New Investor Here, What Strategy Should I Start With?

Question

Hey everyone!

I'm new to real estate investing and really excited to get started on my first rental property. One thing, though: I'm not looking to do a house hack because I’m currently not paying for living expenses and I’d like to keep it that way if possible.

So I'm looking for other beginner-friendly strategies aside from house hacking. I do have about a 20% down payment ready for the price range I’m targeting.

Would love to hear what other approaches you all might suggest for a first-time investor in my situation. Thanks in advance for the advice!

Melissa Justice · Answer

@Isaam Brown,

Welcome, Isaam! That is a great position to be in, especially having your living expenses covered and capital ready to deploy!

If you’re skipping the house hack route, a smart next step could be looking at turnkey single-family rentals in cash-flowing markets like the Midwest or Southeast - places such as Akron/Canton, OH or Columbus, GA may work if you are looking for lower entry point in price. These markets offer affordable entry prices, strong rent-to-price ratios, and solid property management options, making them ideal for out-of-state beginners.

That way, your money starts working for you right away without needing to handle renovations or tenant placement - a great first step to build experience and steady cash flow before scaling up.

Always happy to chat more about what's worked for other investors. Best of luck!

Samuel Diouf · Answer

Hey Isaam, I'd start with something that's turnkey with some value-add potential. Use this experience to work out the kinks and build a strong boots on the ground team. The first purchase is always a huge learning experience. Once you're ready for the next purchase, you will have experience, systems, and the confidence to tackle a bigger return project like a BRRRR.

Drew Sygit · Answer

@Isaam Brown How well do you understand what you are missing by NOT house-hacking?

1) LOWER DOWN PAYMENT: If you live in the property, you can put down as little as 3.5%.- You can use the rest of your funds to fix up the property and force appreciation.

2) MULTI-FAMILY OPTIONS: owner-occupancy allows you to put less down on 2-4 unit buildings!- You can grow your experience & portfolio faster.

3) LOWER INTEREST RATES: you get the best rates with owner-occupancy.

4) MORE CONTROL: by living in a 1-4 unit property, you get to see what's happening on a daily basis.
- Gives you the eduction & experience needed, so when you do choose to hire a PMC, you have solid expectations and don't get screwed.

Here's some other helpful advice (copy & paste):

----------------------------------------------------------------------------------

The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.

This couldn't last forever, and it didn't, as excited new investors drove up prices.

Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.

So, the flood of new investors switched to buying Class B properties.

COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!

Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.

In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.

If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property in a Class D area to Class A standards and try to get a Class A or B tenant to rent it.

Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results.

In our opinion, Class C tenants have FICO scores from 560 to 620 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:

FICO Score

Pct of Population

Default Probability

800 or more

13.00%

1.00%

750-799

27.00%

1.00%

700-749

18.00%

4.40%

650-699

15.00%

8.90%

600-649

12.00%

15.80%

550-599

8.00%

22.50%

500-549

5.00%

28.40%

Less than 499

2.00%

41.00%

Source: Fair Isaac Company

According to this chart, investors should use corresponding vacancy + tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.

To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.

Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.

We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.

Once you understand the above, you still need to find a property. You’ll have to do what investors did before the Great Real Estate Crash:

• Evaluating 100 properties, to identify 10 to make offers on, in the hopes one seller accepts. - Yes, this takes a lot of work!
• Network with wholesalers who can bring you “deals” - Many wholesalers are also newbies who have no clue what a real deal is and are just time-wasters. NOTE: We often see wholesalers re-marketing MLS properties at HIGHER amounts!
• Start using your own personal network to find motivated sellers. - Start posting on your favorite social media site what you are looking for – not once or twice, but CONSISTENTLY for 6 months! Give updates on properties you’ve looked at or analyzed to keep your audience engaged, so when they stumble upon a potential situation, you are the first one they think of.

Good luck!

Travis Timmons · Answer

I'm of the opinion that house hacking and value add strategies are the only paths that are worth the hassle in most real estate markets. If you don't want to house hack or take on a project (you likely don't have enough cash for a heavy rehab unless it's a live-in flip/fixer and you can go slow), then I'd focus on quality and long term rent/price appreciation. Get the best possible asset within your price range.

Also, note that you are going to need far more than 20% to take down a property. I'll use easy math here, but most folks starting out - including me when I was buying my first one - think that $40k gets you into a $200k property. It does not. Closing costs, make ready expenses - there is ALWAYS something to improve or fix - and cash reserves means that you probably need $55k-ish to buy a $200k property. The only guarantee when you buy a house is that you are about to spend a pile of money.

Elealeh Fulmaran · Answer

Nice spot to be in. Pick a simple buy box in two solid C to B neighborhoods and aim for rent‑ready SFR or duplex with multiple exits; use your 20% down on a deal that cash flows at today’s rates with conservative expenses and real rent comps from two PMs. Get preapproved with one conventional and one DSCR lender, compare terms, then run a weekly 20‑listing scan and write one offer that fits your box. Keep six months of reserves, avoid heavy rehabs on the first one, and let this be your proof of concept before you add value‑add plays.

Nadeem Alamgir · Answer

Here's some other common strategies:

1. You can buy for cash flow. If cash flow doesn't exist in your market, what many investors do is invest in smaller more affordable markets with a favorable price to rent ratio.

2. You can flip. This is basically like full time job. You have to manage rehab + timelines.

3. You can BRRRR. Buy, rehab, rent out, refi, and repeat. This is also another full time job because you're managing rehab and timeline. This one is also something that might be harder to do in high priced states, starting out, so many investors go out of state. High risk, high reward. The reward is you can pull most or all your money out here and continue to buy and build up equity in all angles + potientally cash flowing. Risk is that if you don't do location + deal due diligence properly and work with incompetent contractors, you lose money.

Patrick Drury · Answer

@Isaam Brown
If you don't want to house hack, I save up some more funds and buy a rental with 25% down and self-manage it if you are able to to get down the basics, then on the second one you can branch out of your comfort zone and do more of a BRRRR deal

Kerlous Tadres · Answer

Hey @Isaam Brown, having your down payment ready and no housing costs gives you a significant advantage. I’d recommend looking for a duplex in a steady rental area where you can earn solid cash flow and maybe add a little value over time with small upgrades. From my experience, that’s the best way to get started and learn the business without too much risk.

What’s more important to you right now, monthly cash flow or long-term growth?

Kate Nixon Taylor · Answer

Hi Isaam,

What does your credit look like? This is going to be an important factor when getting a loan. I see from another post you made that you have a mortgage on your credit, which is great as long as there aren't any late payments.

Are you able to qualify for leverage with your income or will you need the property's income to qualify?

I would look for a single family or duplex that is turnkey or has value-add potential.

It would be great to connect and talk financing strategy!

Cheers, Kate

Austin Johnson · Answer

IMO depends on your investor DNA--most likely going to get more bang for your buck on a hands on strategy...but remember sanity is a currency too--if you're looking for some passive strategies, happy to share what I've learned--if I could start from square one again I'd implement the Rockefeller method x specific Turnkey--check out Ryan Lee & Garret Gunderson

New Investor Here, What Strategy Should I Start With?

New Investor Here, What Strategy Should I Start With?

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15 Replies

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%