Best Markets for First-Time Investors: Seeking Recommendations for Cash Flow & Growth

[Hector Espinosa]

Hi BiggerPockets Community,

I'm a first-time real estate investor and currently exploring different markets to make my first multi-family property purchase. I’m looking for a market that’s beginner-friendly but still offers potential for steady cash flow and long-term growth. Here's what I’m targeting:

Investment Criteria:

• Unemployment rates below the national average.
• Rent-to-price (RTP) ratio of 0.60 or higher.
• Median home prices below $150,000.
• Growing population and areas where rents are stable or increasing.

Key Questions:

1. Which markets have you found to be ideal for first-time investors? Are there any cities or neighborhoods that you’ve seen consistent success with for multi-family properties?
2. Market Considerations: What factors should I be most mindful of when investing in a new market? How do you balance affordability with growth potential?
3. Best Starter Markets: For investors just starting, which cities tend to have good entry-level opportunities for multi-family units but aren’t too saturated or risky?
4. Local Resources: If you’ve invested in any of the markets you recommend, do you have suggestions for property management companies, lenders, or agents who are supportive of first-time investors?

I’m open to any suggestions or advice on both established markets and up-and-coming areas that could offer strong returns.

Thanks in advance!

[Drew Sygit]

@Hector Espinosa 

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

If you buy/renovate a Class A property in Class D area, what quality of tenant will you get?

Similarly, if you put all Class D tenants in a Class A 4-plex, what do you think will happen?

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

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.
Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.

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.
Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), 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 be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

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

The City of Detroit has 183 Neighborhoods we’ve analyzed.

PM us if you’d like to discuss this logical approach in greater detail!