Where to start my investing career: two options

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Where to start my investing career: two options

Brian Leu
Cranford, NJ · Member since 2017 · 9 posts · 0 votes

Hi all! I'm a recent college graduate who has been saving up money and reading a ton of bigger pockets and am ready to get started investing in real estate. There are two markets that I am looking at, both have their ups and downs and I'm looking for a little advice as to which one is better for starting out.

First, some necessary information about me. I currently live in northern New Jersey (union county) about an hour away from NYC where I work. I currently live with my parents and would be happy to continue doing so to save money. I went to school in upstate New York and have many friends still there. I intend to manage whatever I buy myself and probably hire contractors for any bigger projects.

The first option I am considering is getting an FHA loan multifamily rental in northern New Jersey, roughly in the area where my parents live. I've found a lot of 2-3 family listings in my price range of 3-400k. My concern is I don't have a network set up here (though I do know some contractors) so finding renters might be difficult, plus I'd have to buy a car which is an added cost. Finally, I haven't run the numbers yet but I don't think the property will cash flow with me living in one of the units. Overall, I think it is a great opportunity to learn the basics of property ownership and renting in a comfortable location.

The second rental option for me is to buy single family homes in my old college town (5 hours away). The positives here are that I have connections to people who can find me student renters (with leases backed by their parents) and these things cash flow like crazy (by conservative estimates, 18% COC on a $20k down payment for a $100k house) and having college renters makes me resilient to downturns. The biggest negative is obviously the distance, plus these houses are in a very specific neighborhood that restricts the choices I have for expanding my portfolio.

I'm looking for any advice, some pointers, or even just a lovely discussion. Thanks in advance!

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Jeff StephensPro Member
Rental Property Investor · Portland, OR · Member since 2017 · 94 posts · 78 votes
9y

Hi Brian, congrats on getting started! I think you're off to a good start here, and I like your thought processes behind these two options.  I personally would encourage you to consider the first option; there are a few reasons why I like this best. I think it's important to be very close (physical proximity) to your first deal, and I wouldn't want to be several hours away from my property (especially at first). I appreciate your point about having a good network in your college town, but I with some proactive effort in your hometown, you will quickly be able to establish a good team and network there as well.  

I like your focus on cash flow, but I wouldn't worry as much about your 2-3 unit building not cash flowing if you live in one unit. As an owner-occupied property, it will qualify for some of your best potential financing.  And while it won't "cash flow" per se, it will greatly subsidize your own living expenses. I know you are willing to continue living at home, so maybe you buy the property with owner-occupied financing, live in a unit for a while, and then if you are still feeling like you want to save money and are willing to live at home, you could move back there and rent out the other unit you just vacated. 

Personally, while your option 2 would create a higher cash-on-cash return, I think that at this point in your career it's most important to simply get some deals going, rather than worrying about optimizing your cash flow. Definitely make sure your deals pencil, but I wouldn't worry about 18% COC vs. 14%, etc. Just get out there and make some deals happen; you can fine-tune later when you are approaching some more critical mass.

Last but not least, one question to consider is, "why choose?" If you found great off-market deals with seller financing (I know that sounds rare but it's not as rare as you would think), you might be able to do both!

Good luck!

[email protected]
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  • Rob Suhai
    Real Estate Professional · Oak Ridge, NJ · Member since 2015 · 26 posts · 20 votes
    9y
    Hey Brian! Welcome to Bp man! Seems like you're on the right track and getting your game plan together is the first step. I'm personally doing you're multifamily idea, where I'm living in one unit and renting the other. I'm not cash flowing but living for about 700/mo. Which isn't bad in nj. As far as renters go,if it's in a good area and the numbers work out to the point that allow you to be competitive with rents in your market I don't see why you'd have any issues getting renters. I look at landlording as a service as well. A landlord who takes pride in their property, addresses issues timely, and takes care of their tenants is worth something in my opinion. The one thing that would concern me renting to college students is how well they'd keep the property. Obviously you don't want holes in the walls from a crazy party or something like that. Or someone breaking a lease because of a break up or drama. Just vet your tenants carefully and protect yourself.
    1Reply
  • Brian Leu
    OP
    Cranford, NJ · Member since 2017 · 9 posts · 0 votes
    9y

