A question I’m often asked is ‘Do you recommend buying cheap houses as rental properties, in the 30,000.00 – 70,000.00 price range?’. And my answer is, ‘Yes!’
I’ll give you several reasons why buying cheap houses, where there’s demand, can be a great investment especially when you’re first starting out as a property investor and landlord.
There’s a common misconception that the more expensive and the more attractive a property, the more that can be charged for rent and the bigger return you will receive, and that’s simply not true. Cheap rental properties can make VERY good investments.
Now, I’ve not bought a house in the 30,000.00 – 70,000.00 price range yet, but I plan to, and in fact, the cheapest property I have bought has been my best performing property. It’s been a good solid investment. It’s never been vacant for more than 3 weeks in a year, and that has only happened once in the 14 years that I’ve owned it, and I have also seen some nice capital growth in that time too. I remember, when I first viewed it, I wasn’t that keen. But after listening to the letting agent about the demand in the area, I decided to go for it and I’m so glad I did.
By owning a cheap single unit property you will gain experience as a property investor and landlord. Also, depending on your approach, you may also decide to look for one that requires some cosmetic work to bring it up to scratch so you add value before your first tenant moves in, and you gain some experience with renovations too.
Some people say that they are not going to make a significant income with a cheap rental property, and although that may be true when you compare a single unit family home to a large House of Multiple Occupation, you have to consider that smaller single family properties will require less capital to get started, less time to get up and running, and less time to be managed once a tenant is in situ. They’re typically less of a headache.
I would also add that your rental yield is likely to be better, compared to buying properties in city centres or in more expensive regions. I have a video on working out the rental yield and ROI here which you should watch if you are not familiar with these terms. Property investing is a long term business and business’ are all about cashflow.
If your goal is to replace your salary from your current job in the future, then buying several cheap properties will help you reach that goal providing you stay focused on the rental yield and cashflow, and not the potential capital growth. Each property you buy will be a stepping stone to the next one and your experiences of being both a landlord and investor will sky rocket. It makes sense right, the more you purchase and hold, the more experiences you will gain.
Research conducted by Simply Business has shown that 2 bedroom properties for both houses and apartments, bring in the best rental yield, and I know from experience that these types of properties are rented by key workers such as, teachers, nurses, taxi drivers; both white and blue collar workers, who don’t necessarily want to buy their own property, but want a nice place that they can call their home.
Reason’s Why Cheap Rental Properties Are Great For First Time Property Investors And Landlords
Ok, so if you’re a first time investor, cheap properties can really work for you for a number of reasons:
1. Firstly, lending will be easier. If your looking to borrow 40,000.00 as opposed to 200,000.00 because when you start out there will be fewer lenders available to you. Once you have some experience with owning a rental property and operating as a landlord, you will find that there will be more lenders that will be willing to do business with you.
2. There’s a better chance that you will be able to reduce your loan to value to increase your cash flow. If you have 30,000.00 to invest for example and you use that as a deposit on a 120,000.00 property you will need a mortgage with a 75% LTV, and you will find that the interest you pay on your mortgage will be higher than if you used your 30,000.00 to purchase a 60,000.00 property and took out a mortgage with a 50% LTV.
3. Less capital will be required, but yet you will still gain the experience of purchasing an investment, working with a mortgage broker and a solicitor, and operating as landlord as if you had bought a more expensive property in a city centre or a different region. If you have a sizeable amount of money to invest, but you’re not 100% sure if property is the right asset class for you, then a cheap rental property will allow you to dip your toe in the water, before you decide to go all in!
4. Running costs will be cheaper. I’m talking about buildings insurance as well as mortgage repayments AND utility bills if you find yourself letting the property with bills included.
5. Cheaper properties won’t cost as much to fix compared to more expensive ones. You will gain experience of solving and fixing problems and any mistakes you make wont be as costly compared to the bigger more expensive properties.
6. There’s also a good chance that a cheaper rental will not be near where you live, which will force you to look for a good managing agent and then allow you to put it at the back of your mind once it’s up and running, so you can focus on your normal routine and enjoy the passive income that it brings. Experience of working with letting agents is good to have in my opinion.
I think that cheap rental properties are a great way to start as a landlord and shouldn’t be overlooked. Start as soon as possible, buy cheap, gain experience and start to build your empire and your legacy whilst providing a good service to your customers.