sit on these properties that I think are going to be worth a lot more in the long run, but I'm still buying both and diversifying my risk.