First time investor which direction do I go?

Question

OK here’s my question. I want to get in to real estate investing and this would be my first time. If I had to pick which direction I should go if I want to make this an ongoing thing. I have 30 K in the bank and I can’t decide if I should buy a rental or a flip. I know there is pros and cons to both with the rental. I don’t want to have to wait a long time to save more money to buy my second one. With the flip I am very handy, but I would hate to get into something, not knowing how much It’s all going to cost. If you were in my shoes as a first time investor, what would you do? I have used the tools on the website and they have been fantastic but I just don’t know what direction I just need to go.

Travis Timmons · Answer

If you are going to do a flip, do a live in flip with the plan of living there for 2 years to sell tax free. You get the benefit of 2 years+ of appreciation, tax free gains, protect yourself from buying in a crappy neighborhood because it looks good on paper - you're going to live there...the best test for a good investment location is if it is a desirable place to live - and your risk of running out of cash is lower because you can take your time. It sucks to live in a job site, but if you can take it, it's a worthwhile pursuit. I'm on my 3rd one right now (41, married, and 2 kids - just trying to remove that excuse).

A traditional flip simply requires more cash than you have. Finding some sort of owner occupied house hack-ish option seems to be the most realistic path so long as your debt to income ratio is solid/lend-able.

Feel free to send me a message if you think that I can be a resource. I have nothing to sell and would be happy to help.

A traditional flip simply requires more cash than you have. Finding some sort of owner occupied house hack-ish option seems to be the most realistic path so long as your debt to income ratio is solid/lend-able.

Feel free to send me a message if you think that I can be a resource. I have nothing to sell and would be happy to help.

Randall Alan · Answer

@Marc Young

What catches my eye in your post is this:

“I don’t want to have to wait a long time to save more money to buy my second one.”

Rentals don’t meet this requirement of yours.  Rentals are a $300/month gain on your investment type of proposition.  Each one you own gives you some quantity of positive cash flow, plus tax write offs, plus mortgage pay-down / equity gain.  Plus you get market appreciation as well.  But the only liquid one of those (until you sell a property) is cash flow.  The faster track on rentals  (cash-flow wise) is to do short term rentals like AirBnB, etc…. Presuming your location would be filled enough days a month to support that.

I went to a real estate seminar where their ‘mantra’ was Flip, flip, flip, buy a rental”. That strategy lets you make chunks of cash on each flip, which also gives you cash to buy your next flip, and then eventually you have enough money to buy a long term hold you can rent out for more passive income than flips.  So that is a strategy for you to consider.

The challenge is that flips for a beginner can be daunting.  There is a large learning curve to not only know what to look for, but also finding people to do the work reasonably, as well as to manage them, etc.  the challenges with flips  is that there are so many angles to try and cover / consider that it is somewhat like spokes on a wheel… even if you just take it system by system… roof, plumbing, AC, foundation, subfloors, electrical, appliances, septic, materials expenses, holding costs, taxes, etc.  What you don’t know or check, can come back and bite you in your estimating & repair.

The other big thing is that you need a project with a lot of profit potential each time.  Those are harder to find in the past couple of years.  You may find an ad that says $45k profit potential.  But keep in mind that things like closing costs (where you have to close twice - once to buy the flip and once to sell it) may eat up $10k of that profit before you pick up a hammer to repair something. How about capital gains where you will lose 15-25% of your profit to taxes when you finally sell it?  Then there is inevitably the cost overruns that come when you tear into something and realize “oh, this has to be fixed too!”  For us, we don’t do a deal where we don’t think we can walk away with at least a $50k profit after repairs,  it just isn’t worth the time and risk for us.  But everyone has a different tolerance level for risk. So my suggestion if starting with a flip is to find one that needs simple things… paint, flooring, appliances, landscaping, and such.  Don’t jump into a 6 figure renovation - you don’t have the budget for that anyway, but just start simple to get your feet wet.

