Best strategy to enter NoVA market with 300k capital

[Nisrine Shehadeh]

Hi everyone! I'm hoping to get some advice as a complete newbie to REI. My family owns a 3BR condo and we're planning to downsize to a 2BD condo. This would leave us with about 300k surplus cash.

I have been reading, listening and calculating pretty intensely trying to figure out the best strategy to grow this capital. Our financial goals are to supplement my and my 2 siblings’ incomes in the short term, and contribute to our retirement income in the long term. Our vision is to build a modest portfolio of long-term rentals (3-4, depending on our success!)

We are in northern Virginia - Tysons specifically - and since we are first time investors, we would prefer to own property nearby in order to manage it ourselves. I’ve looked as far as Woodbridge and Lorton. Charlottesville is also a possibility, but it’s still pretty far from us. I’m a teacher and do not have much flexibility in my day to day schedule.

I have learned, based on what I’ve been reading on here as well as properties I’ve been analyzing on Zillow, that it is pretty much impossible to cash flow in this area. One realtor told me that a 50% down payment is often what is needed in order to break even.

What would be the best strategy in this situation? Would it be best to:

a. use the 300k as a 50% down payment on one 600k property

b. find 2 properties under 300k each and put down 150k on each

c. Focus on another more affordable market such as Charlottesville or Baltimore

d. None of the above, you should do ____ instead :)

Huge thanks in advance for any recommendations and advice you can offer! Also, would LOVE if anyone can help me explain to my mother why real estate will be more profitable than just putting the money into an index fund :P

Thanks again!

[Michael Smythe]

@Nisrine Shehadeh

Beginning investors need to STOP believing all the fluff about rental investing, especially with the overheated real estate market trending to historic norms. Many believe unrealistic assumptions and often apply those assumptions to the wrong property classes.

In our OPINION (always verify yourself!):

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenants: Majority will have FICO scores of 680+.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenants: Majority will have FICO scores of 620+, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should often be used to also cover nonpayment & evictions.
Tenants: majority will have FICO scores of 560-600, many blemishes, but should have no evictions in last 2 years. Verifying previous 2-years of rental history very important!

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenants: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.