Regardless of the size of your budget, investors all want to get the most for their money. One of the main aspects of real estate investing is making sure you get the most for your investment dollar while abiding by your budget limitations. This can also be tricky, because you want to find the right balance between quality and quantity. For example, here in Detroit, there is a huge range of property prices depending on the neighborhood and other factors.
A common mistake
Hypothetically let’s say an investor had a budget of $200,000. There are areas in Detroit where you can purchase homes for pennies on the dollar ($10-15k). Some investors would opt to buy 10-15 properties, with the belief that they would be maximizing their return. However, properties in areas with low population density and higher vacancy rates can end up being more of a liability than an investment. Generally, it can be more difficult to place tenants in these areas, thus prolonging vacancy periods and affecting your bottom line.
The right way
The smarter investment would be to buy in areas with lower vacancy rates and higher tenant demand. Naturally prices are higher in these areas because of the demand, but the investment would be a lot less risky. Instead of buying 10 properties in a neighborhood with fewer amenities and more vacancies, it would be a safer play to buy 5 properties in the better neighborhoods. Now of course, you also want to be cognizant of your return on investment. So buying two properties for a $100k each in an even higher end area would be safe, but your return would be minimal. This is why finding the right balance between quality and quantity is important.
The “bang for your buck” issue also comes up when determining the type of rehab you should carry out on a property. There are many factors that go into this decision. If you are buying a property with the intention of reselling it on the open market, your rehab cost is generally higher, since you would use more expensive materials. Your target audience when listing on the MLS is prospective homeowners that will live in the property, not investors. So it would be a good idea to use better materials in the bathrooms and kitchen, ex: granite countertops, premium floor tiles. If your aim is to keep the property as a rental, you approach the rehab process differently.
Many investors try to save as much as possible when doing a rehab on their rentals; cut corners and use really cheap materials. While doing really cheap rehabs might look good on paper, you will find yourself spending more on repairs and maintenance. So we suggest using mid-grade materials, for example: in the kitchens and baths, use ceramic tile instead of peel-n-stick or linoleum. You can find ceramic tile for a good price and it is generally more durable than the lower grade tile. The other thing to keep in mind is that you are competing with other landlords for tenants. So if the landlord down the street uses better material and has a more aesthetically pleasing rehab finish, they would have the advantage. One thing you should never cut corners on is the mechanical systems. Always make sure to have professionals install plumbing, electrical, and HVAC systems.
Don’t make the common mistake of trying to get the most properties for your money, rather than the best properties for your money. For a customized investment proposal that works specifically for your budget, give us a call or send us an email and one of our advisors will reach out to you.