Everyone loves a deal, an opportunity to acquire an asset at a low cost.
When retailers cut their prices on Black Friday and Cyber Monday each year, frenzied shoppers crowd the store aisles to compete for the limited items on the shelves. And every year, the mania for acquiring a bargain includes violent stampedes and physical brawls as buyers wrestle for possession of the bargain goods.
Fortunately for real estate investors, cheap real estate in the U.S. is available year-round for those willing to assume moderate risks for above-market returns. Here’s what you need to know about buying cheap real estate, and a list of cities with the cheapest real estate in the United States.
What Is Cheap Real Estate?
Many connect the word “cheap” with poor quality and low prices. A better definition might be “under-valued,” an asset whose cost is less than its underlying worth, what most people would consider a “discount.”
The concept of cheapness is relative and varies from one individual to another, accounting for the age-old idiom “One man’s trash is another man’s treasure.” Thus, a billionaire accustomed to traveling in his own plane might consider commercial first-class airline travel cheap while the occasional flyer deems first-class passage an extravagant luxury.
To the unfamiliar, cheap real estate brings to mind distressed, run-down homes and buildings in need of extensive repairs and rehabilitation. Though such properties may fit into the category, cheap real estate is actually real estate you can afford to buy, properties with favorable financing terms, and realty that can deliver a higher than expected financial return.
Reasons to Invest in Cheap Real Estate
Warren Buffett, perhaps America’s most successful investor, reputedly said, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
Here are a few reasons why now is a perfect time to buy 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 2.2 million in January 2006 to 540,000 in May 2009. While construction has increased since 2009, they remain at half the level of 2006. During the same period, the average sales price of a new home rose from $322,100 to over $380,300. Consequently, the percentage of American households who rent their homes increased by more than 20% between 2006 and 2016, according to Pew Research. More than one in three families live in a rental unit today.
2. Strong Employment & Rising Incomes
Many economists argue that the U.S. is at full employment levels with an unemployment rate of 3.6%, the lowest in almost fifty years. As a consequence, real wages are starting to rise, even for the lowest-paid workers. According to Nick Bunker of the employment website Indeed, wage growth in low-wage industries (retail, food service, employment services) has outpaced middle- and high-wage industries’ wage growth since 2016, reaching 4.4% in 2019 while the latter failed to top 3%. Since those with lower incomes are the largest group of renters, the trend is favorable for landlords of cheap rental real estate.
3. Ample Funding for Credit-Worthy Buyers
Financial institutions, from traditional mortgage lenders to portfolio lenders like Visio to hard money lenders like LendingHome, recognize the profit potential of financing investment property loans.
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 a range of options and pricing.
4. Historically Low interest Rates
The average interest rate on 30-year fixed-rate mortgages has fallen from a high of 18.37% in 1981 to around 3.7% in early 2020. More importantly, Forbes magazine reports that most economists predict the rates will “stay low – or maybe go lower” throughout 2020.
For more, read up on today’s interest rates when getting a loan for a rental property.
5. Mistaken Public Perceptions
Cheap real estate, by definition, is priced below other properties as a consequence of perceived problems: poor location, condition, or tenants. Investors willing to investigate specific properties often find “diamonds in the rough” – real estate that is excessively discounted.
For example, a low income is not, by itself, an indication of character and future tenant defaults. Successful landlords employ low-cost, proactive tenant screening techniques to identify and avoid potential problem tenants.
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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 75%-80%, buyers have several options to minimize their down payment. Investors interested in property selling in the lowest price ranges should be aware that many lenders require minimum loan amounts of $50,000-$75,000.
7. Uncomplicated 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.
The combination of 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.
Risks of Cheap Real Estate
No investment is risk-free; cheap rental real estate includes unique risks in addition to everyday economic and environmental hazards. Potential investors may confront some or all of the following:
- Lower demand. Cheap real estate is often located in the less desirable areas of the cities with poor schools, inadequate public transportation, and deteriorating public services. As a result, crime increases so that newcomers avoid the area, and residents seek to move if possible.
