The Pros and Cons of Investing in Cheap PropertyAnalysis, Background, Investment
Every property investor wants to buy property at the lowest possible price. Even better, cheap property that will earn a good rental income, or which can be developed and sold on at a profit. But, is buying cheap property really such a good investment? In this report we will look at the advantages and disadvantages of buying cheap property.
The pros of buying cheap property:
* It’s cheap! You get a lot of bricks and mortar for the money. It offers good value, or at least appears to.
* Cheap property is perfect for cash investors. The price may be low enough to make a cash purchase possible, ie. no mortgage needed, no need for the property to meet lending criteria.
* Minimises the Stamp Duty bill for investors.
* Low deposit, low repayments, low interest. Where bought with a mortgage the mortgage will be smaller meaning that the cost of financing the project will be smaller too.
* Low risk. Less money invested broadly means less risk for the investor.
* Less competition. Cheap property is often, by association, located in less prosperous areas – which means fewer people can afford to buy. So there is often plenty of property to choose from but less competition when buying.
* Good rental prospects. Less prosperous areas where few people can afford to buy often have very strong levels of rental demand.
But this is probably the most important advantage of buying cheap property:
* High and even super-high rental yields are possible. Since prices are much less than ‘expensive’ areas but rents are not comparatively much less (and may even be the same) yields can be excellent – sometimes double or even quadruple those in higher priced areas.
The cons of buying cheap property:
This is probably the most important disadvantage of cheap property:
* Property is always cheap for a reason.
Frequently property is cheap because the area in which it is located is economically disadvantaged, has high levels of deprivation, or may have social problems.
And that makes it a different investment proposition, on several levels:
* Property values in these kinds of areas can be volatile. They may appreciate slowly in good times (or maybe not at all), peak late, and then depreciate quickly in bad times.
* Property in these kinds of areas may be difficult to sell, or may even be impossible to sell in some circumstances.
* Property in these kinds of areas offers generally poor prospects for capital appreciation.
* Letting prospects may be limited to certain types of tenant demand, eg. Housing Benefit tenants, limiting the rent that may be charged.
* The area, type of property and tenants involved could require greater management time and expense.
* Scope to add value with renovation or development may be very limited. ie, improved or developed property may only increase in value by the cost of the work – or potentially even less than the cost of the work.
So what should you do if you are looking to invest in cheap property?
* Firstly, be aware of and/or investigate the drawbacks. Know why the property is cheap.
* Be realistic about prospects for future capital appreciation.
* Be realistic about future resale potential.
* Be realistic about the letting potential, and about the level of rent which can be charged.
* Calculate yields accurately. Also, where the possible yields make the property seem an attractive investment ensure that this far outweighs the drawbacks, such as a lack of capital appreciation. (Cheap property is often a proposition for income rather than profits.)
Most important of all, never confuse cheapness with value. Cheap property can offer an excellent opportunity to investors. However it can also offer the worst possible false economy. Before jumping in do your research, take advice and know what you are getting involved with.
You might also find this Insider report useful: Why The Worst Places Are Often The Best For Investors