    Hey Rob, thanks for the feedback! Awesome to hear you're living the house hacking life in the area, I wasn't sure how easy it'd be to do! $700 is definitely a steal for the NYC area, but I'm not sure it's worth even paying that when I could be living for free with my parents. One thing I was considering was also getting a roommate, which could hopefully bring me to even at least, but I don't know how common those are to find either. If you don't mind me asking, what's your go-to method of finding tenants?

    You're right about the college students though, and if they do damage the house I have to travel 5 hours to fix it or hire a contractor which gets expensive. 

    0Reply
  • Jeff StephensPro Member
    Rental Property Investor · Portland, OR · Member since 2017 · 94 posts · 78 votes
    9y

    Hi Brian, congrats on getting started! I think you're off to a good start here, and I like your thought processes behind these two options.  I personally would encourage you to consider the first option; there are a few reasons why I like this best. I think it's important to be very close (physical proximity) to your first deal, and I wouldn't want to be several hours away from my property (especially at first). I appreciate your point about having a good network in your college town, but I with some proactive effort in your hometown, you will quickly be able to establish a good team and network there as well.  

    I like your focus on cash flow, but I wouldn't worry as much about your 2-3 unit building not cash flowing if you live in one unit. As an owner-occupied property, it will qualify for some of your best potential financing.  And while it won't "cash flow" per se, it will greatly subsidize your own living expenses. I know you are willing to continue living at home, so maybe you buy the property with owner-occupied financing, live in a unit for a while, and then if you are still feeling like you want to save money and are willing to live at home, you could move back there and rent out the other unit you just vacated. 

    Personally, while your option 2 would create a higher cash-on-cash return, I think that at this point in your career it's most important to simply get some deals going, rather than worrying about optimizing your cash flow. Definitely make sure your deals pencil, but I wouldn't worry about 18% COC vs. 14%, etc. Just get out there and make some deals happen; you can fine-tune later when you are approaching some more critical mass.

    Last but not least, one question to consider is, "why choose?" If you found great off-market deals with seller financing (I know that sounds rare but it's not as rare as you would think), you might be able to do both!

    Good luck!

    [email protected]
    1Reply
  • Brian Leu
    OP
    Cranford, NJ · Member since 2017 · 9 posts · 0 votes
    9y

    Hi J,

    You make a lot of good points. In reference to the 'why not both', I suppose the only thing I'm really constrained by is my budget but seller financing would go very far in alleviating that. Time to listen to some podcasts about how to find off-market deals! Though if I'm not focused on cash flow, how much attention should I pay to appreciation? I'm in the camp who likes to say appreciation is a gamble, but it seems important to find something that will at least hold its value.

    Thanks for your input!

    0Reply
  • Jeff StephensPro Member
    Rental Property Investor · Portland, OR · Member since 2017 · 94 posts · 78 votes
    9y

    @Brian Leu:  Great question!  In answering your question, it's important to distinguish between two types of appreciation:  

    1. market appreciation:  when the property goes up in value based on supply and demand; it's not so much in your control
    2. forced appreciation:  when you do something to the property to make it more desirable.  This could include things like repairing it, expanding it, improving the management, improving the marketing, etc.  We often refer to this as "adding value"

    (Incidentally, within the category of "market appreciation" it's easy to confuse 'appreciation' with 'inflation.' This was on my mind recently so I wrote a post on my personal site about the distinction. In case you're interested, it's at http://www.jwarrens.com/understanding-inflation-vs...)

    So to answer your question, I would encourage you to NOT rely just on market appreciation (to your point, that should be a bonus) but definitely DO focus on finding things where you can add value and force some appreciation.  

    Go get it!

    [email protected]
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