Real Estate Investor Says Low-Cost Rentals Can Become A Trap Fast. A Roof Costs About The Same Whether The House Rents For $900 Or $1,600
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A real estate investor is warning newer landlords that low-cost rental properties that look amazing on paper can quickly turn into stressful money pits once real-world repair bills start piling up.
In a recent Reddit discussion, the investor explained how they became too focused on cash-on-cash return percentages early in their investing career while overlooking how little actual cash flow some cheaper rentals were producing.
Cheap Properties, Expensive Problems
“A deal cash flows on paper and even has a great cash-on-cash return. It beats the 1% rule. Everything sounds good,” the investor wrote. “Even better, it’s only $80,000 in the Midwest and will rent for $900.”
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But the investor said the problem becomes obvious once larger maintenance projects arrive.
“A roof will cost roughly the same on a small house whether it rents for $900 or $1,600,” they wrote. “Same for the furnace. Same for the turnover costs after a tenant moves out.”
The investor explained that while an 8% or 9% cash-on-cash return might sound attractive, the actual monthly profit may only be around $250 after expenses and reserves.
“Making an 8 percent CoC return doesn’t really matter when it’s only $250 per month,” the investor wrote, adding that a single HVAC replacement costing $6,000 can wipe out profits for years.
Many landlords in the discussion agreed and said cheap rentals often create the illusion of strong cash flow while hiding major risks tied to vacancies, tenant turnover and ongoing repairs.
One investor said that a six-week vacancy on a $900 rental can erase roughly six months of profit because the monthly margins are so thin.
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“The CoC return number flatters the cheap house in two ways,” the commenter wrote. “It ignores absolute dollars, and it usually understates how often the vacancy and capex events will happen relative to the cash flow they’re recouping from.”
Others said lower-priced neighborhoods often come with additional challenges, including higher tenant turnover, vandalism, slower leasing activity and more wear and tear.
One landlord shared that it recently took seven months to find a tenant for a small home despite installing a new HVAC system and repainting the property.
