New investor looking to get started- what would you do?

[Chance Covan]

New to BP but looking to get started in my journey to financial freedom. I wanted to create an open discussion for some experienced investors and understand what you would do in my situation. I currently have $40k and own no real estate. What would your strategy be for creating a portfolio of real estate properties? 

[Brian Cauldwell]

Hi @Chance Covan!

You are definitely in the right forum. BRRRR would be my first suggestion to someone in your situation.

Besides finding the right property, I would see what options you have available. Talk to local banks to see what they could offer you if you were to buy an investment property. If tax returns and DTI is an issue look at private institutional lending.

For private institutional lending, first-time home buyer, the most aggressive I have seen lenders in this space is 90% of the purchase price + 100% of the rehab, not to exceed ~70% of the after-repair value. 

If you were to buy a $100,000 home you would need $10,000 + closing costs to close. Then make sure you have enough in reserves because it would be a reimbursement draw for rehab funds. Complete the work, get reimbursed for completing it. 

I would start small, be safe, look at your options for lending, and find people you trust to help you with everything that goes into a BRRRR. Realtor, contractor, etc.

[Andrew Postell]

@Chance Covan thanks for posting.  Always great to hear from a fellow Texan.  If you don't own any real estate...why not start with your own primary home?

[Min Zhang]

Investing in real estate in Cleveland, particularly with a budget of $40,000, is an option worth exploring. Cleveland has a diverse real estate market with various opportunities, Cleveland is truly known for its strong cash flow potential. If you are looking for a ton of cash-flow, then Cleveland is the way to go. Let me know how I can help!

[Stephanie Meeks]

Hi @Chance Covan!

Welcome to BP! If you have the opportunity I would most definitely house hack. If you do not already own your primary residence, then it will be easier for you to get a loan with low to no money down with a better rate for that then it would be for another property. Rent out whatever rooms you can in your primary residence and manage your roommates/tenants yourself. You will learn so much by just doing this. While house hacking your first year, continue to learn and study as much as you can. No need for any overpriced education, just read books on real estate investing during your down time (I would recommend the "ABCs or Real Estate Investing" by Ken Mcelroy if you are brand new) and listen to the BP podcast when you're commuting, cleaning, cooking, etc. Then by the next year you should be ready to make some bigger moves. Good luck!

[Justin Reagan]

I started myself with a small multifamily house hack. Helps me save money on my own housing and learn a ton about the business without burning through my cash on the first deal.

[Justin Brin]

Quote from @Chance Covan:

New to BP but looking to get started in my journey to financial freedom. I wanted to create an open discussion for some experienced investors and understand what you would do in my situation. I currently have $40k and own no real estate. What would your strategy be for creating a portfolio of real estate properties? 

Do you have a steady job right now? Having a stable job can help you handle unexpected expenses and save for buying new properties.

Many new investors are often looking for deals with good cashflow, but these are usually in less safe areas because they come with higher risks then investors are expecting higher cashflow.

I suggest focusing on the long-term growth in property value rather than immediate cashflow. Even if you're not making much profit at the start because you're investing in a better area, it should work out fine.

If you're losing $100-200 per month but have a stable job, you should be okay.

Most people get rich with real estate through property value appreciation rather than cashflow.

If you're comfortable living with roommates, you can purchase a house in a good area you like and rent out spare rooms. Another option is to buy a house, divide it into separate units, and keep one for yourself while renting out the others for more privacy. Just make sure you're not breaking any city rules when splitting the house.

In most cases, you won't face issues if you split a house as long as you live there, but it's best to confirm with local regulations to be sure.

[Joe Davis]

Some good responses on here! My advice would first be to really understand the numbers. $40k can go a long way or it can be gobbled up on the first deal. 

Learn how to evaluate a deal which leaves as little cash into it as possible. Understand the exit (lending) and you can determine how much cash you're going to need to park into a single deal. 

Your portfolio stops growing as soon as the cash runs out.... If you understand the numbers correctly you can get to low or almost nothing left in. 

[Benjamin Sulka]

Quote from @Stephanie Meeks:

Hi @Chance Covan!

Welcome to BP! If you have the opportunity I would most definitely house hack. If you do not already own your primary residence, then it will be easier for you to get a loan with low to no money down with a better rate for that then it would be for another property. Rent out whatever rooms you can in your primary residence and manage your roommates/tenants yourself. You will learn so much by just doing this. While house hacking your first year, continue to learn and study as much as you can. No need for any overpriced education, just read books on real estate investing during your down time (I would recommend the "ABCs or Real Estate Investing" by Ken Mcelroy if you are brand new) and listen to the BP podcast when you're commuting, cleaning, cooking, etc. Then by the next year you should be ready to make some bigger moves. Good luck!

 Couldn't have said it better myself!! Fantastic stuff here. 

[James Wise]

Quote from @Chance Covan:

New to BP but looking to get started in my journey to financial freedom. I wanted to create an open discussion for some experienced investors and understand what you would do in my situation. I currently have $40k and own no real estate. What would your strategy be for creating a portfolio of real estate properties? 

 Use the $40k as a down payment on a $160k duplex

[John O'Leary]

Hey @Chance Covan

If you're exploring options beyond traditional financing and haven't owned a primary residence for at least 12 months, starting with a bridge loan might be your best bet. This is because most DSCR lenders typically require a minimum of 12 months' real estate ownership experience before considering you for 30-year debt options. Staring with a few flip projects could be a strategic move to build up your reserves and establish an efficient assembly for your investments. Once you identify a property you'd like to hold onto, you can initially finance it through a bridge loan and later refinance. While the interest rate may be higher with a bridge loan, its interest-only payment structure could still allow for positive cash flow.

