For the first time real estate investor, especially someone with limited cash on hand, it’s easier to buy and finance a $40,000 unit than a $400,000 one. Starting out in real estate is an excellent way to build long term wealth for those justSmall Deals Investing News starting on their career paths. But should the experienced investor do the same? Sure, any potential deal has possibilities but the profits from a $400,000 transaction are much, much greater compared to the $40,000 acquisition. Let’s look at a few characteristics of a smaller deal.

Say there’s a property that’s in poor shape and listed at $40,000. When putting in $10,000 worth of renovations the home could rent for say $300 per month or sold for $60,000. Once you take out the selling costs the net proceeds are relatively small. The novice investor might want to take that deal but it’s small change compared to what the experienced investor is used to. And consider the amount of repairs needed compared to the purchase price, rent and as-improved value.

If the property is being acquired, renovated and managed by a turnkey real estate company, it’s important to ask why a turnkey company is even bothering with such a transaction. When the property is sold to the investor, the net proceeds are miniscule. The company will also manage the property but once the company takes its percentage of the rent as a management fee, the proceeds to the company aren’t enough to take care of the overhead. This is often the case with new turnkey companies or those who farm out all the required services rather than working with their own team.

The smaller transaction simply doesn’t provide enough cash flow to properly manage the unit. Something to think about when you see a newer turnkey company offering a small deal. If that’s all they can do, how long can they stay in business if they’re in the red every month? And once they close, it’s time to find a new property management company who will experience the very same.