Where to start with a rental income property

Question

I am new to Bigger Pockets and have been listening to a few podcasts, reading a few popular books. But the situation that I am in now, I feel as though I should probably do even more research on how to start.

I found a property that I would like to purchase (by the way I will not be financing because it is through a foreclosed auction)

Is it too risky for my first investment? I currently have a contractor and an accountant. Would I need anyone else for my first property?

Jeremiah B. · Answer

Risk is a tricky concept.  I believe that no investment is "too risky" in a vacuum.  Instead, an investment may be:

1- Too risky given the potential returns.  If you're going to assume a huge amount of risk for a modest return, or for a return that you could get through a less risky avenue, than this is likely too risky given the potential return.  To say it another way, if you can make 15% on a risky investment, or 12% on a stable one - you really need to determine which is the better fit for you.

2- Too risky for the checkbook.  Cash is a wonderful way to counteract risk.  If you don't have enough cash for the deal to go south and remain on-track for your short term and long term goals, you may want to steer clear.  You mentioned that you can do a full rehab with the cash you have - but could you do that and also lose your job and be OK?  Could it go south without impacting your retirement plan?

3- Too risky for your pysche.  If you're going to stress about things that go wrong, you probably want to steer clear of risky investments.

No one can universally stomach these considerations and everyone has a tipping point.  The key to risk is ensuring (and often, insuring) that the level of the risk you actually take is consistent with your responses to these considerations.

Let us know what you decide.

Happy hunting!

Raylicia Y. · Answer

Even though I do not want to finance the property, I also dont have the funds to fully rehab it if it goes extremely wrong. I may just wait to finance a multi-family property when I do find one I can afford.

Raylicia Y. · Answer

Thank you all

Nicole A. · Answer

Yeah, perhaps make your first deal something you can more carefully inspect before purchase.

Jeremy Pace · Answer

@Raylicia Y.

If you have the money to buy this property at auction, you have enough money to be patient.

Unless you can answer all your questions, the property isn't a good deal.  There are so, so many issues that you can't see through a window ... and unless you have enough money to completely renovate the house, you probably shouldn't buy it.

Eddie Werner · Answer

I would not start this way.  As your first deal you want to build positive momentum with success!  I'm not saying you won't be successful in this deal but if it does bite the dust it may be too hard to continue on and pursue RE.

If I was in your shoes I would find a property you can fully analyze and protect yourself agsint with inspection, walk through, title insurance, etc.

Raylicia Y. · Answer

Yes ive been able to take a peak. But it is a sherriffs sale. No one resides there, as far as I know it just needs cosmetic repairs. I am unsure about things such as the heating, plumbing, electrical etc. Which is why I am asking if it is too risky for my first property.

Nicole A. · Answer

So in this auction, you can't go inside to see the property? Have you at least been able to peek through the windows?

Raylicia Y. · Answer

Thanks for replying! But in a foreclosed auction, there is no such thing as getting an inspector to view the property. Which is why I am nervous about making the purchase. I dont have a prospective renter, but I do have a prospective property manager. They are very popular with low income housing in my area. That and craigslist. I will definitely scratch the accountant for now and get an attorney, simply because I dont to find out that there were liens on the home. I am unsure how that even works.

Michael Worley · Answer

You have to define risk.

If you are paying with Cash then you have no monthly payments so the risk is whether it's worth what you paid for it, not whether the cash flow covers the note. You have no risk of being foreclosed on.

Then you have to decide if the rental income is sufficient, after you've brought the home up to rentable condition.

A real estate attorney is good to have, but not necessary. A contractor, whom you trust, is absolutely necessary if you aren't able/willing to do the necessary repairs to bring the property to that rentable condition. The accountant is nice to have, but not a necessity.

Do you have prospective renters already? If not, I'd argue that a property manager/ realtor / resource for finding tenants is more important than an accountant at this point.