Real estate investing has blown up in popularity since the 2008 Recession. More and more people are jumping into the game, but many aren’t prepared or understand what they are doing.
While I do preach that sometimes it is best to just get started, you want to make sure you know the basics and have a strong financial base before you start buying real estate… especially $50,000 properties.
Obviously, a $50,000 property in one area isn’t the same in another. In the midwest, a $50,000 property can buy you a nice duplex with great price to rent ratios, in a decent area. However, you still need to be prepared and protect yourself when buying this type of asset class.
Before investing in real estate, it is in your best interest to be prepared financially and gather market specific knowledge – especially if you are buying properties under $50,000. Here are the five great ways to prepare yourself:
- Choose the right location
When deciding on where to purchase real estate, it is imperative to choose a location that has solid fundamentals. This means solid population growth, new job growth, new development, etc. Look at the city’s overall plan on their website to see what direction they are headed in. One of the main keys to success is buying in a good location that is fundamentally sound. Remember, location, location, location.
- Prepare yourself financially
Before you buy real estate, you need to make sure you are prepared financially. I recommend having an emergency fund for your personal expenses and an emergency fund for your property. Have at least $5,000 to $10,000 set aside just in case an unexpected furnace goes out, you have a major plumbing leak, etc. You never know what will go wrong.
- Make smart offers
Run your numbers in the beginning and make sure you stick to them. This is especially true for cheaper properties. If your numbers tell you the maximum you can offer is $45,000, don’t go above that and you should be fine. You make money when you buy and you need to make sure you are following your numbers.
- Top-notch property management
Depending on your area, lower-priced rental properties can be more difficult to manage. If you don’t plan on managing your rental properties, hiring the right property manager is very important. Hiring the wrong property management can ruin your investment and turn a great property into a lemon. Do you research and find the best property manager in your town/city that manages the type of asset class you are looking to purchase.
- Thorough inspections
When you are under contract with a property, doing a thorough inspection is very important. It can save you from buying a property that looks good on the surface, but in reality is an absolute nightmare. I suggest hiring a local inspector that is familiar with the type of property you are purchasing. If you are suspicious of the foundation, roof, or any of the mechanicals, it might be best to get those inspected by a person specialized in those specific areas. At the end of the day, do your due diligence during this stage of the process to save yourself from disaster.
Here is the actual investment property that I purchased for around $50,000 and the cash flow numbers I am able to achieve.
Type: Up/Down duplex in central Wisconsin
Purchase Price: $52,000
Downpayment: 20% – $10,400
Closing Costs: $2,000
Total all in cash: $12,400
Unit 1: $525
Unit 2: $525
Total income: $1050
PITI (Principal, interest, taxes, insurance): $351
Property management (10%): $105
Vacancy (7%): $73.50
Maintenance (5%): $52.50
Capital expenditures (5%): $52.50
*** Tenants pay for electric and gas
Total expenses: $724.50
Monthly Cash Flow:
$1050 – $724.50 = $323.50
Cash on cash return: To get cash on cash return you take your yearly cash flow, divided by the total amount of money you have invested, in this case it is $12,400.
$325.50 * 12 months = $3,906 (yearly cash flow)
$3,906 / $12,400 = 31.50% Cash on cash return
Overall this is a very solid return on my investment. Not only that, I self manage this property and I spend about two hours a month managing it because I have long term tenants. Therefore, I am saving an additional $105 a month on property management, which boosts my cash on cash return to 41.7%. My plan is to acquire four of these properties per year for the next five years. My monthly cash flow will be relatively the same for each property – around $325 per month. After five years, my total cash flow would look like:
- 4 properties = $15,600 yearly cash flow
- 8 properties = $31,200 yearly cash flow
- 12 properties = $46,800 yearly cash flow
- 16 properties = $62,400 yearly cash flow
- 20 properties = $78,000 yearly cash flow
Of course this is all theoretical, but it gives you a pretty good idea of what is possible. Currently I own two of these $50,000 rental properties and I plan on reaching 20 of these properties in the next five years. While it does take some money, the return on investment averages over 30%. I’ll take that all day long! My plans could and most likely will change in the future, especially with market fluctuations, but it is important to just have a plan. This will help you keep focus and allow you to master a certain type of investment.
I know what you are saying, real estate does have its own risks which include:
- General market risk
- Asset-level risk
- Property-specific risk
- Liquidity risk
- Credit risk
- Leverage risk
These are just some of the risks to name a few. Real estate is no different than any other investment, however, I believe it has more control. It is a physical asset that you can manipulate and change to improve its value – something you can’t do with many other assets. Furthermore, by being prepared like mentioned above, you can help mitigate certain risks you otherwise could
So, is buying s $50,000 rental property profitable? In this case, it has been. Besides the cash flowI have been earning, I also make money from appreciation, tax advantages, and mortgage paydown. This is why real estate is such a great investment
I have done my research on the location and I have prepared myself for this type of investment. If you are planning on entering this asset class, I encourage you to do the same. You never know what will go wrong, therefore, it is best to cover your bases as much as you can.