How do I buy my first rental property?

Question

Hello everyone,

I am 23 years old and looking to get my start in real estate investing. I’d love some general tips on how best to navigate my situation.

My main goal is to just get some skin in the game by the end of 2022 and purchase my first property. I don’t really care that much about how much cash flow I get, I just want to be in the positive. Some decent appreciation over time would be nice too.

I am looking for multi-family properties or single family homes that can be turned into a property with multiple units to rent. My max purchase price would be about 400k but ideal would be about 150k.

I live in California but I am willing to invest out of state in either Nevada or Colorado. I only have about 40k of my own money to invest so I’d be open to house hacking if I could find a good deal in a decent area of Southern California but that’s not ideal.

I also feel that a property that needs some work done would be a better investment because I can buy cheaper and increase the value right away, but I’m not sure.

The long term goal would be to own a large multi family property (100+ units).

Any tips or ideas on how to get started would be greatly appreciated. Thank you!

Miles Viant · Answer

I agree with @Peter Mckernan, find a market you like and dive right in! I recommend you read both Long Distance Real Estate Investing and Buy Rehab Rent Refinance and Repeat by David Greene to help you develop your strategy with investing in out of state.  I believe both of these books have given me strong knowledge and confidence to invest out of state. Will be diving into Indianapolis this winter implementing the BRRRR strategy.

As mentioned before, SFR appreciates more than multi family, multi family cash flows better than SFR, however does not appreciate the same.

Take a look at renttoretirement.com, turnkey provider and they even are offering new construction opportunities in Florida. They offer properties with strong cash flow and appreciating markets. Worth a look!

Hope this helps!

Account Closed · Answer

@Miles Viant thanks for the shout out.

@Nick Henry This is actually a topic that has been covered many times in the forums and of course you can learn more about us through other experiences and reviews here on Bigger Pockets (see below).  In the meantime - congrats on beginning this journey - so many different ways to go - BRRRR, turnkey, house hacking - it really comes down to you - your time availability , your experience, your budget, and your short/long term goals!

https://www.biggerpockets.com/forums/92/topics/518583-feedback-on-renttoretirement-and-zach-lemaster

https://www.biggerpockets.com/forums/92/topics/765347-rent-to-retirement-review

https://www.biggerpockets.com/forums/850/topics/895660-my-first-investment-property-an-out-of-state-deal

https://www.biggerpockets.com/forums/92/topics/893621-rent-to-retirement-review?highlight_post=5222888&page=1#p5222888

https://www.biggerpockets.com/forums/311/topics/915728-experience-with-rent-to-retirement-turnkey?page=1#p5345200

https://www.biggerpockets.com/forums/92/topics/808479-rent-to-retirement-experiences

https://www.biggerpockets.com/forums/12/topics/533693-anyone-worked-with-renttoretirement-turnkey

https://www.biggerpockets.com/forums/92/topics/581730-rent-to-retirement-zach

https://www.biggerpockets.com/forums/48/topics/874096-reviews-on-r2r-and-nch?page=1&utm_source=Iterable&utm_medium=email&utm_campaign=Transactional:%20topic_notification&utm_content=Transactional#p5123754

https://www.biggerpockets.com/forums/311/topics/883772-turnkey-investing-renttoretirement-feedback-reviews?highlight_post=5171720&page=1#p5171720

Kayla Givens · Answer

Hey, @Nick Henry! Welcome to the wild world of real estate investing! I wish I had thought to get started in my early 20's like you!

I think you're on the right path here - sounds like you've got a good chunk of capital ready to be invested and a decent price range to work with. I would highly recommend house hacking to get started - lower cost of living/potential cash flow, low down payment (3-5%), and after a year, rent out your place and do it all over again!

Austin Largusa · Answer

@Nick Henry what part of California are you from? I'm in the SF Bay Area and am just a tad older than you. I bought 12 properties in my first 6 months of investing with literally $0 of my own money. There are so many ways to buy a rental. I don't even know where to start helping you lol.

1. Pick A Market

2. Build a team - deal funnel, property manager, contractor, and lender

3. GO!!!!

Nick Henry · Answer

Thank you @Kayla Govier! Seems like a smoother transition into investing.

Eric Fernwood · Answer

Hello @Nick Henry,

If your investment goal is an income stream that you can rely upon for many years to come, there are four steps you need to get right, which are illustrated below.

Location Selection

Location is the most important decision you will make, not the property. As long as you buy in a good location, all but the worst mistakes will be corrected over time through rent increases and appreciation. However, if you don't invest in a good location, there is little you can do to turn things around. So, you have to make the right location decision.

Fortunately, there are a few indicators that make selecting a good location easier than you might imagine. The most important of them all is the rate of appreciation.

• Appreciation - The number one criteria in location selection is appreciation. Inflation is constantly eroding buying power; each year, it costs more to buy the same set of goods. If you buy in a location where prices and rents are rising faster than the inflation rate, you will be able to buy the same set of goods because you will have the additional dollars you need from increased rents. If you buy in a location where prices and rents are increasing below the inflation rate, the buying power of your rental income will decrease over time.
• Population Size - Greater than 1 million. Small towns may rely too much on a single business or market segment.
• Population Growth - If people are moving into a location, many things have to be right, including jobs and cost of doing business. I would not invest in any location where the population is stagnant or declining.
• Crime - People and companies will not move to locations perceived as dangerous. One source of cities to avoid is Neighborhood Scout's 100 most dangerous cities.
• Disaster Risk - Some parts of the country are more prone to natural disasters. The best indicator for natural disaster probability is homeowners insurance cost. I would avoid states with high insurance rates. Note, even if insurance pays for all the damage your property suffers, you still lose. When a significant disaster occurs, people and jobs move to locations where they can make money today. The location may take years to recover, or it may never recover. ValuePenguin is a good source for the relative cost of insurance by state.

