Why Low-Cost Properties Are the Most Expensive

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The goal of real estate investing is to escape the daily grind and live life on your own terms. Achieving this requires a reliable passive income that meets the following.

• Inflation compensating: Rental income keeps pace with inflation, enabling you to pay inflated prices to maintain your standard of living.
• Persistent income: Your income will last so you will not run out of money.
• Reliable income: Your income continues even in difficult economic times.

Prices and Rents Are Driven by Supply and Demand

Basic economics of supply and demand.

• Where there are more sellers than buyers, prices are low and rents and prices rise slowly. In such markets, rents will not keep pace with inflation so your buying power declines over time forcing you back on the daily worker treadmill.
• Where there are more buyers than sellers, prices are higher and rents and prices rise rapidly. In the right locations, rents keep pace with inflation so you are permanently off the treadmill.

Below are two (of multiple) indicators of a location where rents and prices are likely to keep pace with inflation:

• State and city populations constantly increase. Only if the population is increasing at a rapid rate will the demand for housing be sufficient to increase prices and rents fast enough to keep pace with inflation. If the population growth rate is slow, prices will remain low and both rents and prices will increase slowly. As a result, they will not keep pace with inflation. Wikipedia
• Low crime - All non-government jobs are temporary. On average, a corporation lasts for 10 years, while an S&P 500 company lasts for only 18 years. Therefore, it is likely that every job held by your tenants will disappear in the foreseeable future. The only way for them to continue paying the same level of rent is if new companies move into the city and create replacement jobs that pay similar wages and require similar skills. However, companies are unlikely to choose high-crime locations to set up new operations. Without replacement jobs, your tenants will be forced to take lower-paying service sector jobs, which will likely result in a decrease in rent or at best, limited rent increases. Neighborhood Scount’s list of the 100 most dangerous US cities.

Total Capital Required

To replace your current income, you will need to acquire multiple properties. The total amount of capital required depends on the appreciation rate, which is driven by population growth and jobs.

Low-price location - Suppose you choose a location with little or no appreciation. In this location, prices will be low so I will assume each property costs $200,000. I will also assume that you will need 20 properties to generate sufficient monthly income to replace your current income. I will only consider the capital needed for the down payments and ignore all the other costs like renovation, closing costs, etc. I will also assume the downpayment is 25% of the purchase price.

Total capital from savings required for down payments: 20 x $200,000 x 25% = $1,000,000

Higher price location - Suppose you purchased in a high appreciation market and each property costs $400,000. In a high-appreciation location, you will do a cash-out refinance when there is sufficient equity to pay the down payment on the next property. In this case, the total capital requires from savings to purchase 20 properties will be:

First property capital requirement: $400,000 x 25% = $100,000

Each additional property is purchased with accumulated equity from the previous properties. This is what many of our clients did to grow their portfolios. Here is a case study where BRRRR was used to pay for the down payment on the next investment property. The process is illustrated below.

This method is how successful investors grow their portfolios over time.

In summary, to achieve financial security with the least capital, purchase in high appreciation locations and take advantage of the BRRRR method.