New to real estate. Where do I start ?

Question

I am new and just getting started in real estate. Can I get advice on how to take my first steps into real estate? How does one go about looking at the type of market it is in Texas?

Eric Fernwood · Answer

Hello @Rosalie Brummett,

Instead of randomly selecting a state, I recommend selecting an investment location based on the goal of buying a dependable passive income so you can get off and stay off the corporate treadmill.

For a passive income to be dependable, it must meet three requirements.

• Reliable - Your income continues even in difficult economic times.
• Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
• Persistent - Your income will last; you and your spouse won't outlive it.

All of these require getting three things right.

• Location - The most important investment decision you will make, not the property. The location defines all long-term income characteristics.
• Tenant pool segment - The tenant pool segment defines income reliability.
• Property - Defines the tenant pool, initial return, time to rent, rent, and maintenance costs.

In this post, I will discuss location selection. I can post about selecting the tenant pool segment and property selection if anyone is interested.

Location Selection

Choosing a location for investment should not involve personal opinions, luck, or feelings. It should be based on metrics. The key is eliminating locations that do not meet the three established criteria for reliable income. The remaining locations are then worthy of further examination. The process and necessary information sources are listed below.

• Metro Population >1M - There are thousands of locations to consider; too many to evaluate. So, start with metro areas with a population >1M. Small towns may rely too much on a single business or market segment. Wikipedia - https://en.wikipedia.org/wiki/...
• Both state and metro populations are increasing - Do not consider investing if the state or metro populations are static or decreasing. Wikipedia - https://en.wikipedia.org/wiki/...
• Low crime - Cities with high crime levels and long-term profitability are incompatible. People and businesses avoid areas with high crime. The result is a lack of job opportunities and investment. Never invest in any city on Neighborhood Scouts' list of the 100 most dangerous US cities - https://www.neighborhoodscout....
• Low operating costs - High operating costs can turn what appears to be a profitable property into a money pit. The two most apparent overhead costs are property taxes and insurance. Look for stats with low taxes and insurance. Insurance - ValuePenguin (https://www.valuepenguin.com/a...), Metro Property Taxes - LendingTree (https://www.lendingtree.com/ho...).
• Limited urban sprawl - Many cities in the US, including Phoenix, Memphis, and Indianapolis, have large open areas surrounding them, enabling unlimited expansion through urban sprawl. This leads to a slow or stagnant increase in property prices and rents in established areas as people move further out and rent or buy newer homes.
• Natural disaster risk - Natural disasters such as tornadoes, hurricanes, and earthquakes destroy communities. While insurance might rebuild your property, the bigger issue is the loss of jobs, local businesses, and essential amenities. Until the community is rebuilt, you will have an empty property, but mortgage payments, taxes, insurance, and other expenses will continue, with no income to offset these costs. The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Insurance - ValuePenguin (https://www.valuepenguin.com/a...)
• Metro rent and price growth rate - To have the additional dollars you need to pay for inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. If historical rental data is unavailable, you can use the rate of appreciation in the area as a proxy, as rents tend to follow prices. However, COVID-19 distorted markets, so only consider data from 2013 to 2020. Zillow research data - https://www.zillow.com/researc...
• Landlord/tenant rules and regulations - Some locations have laws that limit how much you can raise rents, making it nearly impossible to keep pace with inflation. Similar regulations can also make it difficult to choose reliable tenants and evict non-performing ones. Don't invest in places with these restrictions. To find out if a place has these laws, talk to local property managers.

The metro areas that remain are the ones to investigate further.

Operating Cost Comparison

Since you mentioned Texas, I compared property taxes and insurance costs in Texas and two other no-income tax states. See the table below.

To demonstrate the effect of taxes and insurance, I compared the overhead costs for a $400,000 property in three states. It's important to note that these are average costs for the states and that individual cities may have additional taxes.

To match the net income of a property in Nevada, you need to generate a higher cash flow in Texas and Florida due to their higher property taxes and insurance expenses. The table below displays the additional cash flow required to achieve the same level of net income.

Rosalie, I hope this helps.

Mohammed Rahman · Answer

Hey @Rosalie Brummett - You'll get a lot of different advice in the forums about how to start, but my cheapest and easiest tip is just to pick up a real estate book to learn more. The knowledge is already there, and it will help you decide whether or not you want to keep exploring the world of REI. Good luck!

Frank Godfrey · Answer

Hey Rosalie,

1st step in anything is to know first why you are doing what you are doing?  Hobby, income replacement, retirement, knock down some debt...whatever the answer...then make that a dollar amount.

As far as investing, ask yourself.  Am I looking to build a portfolio for cashflow or am I looking to build capital?

2nd step is to link up with a local expert that can guide you through the process of determining your goal and creating an action plan.

Get familiar with homes , retail and investments, pricing for labor, material, transactions and money.  Know your tolerance for working with contractors, tenants and all aspects of the game called investing.

Create a winning strategy based on your goal and find partners to make it all easier.  Like a mentor that is already doing it.  They will help your have more wins and limit the learning curve.

Chalk everything up as educational.  Just do your best not to make the educational process too costly.

Final note and most important - Don't pay tens of thousands of dollars to anyone stating they can teach your everything. That will be the most expensive lesson you could ever learn.

Agent/Investor/Coach

Taylor Dasch · Answer

Hey Rosalie, great question. I think the most important part right now is to learn and network. Learn what the actual ARVs are in your market ( a local realtor will be happy to help) as wholesalers will inflate this number sometimes , learn how to calculate rehabs, develop a criteria of what your dream portfolio looks like, learn what neighborhoods in your market have the highest chance of fitting that criteria.  Find a real estate investor that you can learn from in terms of finding deals, talking to sellers, etc. Even if you dont do any of that but take action and learn from your mistakes, I think you will be successful! Best of luck!

Alli Breighner · Answer

Hi Rosalie, welcome to BiggerPockets!

I'd love to offer guidance where I can, and connect.

Clay Asplundh · Answer

The best thing you can do is get in contact with a great realtor in your area who also invests themselves. It is critical they have their own investment properties or at least know what makes a great investment property. There are many realtors who are great at what they do for the average home buyer but are completely clueless when it comes to analyzing a rental property. The second thing to do is figure out what your goals are. Do you have only a small amount of money to put down? Consider house hacking so you only need to put 3.5% down. Do you want cash flow now or are these long term investments that you are comfortable having delayed gratification on through appreciation because it is in an A+ area? Your goals will determine the right market for you! Good luck and feel free to reach out with any questions.

Brandon Rabe · Answer

@Rosalie Brummett congrats on taking this step! You'll get a lot of different perspectives so it's important to understand who you're getting the perspectives from. Including me. I'd say, start with your goals. What is it that you want to achieve in 10 years? What does your life look like? Now as you work it back, does real estate play a role in that? If so, what does that look like? What strategy are you using? What type of asset class is it?

Knowing what market to invest in is important, but if you don't know your strategy or your Why, the market you choose could be in total opposite support of your goals. ie investing for cashflow but you're looking at a rapidly appreciating market.

Tim Bee · Answer

Stick to the 1% rule.  Unless you are flipping or holding for capital gains always stick to the 1% rule.  Realtors even on here will always try to sell you on the reasons to buy something that doesn't meet that rule.   Don't listen to them.  I still today, even in California am able to find houses that meet that expectation.

Eliott Elias · Answer

Invest in your neighborhood, don't go further than you have to. I believe I can be successful in any market you put me in. I don't have to find outside markets to make things happen.

New to real estate. Where do I start ?

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