High end (and high price) for first property?

Question

I am getting started in real estate investing.  Have been doing lots of reading, running lots of numbers, but this would be my first actual investment property.

There is an up and coming area not far from me that it growing quickly for vacation rentals, and I believe I have pin-pointed the place/style/etc that is doing really well there.  I've run the numbers and they look very strong.  The problem is getting that requires a large 6 bedroom, ~$700k house.

My wife and I make good money at our full-time jobs so we wouldn't have trouble qualifying (already talked to my home lender and they said no problem).  I am just concerned at such a high price on the first go-around without having any properties under my feet to have learned through experience on yet.  Is starting smaller and building up to higher end properties once you have that experience a must or, if I'm fairly confident in the numbers, is it reasonable to just dive in and do it?  I am worried this opportunity will not be there in a few years as I expect prices to rise rapidly in the area (and they have already begun to).

As an aside, would it be out of line to contact other vacation rental owners in the area through AirBNB/VRBO messages to ask them about their experience in the area, double check that their homes cash flow, etc?  I'd definitely like to get that input direct from them (using AirDNA currently, which is my biggest concern as I'm not sure how reliable their data really is) but I don't want to alienate myself in the community before I even get started there if it is frowned upon.

Brenden Mitchum · Answer

Hey @Ryan Moyer! First off, welcome to the BP community!

Yes, buying a bigger home to start is more risky because the potential losses are greater. But if the numbers are right and you're being conservative you'll probably be alright. No one makes money in this business by being afraid. So now you just have to decide (with your wife) what your risk tolerance is. If y'all decide that you can handle the pressure of some added risk, then go for it! If not, then start out with something small and maybe kick yourself later for the missed opportunity and not going big to start. Many seasoned investors wish they'd started earlier or scaled faster.

However, I would not focus so much on raising prices. Yes, we all want to buy in "up-and-coming" areas but that's only if the numbers make sense now. Don't assume in your analysis that the property will increase in value by anything more than inflation. If it's still a great deal then you'll make money regardless what happens in the market and that extra speculated gains will just be icing on the cake.

I don't see the problem in reaching out to current airbnb owners. However, I would not ask them what their cashflow or ROI is because this is irrelevant to you unless you also know how much they payed for their home and what their expenses look like (which I also wouldn't ask). What you can do is ask what the busy months and slow months are and how many days in these months they're typically booked. This is much more useful to you because now you can better calculate your own cashflow and ROI.

Anyways, just my two cents! Hope that all makes sense and I did not ramble too much. Please feel free to reach out to me if you have any other questions