Where to start my investing career: two options

[Brian Leu]

Hi all! I'm a recent college graduate who has been saving up money and reading a ton of bigger pockets and am ready to get started investing in real estate. There are two markets that I am looking at, both have their ups and downs and I'm looking for a little advice as to which one is better for starting out.

First, some necessary information about me. I currently live in northern New Jersey (union county) about an hour away from NYC where I work. I currently live with my parents and would be happy to continue doing so to save money. I went to school in upstate New York and have many friends still there. I intend to manage whatever I buy myself and probably hire contractors for any bigger projects.

The first option I am considering is getting an FHA loan multifamily rental in northern New Jersey, roughly in the area where my parents live. I've found a lot of 2-3 family listings in my price range of 3-400k. My concern is I don't have a network set up here (though I do know some contractors) so finding renters might be difficult, plus I'd have to buy a car which is an added cost. Finally, I haven't run the numbers yet but I don't think the property will cash flow with me living in one of the units. Overall, I think it is a great opportunity to learn the basics of property ownership and renting in a comfortable location.

The second rental option for me is to buy single family homes in my old college town (5 hours away). The positives here are that I have connections to people who can find me student renters (with leases backed by their parents) and these things cash flow like crazy (by conservative estimates, 18% COC on a $20k down payment for a $100k house) and having college renters makes me resilient to downturns. The biggest negative is obviously the distance, plus these houses are in a very specific neighborhood that restricts the choices I have for expanding my portfolio.

I'm looking for any advice, some pointers, or even just a lovely discussion. Thanks in advance!

[Jeff Stephens]

Hi Brian, congrats on getting started! I think you're off to a good start here, and I like your thought processes behind these two options.  I personally would encourage you to consider the first option; there are a few reasons why I like this best. I think it's important to be very close (physical proximity) to your first deal, and I wouldn't want to be several hours away from my property (especially at first). I appreciate your point about having a good network in your college town, but I with some proactive effort in your hometown, you will quickly be able to establish a good team and network there as well.  

I like your focus on cash flow, but I wouldn't worry as much about your 2-3 unit building not cash flowing if you live in one unit. As an owner-occupied property, it will qualify for some of your best potential financing.  And while it won't "cash flow" per se, it will greatly subsidize your own living expenses. I know you are willing to continue living at home, so maybe you buy the property with owner-occupied financing, live in a unit for a while, and then if you are still feeling like you want to save money and are willing to live at home, you could move back there and rent out the other unit you just vacated. 

Personally, while your option 2 would create a higher cash-on-cash return, I think that at this point in your career it's most important to simply get some deals going, rather than worrying about optimizing your cash flow. Definitely make sure your deals pencil, but I wouldn't worry about 18% COC vs. 14%, etc. Just get out there and make some deals happen; you can fine-tune later when you are approaching some more critical mass.

Last but not least, one question to consider is, "why choose?" If you found great off-market deals with seller financing (I know that sounds rare but it's not as rare as you would think), you might be able to do both!

Good luck!