- Continued decline. As property values fall, residents and business owners lose hope and are less willing to invest in their property or community. This cycle of urban decay can continue until the area becomes a wasteland.
- Troubled tenants. Those who reside in the cheapest rental properties in deteriorating neighborhoods typically earn a low income, are unemployed, or depend on public welfare programs such as Social Security and HUD’s Housing Choice Vouchers (Section 8). They may have criminal or mental health issues.
- Landlord-tenant disputes. Public agencies and interest groups actively intervene between landlords and tenants as a result of past discrimination and abusive property owners. Anyone who acquires cheap rental real estate should be aware of the local political environment, zoning requirements, and state and local ordinances that might affect a rental contract or dispute.
These conditions can result in abnormal rates of property damage, equipment thefts, and high tenant turnover unless anticipated by the new owners. Fortunately, many of the above issues can be avoided or alleviated with diligent research before purchase combined with on-going, active site management; implementation of a comprehensive, non-prejudicial tenant screening process; and proactive landlord-tenant communications.
Cities with the Cheapest Real Estate in the United States
So where can investors buy the cheapest real estate in the United States? Better yet, where’s the cheapest real estate in the US that’s still attractive and worth buying?
It’s worth noting that the cheapest real estate in the US is typically found in rural areas, not cities. But since most of the acreage in the United States is rural and sparsely populated, it’s not practical to focus on the cheapest rural real estate.
So instead we’ve assembled a list of the cities with the cheapest real estate in the United States, based on the top 146 most populated metro areas. We reviewed data from the National Association of Realtors, comparing prices from 2016 through late 2019 (the most recent data available).
As an arbitrary cutoff, we’re only listing cities with median home sales prices under $200,000. Given that the median sales price nationwide is $280,200 according to the same data set, that means every city on this list is at least 28.6% cheaper than the national average.
Without further ado, below are the cities with the cheapest real estate in the United States (all numbers in hundreds of thousands of dollars):
Metropolitan Area 2016 2017 2018 2018 Q3 2019 Q3 YoY Change
Cumberland, MD-WV 88.8 90.7 100.5 110.3 105.3 -4.50%
Youngstown-Warren-Boardman, OH-PA 84.4 86.1 94 97.6 106.8 9.40%
Decatur, IL 93.3 94.4 90.8 102.8 107.9 5.00%
Elmira, NY 116.1 110.4 111.2 121.6 115.2 -5.30%
Peoria, IL 118 122.6 124.3 131.3 123.6 -5.90%
Wichita Falls, TX 111.8 114.9 120 115.6 124.7 7.90%
Binghamton, NY 108.4 109.6 121.1 126.9 130.1 2.50%
Erie, PA 114.9 115.7 118.7 123.2 131.5 6.70%
Rockford, IL 107.1 117.8 124.5 131.6 134.4 2.10%
Waterloo-Cedar Falls, IA 122.2 123.9 127 132.9 136.5 2.70%
Toledo, OH 117 118.2 123.4 130.1 138.9 6.80%
Davenport-Moline-Rock Island, IA-IL 123.6 126.3 131 133.9 140.9 5.20%
