There are plenty of real estate investment opportunities nowadays. However, many of them tend to involve expensive apartment deals geared solely for the wealthy. Nevertheless, there are also investors who are making a killing investing in cheap apartments for rent. So, is buying a cheap apartment for rent a wise investment?
In this blog, we will look at the benefits and drawbacks of buying cheap apartments for rent and how to find a profitable cheap apartment for rent.
Pros of Investing in a Cheap Apartment for Rent
1. Easy to Afford
Investing in real estate is capital intensive as it usually requires a huge initial investment to buy rental property. Therefore, if you are a beginner investor with limited capital, you may want to invest in a cheap apartment for rent.
Cheap apartments for rent are also a good investment option for cash investors. If the price is low enough, you may be able to make a cash purchase without needing a mortgage. Even if the property doesn’t meet the lending criteria, you may still be able to purchase it. When buying a cheap apartment for rent with a mortgage, the cost of financing the purchase will also be lower.
2. Opportunity for Strong Cash Flow and Rate of Return
A cheap apartment for rent in a good location is likely to have a higher level of rental income relative to the purchase price and cost of ownership. It’s easier to get a cheap apartment with a rental rate of more than 1% of the acquisition cost. Both cash flow and return on investment tend to be high when investing in affordable apartments.
Even with a higher level of repair costs, the return on investment (cap rate and cash on cash return) can be greater than high-cost apartments for rent.
Related: 7 Best Real Estate Investments for Cash Flow
3. High Rental Demand
Cheap long-term rental properties are good rental prospects as they tend to have strong levels of rental demand.
4. Recession-Proof
During an economic downturn, vacancies in cheap traditional rentals are lower than in upscale rental properties. Middle-income renters may relocate to cheaper rental properties in an effort to save money due to job loss or significant reduction in their income.
In today’s rental market, there has been a consistently high demand for affordable apartments despite the impact of COVID-19 on the economy.
Related: A Guide to Recession Proof Real Estate Investing
Cons of Investing in a Cheap Apartment for Rent
1. Poor Location
One common issue with cheap apartments for rent is that they may be located in bad neighborhoods. If you are looking to invest in a cheap apartment for rent, you should keep in mind that they may be located in lower-income areas with high crime rates, below-average school districts, poor infrastructure, and fewer essential amenities.
However, this is not always the case. With good rental market analysis, it’s still possible to get a cheap apartment for rent in a fairly good location.
2. Potentially High Maintenance Costs
A cheap apartment for rent is likely to be so because of its old age and lower general quality. Such a property is likely to have higher maintenance and repair costs. Nevertheless, if you buy the right property, the increased operating costs can be offset by a higher cash flow. Be sure to do the math to know how these costs will affect your rate of return.
3. May Attract Low-Quality Tenants
Cheap long-term rentals will often attract lower-income tenants. With such renters, you are likely to experience a higher rate of rent non-payment and tenant turnover.
With these kinds of tenants, a landlord needs more extensive property management. You’ll need greater oversight to collect rent, deal with tenant issues, and do maintenance. You can reduce your risk by conducting thorough background checks on each potential tenant.
Related: How to Deal with Bad Tenants
4. Low Prospects for Capital Appreciation
Due to the old age and/or poor location of a cheap apartment for rent, there’s little chance that its market value will go up significantly. Investors tend to buy cheap traditional rental properties for their potential cash flow and not for appreciation.
6. Financing Issues
A cheap apartment for rent with a significant amount of differed maintenance is usually more difficult to finance. Mortgage rates for such properties are higher and lenders expect investors to maintain a good amount of cash reserves to deal with the expected repair costs and tenant turnover.
7. Low Resale Potential
A cheap apartment for sale that is located in a less than favorable neighborhood or is in poor condition may be difficult to sell quickly and profitably. This is something investors should keep in mind before buying a cheap apartment for rent. In some cases, it may even be impossible to break even after a sale.
How to Find a Profitable Cheap Apartment for Rent
With property prices constantly on the rise, it is becoming more difficult for investors to find cheap apartments for sale in major housing markets. What’s even more difficult is finding a cheap apartment for sale with a good rate of return. Not all cheap rental properties for sale will be profitable deals.
If you want to easily find cheap apartments for rent that are profitable, here are 3 real estate investment tools to use.
1. The Real Estate Heatmap
Location is the most crucial factor in the success of a rental property. Therefore, your process of finding a profitable cheap apartment for rent should begin with finding the right location. You’ll need the Real Estate Heatmap in your real estate toolkit if you want to simplify the process of discovering affordable properties for sale that are profitable.
Say you want to find cheap apartments for sale in Las Vegas. With the help of a real estate heatmap analysis tool, you can locate affordable neighborhoods in Las Vegas that fit your budget. The heatmap tool has filters for the average listing price, traditional and Airbnb rental income, traditional and Airbnb cash on cash return, and Airbnb occupancy rate.
If you want to avoid owning a rental property in a poor neighborhood where no one wants to rent from you, then the Real Estate Heatmap is for you. In only a few minutes, you’ll be able to do a complete neighborhood analysis with this tool.
To find the most affordable neighborhood, you simply set the listing price filter. You’ll instantly get a quick overview of the areas you are likely to find a cheap apartment for rent. They are the areas marketed in red and orange.
To find neighborhoods with properties that are not only cheap but also promise a good return on investment, you can set the other filters one by one to narrow your search further.
2. The Rental Property Finder
If you already have a place in mind to find a cheap apartment for sale and are just looking for ones that provide positive cash flow, you may want to use the Rental Property Finder.
This real estate investing tool provides a few useful filters to help you identify the right investment property. They include:
- Location
- Miles
- Budget
- Property type
- Rental Strategy
- Number of Bedrooms and Bathrooms
For instance, if you want to find cheap apartments for rent in Brooklyn and have a limited budget, you can use these filters. The tool will instantly show you the top-performing properties that match your budget and preferences.
When you click on any of the listings, you will be taken to the Property Analysis Page. Here, you can use the investment property calculator to conduct a full analysis of the property.
3. The Mashvisor Property Marketplace
It is common knowledge that if you’re looking for a cheap apartment for rent, you should seek off-market properties like Short sales, foreclosures, and bank-owned properties. Off-market properties can be a fantastic investment opportunity because most of them are sold below market value. However, some of them can be very risky.
If you visit the Mashvisor Real Estate Marketplace, you’ll be able to search for off-market properties using a set of filters including location, budget, rental strategy, property type, listing type, cap rate, cash on cash return, etc. When you click on any listing, you’ll be able to access the rental property calculator and do a comprehensive analysis of the property.
The Bottom Line
Like any type of real estate investment, finding profitable cheap apartments to invest in requires in-depth research and meticulous analysis of all the variables at play. Fortunately, Mashvisor is here to help. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.