Low-cost properties are appealing because you can acquire and generate income with less initial capital. However, they are actually the most expensive way to achieve and maintain financial freedom. Here’s why.
What Determines Prices and Rents?
Real estate prices and rents are driven by supply and demand. When the number of sellers equals or exceeds the number of buyers consistently, property prices remain low. If prices do increase, the rise will be gradual. Furthermore, when prices are low, more people can afford to buy, leading to fewer renters. This results in stagnant or slowly increasing rents.
Where there are consistently more buyers than sellers, property prices are higher, and rents and prices rise. In the right locations, rents outpace inflation.
Here are two (of many) indicators of a location where rents and prices are likely to keep pace with inflation:
- Significant, sustained metro population growth: Only when the population increases rapidly will demand for housing be enough to raise prices and rents at a rate that outpaces inflation.
- Low crime: On average, a corporation lasts for 10 years, while an S&P 500 company typically survives for 18 years. This means most nongovernment jobs your tenants currently have may disappear in the foreseeable future. In order for your tenants to sustain their current rent level, new companies must set up operations in the city, offering jobs with similar wages and requiring similar skills. High-crime cities are not typically chosen for new business operations. Without these replacement jobs, your tenants may be forced to accept lower-paying service sector jobs. This could lead to a decrease in rent or, at best, limit potential rent increases.
Capital Required to Reach Financial Security
To replace your current income, you will likely need multiple properties. The capital required to purchase the properties depends on the appreciation rate.
Low appreciation cities
Cities with a low…