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Buy Cheap Real Estate? Strings Are Attached

In California, a stately mansion is up for sale. The price? Just one dollar. In Detroit, a two-story house is on the market. The owner will take an iPhone for it. Or any similar device. An older home with land can be had in New Mexico for the trade of a motorcycle or running truck.

Are these homes the undiscovered treasures that a smart and creative investor can use to launch a wealth-building career in rental real estate? Not exactly. Those gimmick prices posted by desperate owners are just the tip of a financial iceberg. But they point up a pitfall for potential investors: the temptation to buy troubled homes for a song in hopes of a high return once they’re refurbished.

That strategy underlies the practice of house flipping, where buyers grab cheap homes, do some refurbishing and put them back on the market quickly for a much higher price. Then the flopper starts the cycle all over again with another property.

As Jason Hartman says, that’s not investing. The goal of investing is to build wealth over time, not just make money in the short run. And a purchase that doesn’t make money isn’t a very good investment.

So it is with the many “distressed” homes that wound up on the market after the housing crash and recession of a few years ago. As homeowners fell into default on their mortgages, their houses fell into foreclosure and were sold by lenders for whatever they could get. Short sales by desperate owners put more homes on the market. And some were simply abandoned by owners who just walked away from the entire process.

Now, for all those reasons and others besides, several distressed properties are showing up in markets cross the country for attention grabbing prices like a dollar or an iPhone. The prices are real — owners of these properties, whether individuals or financial institutions, are making last ditch effort to unload them.

But the price is just the beginning. The California mansion really can be owned for a dollar – but the buyer has to agree to return the home to its original, turn of the century condition. The house in Detroit is missing a few pieces like a front door – and is thousands of dollars in arrears for taxes. Whoever buys that tract home in New Mexico will have to assume the payments and dig a new well.

Those small details mean that a buyer who snaps up one of these beauties will land feet first in debt from the beginning. Investing in upgrades and refurbishing will yield benefits in the long run. They’ll also let the buyer claim some of the many tax breaks available to property owners. But it will be a long time before that buyer is able to break even, let alone turn a profit on the “investment” by renting it out.

Another issue with bargain basement real estate has to do with how it got that way. Distressed homes for low prices are usually located in distressed regions where jobs are scarce, incomes are low and entire neighborhoods have fallen into decay, taking property values and home prices with them.

That means few quality tenants and low average rents across the board. Take, Detroit, for example. Thanks to a downturn in manufacturing and a hard hit from the recent recession, that city is now a place people move from, if they can – not to. Similar scenarios play out in markets large and small all across the country.

Jason Hartman points out that one key to successful investing is to buy reasonable priced properties in generally good condition. Those are properties that can be rented with a minimum of delay and expense. Repair and maintenance expenditures are part of doing business as an investor, and they are eligible for tax deductions and write offs. And appreciation can be leveraged for refinancing. But a property in need of serious attention from the start is a false bargain.

Another essential for successful investing is diversification – buying properties in as many areas as possible in case of a collapse in one. Thriving markets with a diverse job base attract quality renters and lets rents stay competitive – a combination that supports long term returns.

In real estate as in other aspects of life, the old saying still obtains: if it sounds too good to be true, it probably is. If you’re serious about inviting, not just speculating, it’s important to consider not just the price, but also the cost of that home you buy. (Featured image: Flickr/byrdiegyrrl)

Source:

Colgrass, Neil. “Detroit Homeowner: I’ll Trade House for a Smartphone.” Newser Money. newser.com. 8 Oct 2014.

Read more from Jason Hartman:

Are Mega Investor Grabbing All the Houses?
New Investing Opportunities Promise Profits

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