Charleston, WV 137 135.7 136.6 133.8 143.1 7.00%
Canton-Massillon, OH 123.1 129.8 131.9 139 144.4 3.90%
Fond du Lac, WI 125.5 131.9 138.6 139 144.9 4.20%
Springfield, IL 135 132.4 133.5 134.4 146.2 8.80%
Topeka, KS 124 128.6 132.1 135.2 147.2 8.90%
South Bend-Mishawaka, IN-MI 118 124.9 131.5 142.7 149.9 5.00%
Syracuse, NY 129.1 130.5 138.7 144.6 150.7 4.20%
Fayetteville, NC 126.9 130.8 137.1 141 151.9 7.70%
Florence, SC 136.8 137.9 143.2 150.7 153 1.50%
Cape Girardeau, MO-IL 140.3 143 138.1 142.7 153.8 7.80%
Little Rock-North Little Rock-Conway, AR 137.8 141.7 146.4 146.5 156.4 6.80%
Gulfport-Biloxi-Pascagoulia, MS 126.9 133.5 139.3 145.2 157.4 8.40%
Kankakee, IL 125.3 125.6 139.3 146.7 157.7 7.50%
Montgomery, AL 131.2 137.7 140.9 140.1 157.8 12.60%
Mobile, AL 132.6 136.8 145.2 148.4 158 6.50%
Springfield, MO 130.3 134.3 143.1 144.6 158.1 9.30%
Fort Wayne, IN 125.6 132.9 143.3 147 160.6 9.30%
Decatur, AL 129.5 128.5 142.4 151.6 160.7 6.00%
Champaign-Urbana, IL 143.5 148.8 150.9 152.8 162.7 6.50%
Rochester, NY 133.4 137.7 146.9 153.4 162.9 6.20%
Akron, OH 125.6 135.1 145.6 156 163.2 4.60%
Oklahoma City, OK 150.8 154.3 159.5 164.7 163.6 -0.70%
Bloomington, IL 152.4 156.2 162.7 169.3 164.2 -3.00%
Wichita, KS 129.4 132.9 142 147.7 164.5 11.40%
Dayton, OH 131.6 138.7 148.4 154 165.7 7.60%
El Paso, TX 148.5 151.5 155.8 158.2 166.5 5.20%
Amarillo, TX 154.6 157.7 158.6 165.7 167.4 1.00%
Lansing-East Lansing, MI 135.5 139.7 149.3 155.5 168 8.00%
Oshkosh-Neenah, WI 131.2 141.8 151 155.2 169 8.90%
Cedar Rapids, IA 151 152.6 159.2 167.7 169.9 1.30%
Beaumont-Port Arthur, TX 144.3 150.3 154.6 159.1 170.9 7.40%
Cleveland-Elyria, OH 132.2 140.4 153.3 159.8 171.7 7.40%
Buffalo-Cheektowaga-Niagara Falls, NY 132.5 142.7 152.8 163.1 172.2 5.60%
Ocala, FL 128 147 159.9 164.9 174 5.50%
Tulsa, OK 151 160.2 165.3 166.9 175.4 5.10%
Greensboro-High Point, NC 151.6 157.2 164.1 171 178.1 4.20%
Reading, PA 156.2 164.6 163.6 175.7 180.2 2.60%
Jackson, MS 169.6 174.7 176.5 177.9 180.5 1.50%
Lexington-Fayette, KY 155.3 162.7 171.2 173.1 183.8 6.20%
Shreveport-Bossier City, LA 166.6 166.7 168.4 176.4 183.8 4.20%
Winston-Salem, NC 149 155 165.4 168.3 184.3 9.50%
Harrisburg-Carlisle, PA 160.4 165.9 173.7 179.4 185 3.10%
Columbia, SC 161.8 162.3 171.6 174.3 185.5 6.40%
Abilene, TX 157.5 161.2 166.8 167.2 186.2 11.40%
Farmington, NM 171.4 174.8 180 184.3 186.6 1.20%
Glens Falls, NY 171 164.6 169.5 178.5 189.2 6.00%
York-Hanover, PA 163.7 171.3 177.4 185.6 190.2 2.50%
Gary-Hammond, IN 149 160.5 170.1 177.3 190.3 7.30%
Spartanburg, SC 148 158.2 172.2 174 191.2 9.90%
Cincinnati, OH-KY-IN 152.3 162 174.3 179.1 192.1 7.30%
St. Louis, MO-IL 163.9 169.4 177.5 182 193.8 6.50%
Appleton, WI 152.3 163.6 175.3 179.3 194.9 8.70%
Hagerstown-Martinsburg, MD-WV 163 169.3 181.7 188.2 195.1 3.70%
Memphis, TN-MS-AR 155.3 166.7 177.9 180.6 195.5 8.30%
Bowling Green, KY 156 165.3 171.3 179.3 196.2 9.40%
Chattanooga, TN-GA 164.6 176.1 185.7 187.9 196.5 4.60%
Green Bay, WI 150.6 163.2 177.3 177.9 196.5 10.50%
Louisville/Jefferson County, KY-IN 163.2 171.6 180.1 184.8 199.2 7.80%
Sherman-Denison, TX 144.8 164.4 178.8 186.1 199.2 7.00%
(All numbers represent prices in hundreds of thousands. Data courtesy of the National Association of Realtors.)
