What Constitutes Cheap Real Estate?
Many connect the word “cheap” with poor quality. However, workmanship has nothing to do with comparing average home prices across cities and towns.
In the context of the cheapest real estate in the United States, we’re simply referring to the average price to buy a property in each city. Compare them to the national median U.S. home price of $417,700 in the first quarter of 2024.
Low housing costs don’t necessarily mean that these real estate markets are bargains. These towns may never see ballooning median incomes or job growth, and may never see median prices rise faster than inflation, no matter how many centuries go by.
Or someone could discover natural resources in one of these towns tomorrow, skyrocketing the cheapest land to surpass the national median. My crystal ball is no clearer than yours.
But the cheapest cities in the U.S. do have a few advantages over their overpriced peers for savvy real estate investors.
Reasons to Invest in Cheap Real Estate
As inflation roars in the wake of the coronavirus pandemic, many Americans have looked to move for a lower cost of living.
Here are a few reasons investors should consider buying some of the cheapest real estate in the United States.
1. Lack of Affordable Housing
The housing crash and Great Recession slashed housing starts from over 2.27 million in January 2006 to 478,000 in April 2009. While construction has increased since 2009, housing starts remain lower than in the 2000s, at 1.46 million in December 2023.
With developers building fewer homes over the last decade, the average sales price of a new home exploded from $265,100 in 2013 to $413,200 in December of 2023.
Over that time, the percentage of American households who rent their homes increased by more than 20%, according to Pew Research. More than one in three families live in a rental unit today.
2. Strong Employment & Rising Incomes
The U.S. has recovered to full employment levels with an unemployment rate of 3.7%, among the lowest in decades and below the 5% healthy market target. Wages have risen sharply, especially for lower-wage workers. The US faces a labor shortage, with too many jobs courting too few workers.
Since renters with lower incomes are the largest group, the trend is favorable for landlords of cheap rental real estate.
3. Finance with Low Down Payments
Low median sales prices mean low down payments—if you don’t buy outright in cash.
And yes, you can take out an investment property loan on cheap real estate. Lenders from traditional mortgage lenders to portfolio lenders like Visio and Kiavi to hard money lenders like New Silver all lend against low-cost properties. Better yet, have our friend Jason Forman comparison loan shop for you through Forman Loans, although minimum loan amounts do range from $50,000 to $100,000, depending on the lender.
That means more options than ever before for using real estate leverage and getting a loan for a rental property, even if you’re self-employed or looking for a mortgage on a rental property owned by an LLC.
See our comparison chart of investment property loans and terms for various options and pricing.
4. Avoid Rising Interest Rates
While the average interest rate on 30-year fixed-rate mortgages has fallen from a high of 18.37% in 1981 to around 7.03% in January 2024, it’s still far higher than the roughly 3% interest rates borrowers were scoring in early 2022.
But with cheap real estate, you don’t necessarily need a loan. You may be able to afford to make cash offers and negotiate a lower purchase price as a result.
For more, read up on today’s interest rates when getting a loan for a rental property.
5. Mistaken Public Perceptions
By definition, cheap real estate is priced below other properties due to perceived problems, such as poor location, condition, or tenants. Investors willing to investigate specific properties often find “diamonds in the rough”—excessively discounted real estate.
For example, a low income is not an indication of character and future tenant defaults. Successful landlords employ low-cost, proactive tenant screening to identify and avoid potential problem tenants.
6. Flexible Financing Alternatives
Buyers of cheap real estate have multiple financing methods to acquire property, including an all-cash payment.
While loan-to-value ratios (LTV) for investment real estate are generally 70%-80%, buyers have several options to minimize their down payment. Investors interested in property selling in the lowest price ranges should know that many lenders require minimum loan amounts of $50,000-$75,000.
7. Easy Diversification
Owning multiple small assets versus a single high-value asset is a recommended strategy to reduce risk, whether buying stocks or cheap real estate. Investors can easily acquire several lower-priced properties varying by location, tenant mix, and condition for the cash outlay required for a single premium property.
To illustrate, an investor with $100,000 might acquire a single home costing $400,000 (75% LTV) or four individual homes, each valued at $100,000 in different locations, for the same out-of-pocket costs.
Combining these trends presents a rare opportunity to build a portfolio of cheap real estate assets. Carefully selecting a diversified group of affordable rental properties (single-family homes to fourplex units) in the right locations, attracting stable, credit-worthy tenants, and taking advantage of low-interest mortgage loans can produce a steady cash-on-cash return with favorable tax treatment and the possibility of significant long-term capital gains.