Investment Team

If you needed surgery, you would not start medical school. Also, not just any doctor will do. You want a surgeon that specializes in the kind of surgery you need, not a general practitioner. The same is true with real estate investing. You want to work with an investment team that already has the skills. Below is a list of the necessary skills. (You will need to click on the image to enlarge.)

A good investment team will minimize your risk and save you time and money. If you try to do everything yourself, it will cost you more, and the odds of being successful are much lower. Do not make this mistake.

Good investment teams are hard to find. The place to start is with an investment Realtor. Know that even in a large metro area, there is likely only one or at most two investment Realtors. While finding an investment Realtor may take time, the cost, risk and time savings will be worth it.

Tenant Pool

The only way to consistently make money is to keep the property occupied by what I call a good tenant, who:

• Has stable employment in a market segment that is very likely to be stable or improve over time
• Has a credit history with which you can evaluate the likelihood that they will perform
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

Good tenants are the exception, not the norm. Good tenants are the result of:

• Targeting the right tenant pool
• Selecting the right property
• A skilled property manager

How do you determine the right tenant pool that will support your financial goals? Your investment team will include a property manager in addition to an investment Realtor. They are your first stop. In addition, I would interview multiple property managers. I believe that the best tenant pool to target will be obvious once you go through the interviewing process.

Property Selection

If you select a property that matches your target tenant pool, most applicants are likely to come from your target tenant pool. With the right property, combined with a skilled property manager, your chances of getting a good tenant are high.

To know what to purchase, you need to understand how prospective tenants select a property. Tenants develop a shortlist by applying four filters, as illustrated below.

Working with your team, translate your tenant pool's rent range, needs, location, and wants into a physical description of properties that will match. I call the physical description a property profile. See the diagram below.

The minimum information a property profile contains is the following:

• Type: Condo, high rise, single-family, multi-family, etc.
• Price Range - You must be able to profitability rent the property within the target tenant pool's rent range.
• Location - Where the target tenant pool wants to live.
• Configuration: For example, 2,000SF, two bedrooms, three-car garage, large back yard, single-story, two stories, etc.
• Wants - Tenant pool specific property features. For example, bars on the first floor windows might be very important. For another tenant pool, it might be granite kitchen counters.

Your investment team will find properties that conform to the property profile and provide the information you need to make an informed decision, which includes:

• Candidate properties
• Rent
• Time to rent
• ROI/Cash flow
• Renovation items - The items that must be changed in order to attract the target tenant pool.
• Estimated renovation cost

Note that an MLS data sheet contains none of the above information. MLS data sheets are excellent for home buyers but not for investors.

With the above information, combined with what you learned about the target tenant pool's vacancy cost, you have what you need to make an informed decision on property selection.

Summary

Nick, if you follow the above process, your odds of consistently buying properties that perform in good times and bad are very high.

Charles Renn · Answer

Hi @Nick Henry, welcome to the BP family! You've got a lot of great advice here. Working with a lot of SoCal multi-family investors, there are pockets here that fit your price point for a house hack. Since you have a year to save up and learn, you'll be on the right track in no time, but my 1 piece of advice would be to own your residence/house hack, then start building your empire.

Let me know if I can be of more value.

Hope this helps!

Nick Henry · Answer

Thank you everyone! All of your insight is very helpful and I really appreciate it. I wish everyone the best!

Frank Posluszny · Answer

@Nick Henry

Nick, I live in Southern California and no way could 40k get me anywhere near the multifamily property that I was looking for to start with...

What I did was remember that im originally from another part of the country where prices are much lower and decided that since I visit home every year anyways (at the cost of about $2500 for the trip) that i would find a property there. That way my annual visit is a tax deduction. Then I found a great real estate lady who connected me to a great property manager. The manager would check on properties for me with the understanding that I wanted less work for her to manage so we wanted good shape. She found us a turnkey 4 unit building for 150k. Just under 40k out of pocket and about 1k a month payment. Any 2 units rented pays the mortgage and anything more is positive cash.

I think that kind of looks like you're after with just getting your feet wet but not losing money. As far as me being from another state, you could also pick something near a vacation zone that you may like. For example, if you like Vegas but its too expensive, you could find something an hour away from there and "check" on your investment every time you're in Vegas. Since my wife loves Hawaii, we will have to find something small there to add to our portfolio.

The only thing I would say is to watch rental laws and taxes since, as you know, in California it takes God and 6 unbiased judges as well as a writ signed in blood in order to evict someone. My understanding (but I'm not sure so don't quote me on it) is that Nevada laws are basically the opposite.

As others have said, good for you to have your head on right at your age. Entrepreneurs are the best because they make life better for everyone.

Frank Rodrigues · Answer

@Nick Henry

You have enough money to start with a single (possibly two depending on the market) or multi so pick one. Multi’s have better Cashflow and singles are easier to sell with great appreciation if you choose the right market. Once you have made your  choice ask yourself do you want to run everything? Dealing with contractors, boots on the ground, finding competent property management… or would you rather go full Turnkey and not do all the work? Both are gonna cost you. One with time, effort, trial and error or the other with a higher premium. And finally the market that is going to help you meet your goals whatever that may be. Once you’ve done that pull the trigger and go. I hope that helps and best of luck to you!

How do I buy my first rental property?

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