As you scout these cities with the cheapest real estate in the US, just be careful of cities with declining real estate values, high crime rates, high unemployment, and high vacancy rates. Some cities make great bargains. Others are cheap for a good reason!
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A Few Favorite Cities to Buy Cheap Real Estate
Investors use a variety of indicators to find good locations for cheap real estate investing. Each year, SparkRental analyzes cities across the country by comparing seven different metrics to identify the 15 best cities to buy rental properties. We also run another analysis based on capitalization rates (the return on investment calculated by dividing the net operating income by the property asset value) to identify the nineteen cities with the highest cap. The reports are an excellent place to begin your investigation of suitable sites to acquire cheap real estate.
When deciding where to buy an affordable rental property, I favor real estate in cities that are economically strong with diversified industry base, a history of population and job growth, and attractive rental economics. As a consequence, my top two cities for cheap rental real estate in the U.S. today are:
1. Arlington, Texas
This mid-sized town located midway between Dallas and Ft. Worth – two of the fastest-growing cities in the U.S. – is best known as the site of the Dallas Cowboys’ football stadium, the home of the Texas Rangers professional baseball team, and the Six Flags entertainment park. In addition to being the bedroom community for workers in the nearby large cities, Arlington’s economy is well-diversified with significant employment in the manufacturing, health care, and education sectors. The University of Texas at Arlington and its 40,000 students is the largest university in North Texas.
According to Zillow, the median price of a home in the community is $213,000 or $126 per square foot, well below the $140 average in the Dallas-Fort Worth metroplex. Average rent ($1,642) is also below the region’s average ($1,745) with a calculated GRM of 10.8. The potential for continued high occupancy and increased rent is high with the lack of affordable housing, leaving many unable to purchase homes and turning to rentals.
2. Huntsville, Alabama
Ranked #11 in a list of the Best Places to Live in America by U.S. News & World Report, this northern Alabama city has a diversified workforce anchored by government installations (Redstone Arsenal and NASA’s Marshall Space Flight Center) and several Fortune 500 companies. Its three universities have produced the most educated residents of the state.
Huntsville’s population growth (8.2%) is more than 50% greater than the national average of 5.3%, with unemployment of 2.1%, and predicted job growth over the next ten years above the national average.
According to Zillow, the city’s median home price ($154,800) is considerably below the national average ($231,700), with plenty of properties available at or below $100,000. Median rent is $1,251with a Gross Rent Multiplier (GRM) of 10.31, slightly below the national average of 11.70.
If you opt to invest in real estate long-distance, you have plenty of options, from Roofstock to Asset Column to local wholesalers and turnkey property sellers. In fact, nearly two-thirds of transactions on Roofstock involve buyers who live over 1,000 miles from the property!
One factor to be considered before you purchase cheap real estate long-distance is property management. Who will deal with tenants, collect rents, and maintain the property? Many investors prefer to manage their properties personally, and we’re happy to help with our online landlord software.
But if you prefer to hire a property manager, start with Roofstock’s list of certified property managers as a good starting point. In more populous cities, you’ll have more options to choose among, for property managers.
What have your experiences been in investing in cheap real estate? Have you ever invested in any of the cities listed above as the cheapest real estate in the United States? Share your thoughts below!