Buying Your First Investment Property?

Question

Hi Y'all,

I am 23 and been working a 9-5 for a few years now. I have managed to save about $20,000 and I do have friends and family that would like to "invest in me" as well. I would  LOVE nothing more than to quit my 9-5 and start investing in real estate. I live in Brooklyn, NY.

I am looking to purchase a single family home where I will be cash flow positive. Wherein the rent roll will exceed the monthly mortgage and expenses (insurance maintenance taxes etc). Price appreciation in the property would be an added bonus but not part of my NOI calculation. I am looking to garner returns at about 10%.

I know that, that is quite challenging in New York. I spent some time looking at properties in Brownsville NY where it seemed like their may be some viable options. Additionally, based on my limited knowledge it seems like the experts on bigger pockets recommend starting with a home under $200,000 for a first time real estate investor.

One of my biggest concerns is  this article  I recently came across on Investopedia, which seemed to indicate that you need to use the 50% rule. I.E. if the rent you charge is $2,000 a month expect to pay $1,000 in expenses.

I don't see how I can ever be cash flow positive let alone a 10% return if I need to factor in 50% of the monthly rent for expenses.

All and any help/tips would be much appreciated!

Adolph Littlejohn · Answer

It is going to be difficult to buy a multi family home in BK at the price point you are speaking about.  You will qualify as a first time home buyer and you have lots of options available to you especially if you have family member s that can assist you with gifted funds for your down payment and or closing cost.  Please contact me to discuss in can definitely assist you with this and let you know what your options are.  I am a real estate agent and investor.  I do a lot of work in Brooklyn.  Pleae contact me to discuss further.

Patrisha Leybovich · Answer

It's great that you're saving money and getting some education. Don't rush into your first investment. Get to know your market and spend some effort discerning market cycles. You've got good energy but a lot to learn!

Adam K. · Answer

@Boruch Leivi Bartfield

I suggested FHA because it requires less cash to get started and also the lower the down payment the greater the power of appreciation will be on your ROI. And as I said, in this market, it's all about appreciation. That's why I said what I did about your 9-5. It's great that you want to get started now and the sooner the better - but the goal should be to build and maximize your net worth, not replace a salary with cash flow.

I don't know how much capital you have access to, but whatever it is, the advice remains the same. Get the most units/bedrooms you can for your money in a neighborhood you feel comfortable living in. If you have enough capital to get a 3 or 4 unit in a gentrifying neighborhood that'd be what I'd try for.

Boruch Leivi Bartfield · Answer

Hi y'all,

I appreciate everyone's responses! (I am even more ignorant than I thought, the more I learn the more I realize how little I know about investing in real estate).

@John Hickey Thank you for sharing your story with insightful details. It allowed me to get a more pragmatic understanding to the different expenses associated with rentals .

@Adam Giles I love the idea of using a self made spreadsheet to build formulas to calculate Coc and NOI returns!

@Adam K  Thank you for taking the time to respond and clarify everything.

1) That the 50% rule and the 200k suggestion doesn't apply in NYC.

2)That 10% CoC is unrealistic in Brooklyn.

3) I do understand real estate is a "get rich slow" play. I know I said "quit my 9-5", but it was more of a sense of shifting my focus from just my 9-5 to investing as well.  I want to be at the point where eventually (thanks to real estate) I will be able to quit my 9-5 way down the line. I will not be quitting my 9-5 any time soon. However, I would still like to make a move whilst I'm young and not "bogged down by life".

4)I do have a partner and other investors to help fund the down payment would you still suggest an FHA loan?

One Love

Adam K. · Answer

@Boruch Leivi Bartfield

50% rule is pointless in the NYC market, just ignore that. Ignore that 200k suggestion that's not gonna buy you anything worthwhile here. Actually ignore mostly anything you read here that is not NYC-centric. Plenty of good stuff on the message boards but the vast majority of the content on the site won't apply to this market.

Also you're not going to find 10% cash on cash returns anywhere around here especially not on a single family house. Brownsville might be a good long-term appreciation play but it's a rough area with higher than average vacancy and older housing stock / high maintenance/capex costs.

You need to figure out how much money you have to invest. You also need to stop dreaming about quitting the 9-5, unless you have seven figures of capital there's no way you'll generate cash returns even close to live off of. Real estate is a get rich slow scheme.

The absolute best thing you can do is buy a place with an FHA loan with the most total bedrooms you can, live in it and house hack. You won't cash flow much at all but there are places where you can live rent-free and build equity and hope for appreciation. Or invest out of market but I am not an expert in that route.

Adam Giles · Answer

The 50% rule and 2% rule, and whatever else rule are just guidelines. IMO people get far too concerned about these rules. They are really just a quick and easy method of weeding out properties that would warrant any deeper analysis, nothing else. I spent some time up front building a spreadsheet with formulas based on actual insurance quotes I have received, my local mill rates, my typical debt structure, etc. I also have calculations for NOI, occupancy, reserves, etc. Now all I have to do it punch in what I think I should pay, what I think it will rent for, and number of units, and I instantly get cash flow, debt service, NOI etc all returned instantly. I find that I make much better decisions this way vs using arbitrary rules.

You also need to consider what you are willing to accept and what your market allows. For instance, I know a lot of folks are looking for 10% CoC and at least $200 cash flow per month. That’s tough in my market. I make my offers at a min of 7% CoC and $125 min cash flow. I am comfortable with this and it opens me up to FAR more deals in my area. Of course, I take 15% and $300 when I can get it ;-)

Boruch Leivi Bartfield · Answer

Hi Arpan,

Thank you for the swift response! I appreciate you clarifying the 50% rule for me. I am (evidently) A complete rookie.

3-4 units is definitely doable in my area.

Thanks for the tip about using the BP calculator, I'll give it a whack.

Best,

Leivi

Arpan Patel · Answer

Yea, you don't buy cash. That is a normal business rule of thumb - namely the 50% rule. Of that remaining 1000, if your cash in was 120,000 then you would make those numbers. Also, what about 3-4 units? You will need to play with numbers, areas, and types of property but it can and does work. Have you tried running deals through the BP calc?

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