Is Now a Bad Time to Start Out?

[Gabe Morrell]

My wife and I are certain future real estate investors (Minneapolis-St. Paul greater area) who would love to enter the market sometime within the next 1-4 years and acquire our first rental property. We both are drawn to either single family long term rentals, or STR's in the right locations.

Right now we have $20k cash available for immediate investment, with the ability to increase that to $60-70k in the next 3 years through savings and bonuses at our day jobs. We also have approx. $140 equity in our primary residence that we'd be open to getting a HELOC on (would love feedback on if people recommend this or not).

Given our limited available resources for down payment, high home prices, and higher interest rates, is now a bad time for first time investors to enter the market? Is there a chance that rates and prices decrease in the next 1-4 years as our cash reserves increase, thus creating a better scenario for us first time investors?

We would GREATLY appreciate feedback from experienced investors on how best to start out on our REI journey.

[Jeff Schemmel]

@Gabe Morrell My post reply to you is going to read like I'm discouraging you; just know that I firmly believe investing in real estate is excellent and there are few places I'd rather put my money.  

You won't get off the ground with $20,000, and you should wait the 4 years until you have a proper amount.  $20k is the amount I'd recommend to have in just reserves for owning two properties.  It's a different situation when you're not going to occupy the property you purchase.   Owner-occupants often get lower down payment options and better rates.

As far as whether to take or utilize a HELOC for the acquisition my advice is a firm NO. HELOCS can be leveraged in consideration of a short-term project, but in my opinion you want to avoid leveraging one property to buy and hold another for several reasons. Consider utilizing a HELOC for a flip/brrr where you are extremely confident you can turn it around in 6-9 months (max), so you don't hold that 2nd property leveraging the first for longer than necessary; especially with single-family rentals. I wouldn't even consider this scenario if you have no business managing a flip, and you have never done renovation projects, as that is an arena where you need to have built experience and connections to just be OK.

Let's consider that you decide to save just enough ($75k) and grab a $300k single-family rental with 20% cash down (plus closing costs) and you just rent it out (not owner-occupied) and you have limited reserves. It's crucial that you properly screen the tenants and you don't skip any part of the necessary due diligence with that. If that tenant decides not to pay, the whole asset is jeopardized because you don't have enough reserves, AND there's no part of your mortgage or utilities covered when a tenant isn't paying rent. If you've used a HELOC to purchase this property, you have both the HELOC (high-interest payment) AND this 2nd mortgage which aren't being covered. If you can't pay that HELOC, that's bad news for your primary as well. Now, consider that same scenario in a duplex investment, where one tenant is still paying and even if you have issues with the 2nd tenant you may have a chance to weather that storm. There is more to that argument, but this is something you really need to prepare for and consider well in advance of your decision to invest. In the MSP single-family rental market you'll want to have a solid $90-100k before you consider throwing it at a single-family rental you don't live in. That is no exaggeration. Here's some rough math:

purchase price: $300,000 (well below median, and forced to certain geographic areas)
down payment: $60,000 (minimum 20% for NOO SFH)
Closing & out of pocket $11,500
Rehab & reserves: $20,000

I want to congratulate you a bit for having built some really solid equity in your primary; consider yourself very lucky and take good care of that asset.  This corner of the single-family market at or below $350,000 is currently hyper-competitive.  It's the first rung on the homeownership ladder, and folks who could previously afford $400k in a 4% interest rate environment, are now having to fight over a basic bungalow.  I strongly encourage you to consider a variety of asset types while you build up the capital to enter non-owner-occupant investing.  The fall/market market tends to favor investors a bit more, as the common homeowner isn't selling during that time unless they have to.  Less choices in the fall/winter, but then again, we're not worried about where to put the tv, or what color the carpet is :)