Which brings the conversation to finances. $30k is probably barely enough to let you buy a flip if putting 20% down.   Maybe if you buy it and live in it where you only have to put 3-5% down you could pull something off… but we bought mostly C class properties back in 2018-2021 and our dollars to close were usually in the high 20’s to low 30’s just to buy the property with 20% down. Today those numbers would certainly be higher… so your funding is a big concern to me on the ‘flips” side.

I sort of point you back toward the old adage that real estate is not a get rich quick scheme.  In today’s high interest rate, high priced homes market, just trying to find descent cash flow is seriously challenging.  While the urge for a beginner is “I just want to start”… I would tell you from having been in the market for about 6 years (but at 37 doors today) … now isn’t the greatest time to try to be starting.  Can it be done today?  Yes, maybe.  But will it be a whole lot easier with interest rates in the 5% range though?  Most definitely!  Timing is an important factor in real estate... both when you buy and when you sell.  But the funny thing is that you often don’t know at the time you’re doing it where you are at on that timing question.  I guess what I’m suggesting is that you aren’t coming in at the optimal time in today’s market.  Very little cash flows at 7% interest when you factor in all your costs.  So run your numbers and if your deals are upside down… or cash flowing poorly (say under $150-200/month) they aren’t great deals and you should think about what that is telling you.

All the best!

Randy

Travis Timmons · Answer

@Marc Young - one more thought I'd like to add - buy the asset that you want to own the most 10 years from now. Year 1 cash flow matters (don't buy a cash vacuum), but price appreciation and rent appreciation is how you get real economic security and build wealth. There are a lot of cheap markets and properties that look great right now but will still be renting for $900/month 8 years from now (I'm making up numbers but you get the point).

I'll use one anecdotal example to illustrate that point. I lived in Saint Louis until 2009 and then moved to Houston. The last Saint Louis apartment that I lived in has increased rent from $600/month to $850/month in 15 years. The apartment I moved to in Houston went from $800/month to $1650/month in that same time frame.

Budgets and constraints are real. I get that. We can't go buy in the best neighborhoods are markets, but run prospective purchases through that filter. Also, $30k isn't enough money to get into the game if you are buying a property with 20-25% down. Even "turn key" rent ready houses will have some expenses. And if you are buying a $90k house, capex and turnover costs from that class of tenant is going to be more expensive than you likely expect.

Marc Young · Answer

Wow!

This is my 1st post on here and I’m blown away that you took all that time to explain this. I really appreciate it. Thank you for the insight. I have areas about a hour where I live with a military base houses around 90-180k not great area but hopefully a good spot to start.

Jack Krusinski · Answer

I would hedge your bet. I would try to buy a property that you can flip, but it would also be a good rental. Flipping is a great way to build more cash to go to bigger deals. But it can become a big financial issue if things don't work out. More risk, more reward. I know that it is a lot harder to find a flip that would make a good rental, and I'm not sure if rentals or flips are good in your market, but if you can hedge your bets with two good exit strategies, I would.

Hunter Stoudnour · Answer

House hacking your first rental or doing a live-in flip would be the most advantageous. I would lean towards house hacking your first rental. You'll gain experience with leasing, tenant management, etc. You will also have the opportunity to build equity and eventually use it as collateral to purchase more.

Ko Kashiwagi · Answer

Hi Marc,

It sounds like you are in the military? A house-hack would be the lowest barrier to entry if you can find a good deal. You could put in very minimal cash and spend your capital on repairs to do a house hack flip. This will get you experience in remodels and much lower down side than a normal flip because you are literally living in the house (so you know exactly what is going on and 0 travel time) and you are utilizing a low down payment, low rate program like a VA loan.

Jason Taken · Answer

Goto some networking events in your market and see about teaming up with local investors on your first one. This can remove a lot of the error likely scenarios that you'd run into as a first time investor.

Also having solid debt solutions for your first project is definitely a plus. Give me a call if you want to discuss that aspect.

First time investor which direction do I go?

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