Trouble pulling trigger on first rental property?

Question

I'm looking for advice on how to feel more comfortable pulling the trigger on my first out of state rental property. On paper I'm ready - I have the money, I've done the research, I have well-defined property/neighborhood criteriaI, I have an agent, contractor, property manager, lender, etc.

I'm targeting off market deals with light value add potential in an area with high appreciation potential. However, most deals in this area have close to break even cash flow (i.e. $100/month on a 150k property). My main fear is that I've underestimated my Opex assumptions or will miss some major issue during inspection that will turn the deal into an alligator property.

For the last 4 months I've been stuck in analysis paralysis and haven't been able to just pull the trigger on a deal. It's gotten so bad that for the last 2 months I've hardly looked at any properties and my downpayment is just sitting in a savings account.

I'm curious who else has had this problem with their first property and how did you get over it?

Nathan Gesner · Answer

Do you have a good property manager lined up? A good PM can keep a mediocre investment afloat; a bad PM can destroy the best investment.

Think about people investing in 1940, 1960, or 1990. They found a house they liked in a neighborhood they liked, they bought it, and they held on. They were never wrong. Rents increase, property value appreciates, and they made money. They did it without a forum to ask questions, no podcasts to listen to, no formulas and calculators. They bought property and held on.

Real estate investing is very forgiving and most mistakes are erased with a little time. Just buy something and be done with it.

Kevin Sobilo · Answer

@Allan Kapoor, when I bought my first property my defining mental moment is when I decided that I didn't care if I lost money! Seriously, you pay for your education is what I thought and even if I lost money I would be well ahead for the experience. That said I did NOT lose money on that property.

A few things to keep in mind:

1. Even a marginal real estate deal will often look better over time if you stick with it. For example, several years from now when rents are up and you refinance to a lower rate suddenly you will have cashflow you were not imagining when you made the purchase.

2. YES, you will miss something and have unexpected expenses, OR you will have a bad tenant experience with damages you are not able to recover from them. That is to be expected and you need to be prepared to cope.

3. If your investment is only a good investment if everything goes perfectly then it isn't a good investment because if you hold a property long enough it will not go perfectly!

4. Your reasonable assumptions will come true! When you analyze a deal you make "reasonable assumptions" about how it will go. Those assumptions may not happen on this deal all on its own, BUT if they are reasonable assumptions over the course of many deals those assumptions should bear out.

5. You need a first deal before you can close more deals! One deal is just the start, with 1 or 2 properties there will be more highs and lows, but once you acquire a handful or more then things even out. You will still have issues come up BUT the performance of the other properties overcomes those issues without them stressing you if you are managing them well.

6. Having your down payment in a savings account for a couple months is TRIVIAL. Don't focus on such small things. Investing isn't a perfect world lined up to give you 100% perfectly efficient use of your resources (money etc) but it is potentially lucrative enough to overcome those minor inefficiencies.

Also inefficiency can create opportunities! For example, back in the great recession when lending dried up, that market inefficiency created an opportunity for investors with capital to take advantage by drastically decreasing many people's ability to buy. So, inefficiency is part of what creates opportunity.

Michael Smythe · Answer

@Allan Kapoor if you knew you couldn't lose, what would you be doing differently?

So, what is stopping you from believing you won't lose?

Hunter Stoudnour · Answer

You're going to learn more from actually purchasing this deal then you would if you would wait another 6 months. It sounds like you have done your due diligence. Something will go wrong at some point, but if you stay diligent and have the right team, you'll be fine and more prepared for the next one.

Nicholas L. · Answer

@Allan Kapoor

have you been to the area in person?  are you walking these properties yourself?  a lot of folks in California pick out a property they don't see in person, trust people they don't know to manage it, and then it goes south.  so - don't do that.

https://www.biggerpockets.com/forums/48/topics/1160450-run-i...

https://www.biggerpockets.com/forums/963/topics/1195280-expe...

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

your down payment is way better served in savings than getting crushed like those folks did.

if you're targeting off market - are you getting emailed off market deals?  are you marketing yourself?  are agents sending you leads?  would you go to a property in person if you made an offer?

Allan Kapoor · Answer

@Kevin Sobilo thanks for the fresh perspective. You're right that I'm focusing too much on this first deal being perfect and losing sight of the long term picture. I'm so worried about my assumptions being correct that I've forgotten that it isn't the end of the world if they aren't.

Joseph Bui · Answer

You'll never feel 100% comfortable with your first investment. There will always be risk and many things can always go wrong. Those of us who have done it awhile are just used to the risk and can stomach when things go sour. I say, if the numbers work, go for it. If you run through the worst case scenario, is it that bad? To me, best way to learn is to jump in and take your lumps.

What market are you looking in? You mentioned your math shakes out to 150/month cash flow on a property that costs 150k? thats not bad, assuming you are calculating a mortgage and you expect solid appreciation over the next 5 or so years. Happy to connect and run through all the opex costs I face through a year if that helps.

Nicholas L. · Answer

@Allan Kapoor

exactly - the purpose of the trips is to build knowledge and a network, not to hop on a plane when a property hits your inbox.  you'll get to know areas you like, property types you like, etc.  then when something similar to something you have seen comes up, you'll have a much stronger idea of whether it might pan out or not.

and - would walking the properties give you more info than you would get from an experienced contractor or inspector?  yep.  the buck stops with you.  the inspector tells you what needs to be fixed and the contractor tells you how much it will cost.  neither one tells you which properties to buy.

capex being a lot of effort - yep!  that's how you avoid getting burned like the folks in those other threads i posted.  and again, that's the purpose of the trips.  you'll learn how much things cost and what properties need and then the detailed analysis will get faster.

Allan Kapoor · Answer

Thanks, very much appreciated. I'll be in touch.

Allan Kapoor · Answer

RE capex underestimation - I should have clarified the 10% assumption was for screening. I think you're recommending a more detailed analysis involving the age/condition of all the building components/systems and prorating those costs out over time. This makes sense, but is a lot of effort to do for every property I consider, especially for OM deals where not all this information is available until I get an inspection. How do you recommend I balance efficiency vs completeness in this type of analysis?

Trouble pulling trigger on first rental property?

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