[Alecia Loveless]

@Chance Covan I’d buy a small multi family and house hack. With a 3.5% down payment so you don’t use all your money. Then after you’ve saved up again at least a year in the future to qualify again buy another small multi family again with the 3.5% down, move into it and keep doing that every year or so for several years and you’ll build up a nice portfolio.

[Chance Covan]

@Alecia Loveless Thank you for this response. I've considered buying a duplex and renting out one side. The issue I run into, based on what I can put down, is that I would most likely have to split the mortgage down the middle (I pay half/Tenant pays half) based on current rental rates and current mortgage rates (considering what I can put down). Does that scenario make sense? What would pros and cons be of splitting mortgage evenly?

[Chance Covan]

Quote from @Min Zhang:

Investing in real estate in Cleveland, particularly with a budget of $40,000, is an option worth exploring. Cleveland has a diverse real estate market with various opportunities, Cleveland is truly known for its strong cash flow potential. If you are looking for a ton of cash-flow, then Cleveland is the way to go. Let me know how I can help!

 @Min Zhang Thank you for the response!

[Chance Covan]

Quote from @James Wise:

Quote from @Chance Covan:

New to BP but looking to get started in my journey to financial freedom. I wanted to create an open discussion for some experienced investors and understand what you would do in my situation. I currently have $40k and own no real estate. What would your strategy be for creating a portfolio of real estate properties? 

 Use the $40k as a down payment on a $160k duplex

@James Wise Thanks for the response. What market should I be exploring?

[James Wise]

Quote from @Chance Covan:

Quote from @James Wise:

Quote from @Chance Covan:

New to BP but looking to get started in my journey to financial freedom. I wanted to create an open discussion for some experienced investors and understand what you would do in my situation. I currently have $40k and own no real estate. What would your strategy be for creating a portfolio of real estate properties? 

 Use the $40k as a down payment on a $160k duplex

@James Wise Thanks for the response. What market should I be exploring?

 Lots of folks with your budget hit up the Midwest. Ohio and Michigan are very popular places.

[Joe Davis]

Quote from @Chance Covan:

Quote from @James Wise:

Quote from @Chance Covan:

New to BP but looking to get started in my journey to financial freedom. I wanted to create an open discussion for some experienced investors and understand what you would do in my situation. I currently have $40k and own no real estate. What would your strategy be for creating a portfolio of real estate properties? 

 Use the $40k as a down payment on a $160k duplex

@James Wise Thanks for the response. What market should I be exploring?

I agree with James actually, we are in Houston but we are seeing a lot of borrowers acquire rental properties in the Midwest. The numbers just seem to work on a BRRRR in terms of parking less into the deal. Why not allocate 4-5 markets and start marketing to local realtors for off market fixer-uppers. Once you get a great lead throw it on BP and see what the feedback is. Goal is to get one that has equity, covers the nut (PITI) plus a little and you can get your cash out on the refi.

Happy Hunting

[Alecia Loveless]

@Alecia Loveless Also with a good job, doesn’t have to be high paying just has to be consistent and long term. I’m in social work and still have 7 properties and 25 units. With $40,000 you can definitely get started with a househack or something

[Arlene Dayoan]

@Chance Covan

Welcome to Bigger Pockets! So you definitely have some options. 

If you currently don't own your primary residence there are plenty of first-time home buyer options that banks are offering. I would recommend buying your first home, either single family or a duplex and house hacking so you can collect rental income and have renters help you pay down your mortgage. Or you can purchase a home in your own market, rehab it and sell it later.

You can also invest out of state in a cheaper market and buy and hold. 

It just depends on your comfort level. Good luck on your real estate investing journey!

[Cade Edwards]

@Chance Covan welcome to BP and glad to hear that you're getting started in real estate! My biggest advice would be for you to explore all options and do as much research as possible. You also have to figure out if you're wanting to be a passive investor or an active one. If you'd like any additional information or have any questions please let em know. 

[Lorie Queen]

Quote from @Justin Reagan:

I started myself with a small multifamily house hack. Helps me save money on my own housing and learn a ton about the business without burning through my cash on the first deal.

What size was your small multi family? Duplex, triplex or 4plex?

[Justin Reagan]

Quote from @Lorie Queen:

Quote from @Justin Reagan:

I started myself with a small multifamily house hack. Helps me save money on my own housing and learn a ton about the business without burning through my cash on the first deal.

What size was your small multi family? Duplex, triplex or 4plex?

 Lorie, my house hack is a duplex. Triplexes and quadplexes give better returns, but I wanted to start conservatively to learn.

[Lane Kawaoka]

One pitfall people do at this stage is buy a home to live in which can be a potential financial trap on your journey to wealth. Many aspiring investors wonder if they should buy a primary residence or invest in rental properties. This decision can vary significantly based on location. In high-cost areas like California or New York, the rent-to-value ratios often make buying a primary residence less attractive compared to investing out-of-state where the economic and political climate may be more favorable for landlords. For those just starting, investing in rental properties may offer a more substantial financial growth pathway through cash flow, tax benefits, and mortgage pay-down facilitated by tenants.

In contrast, areas with more favorable rent-to-value ratios (like some parts of the Midwest) might make buying a primary residence a sensible start. 

[Jake Baker]

@Chance Covan

The best way to build wealth is to house hack. You get the best financing and people pay your mortgage for you. 

I live in San Diego, a high-appreciating market with a lot going for it economically, and very little cash flow. I try to buy a primary residence every few years to take advantage of the favorable financing to eventually turn them into rentals. You can even do a live in BRRRR and refinance after two years.

One thing to note - The "2 out of the last 5 years" rule in real estate allows homeowners to exclude capital gains from the sale of their primary residence from their taxable income if they've owned and lived in the property for at least two years out of the past five years. (up to $250,000 for individuals or $500,000 for married couples filing jointly) Consult your CPA :)