Does dis make sense? Newbie,little money down in expensive market

Question

Hello fantastic humans of bigger pockets,

I come to you today for your expertise. I am looking for my first deal in an expensive market but low taxes. I want to put as little money down as possible, which means the dreaded PMI. My state offers a program that allows me to do that and they will pay closing costs! I am on the hunt for the right deal but because of high costs, it has been difficult trying to hit on the 1% rule. (Q. 1)When can someone deviate from this rule? (Q. 1a) Granted, expensive markets come with high rents but would .9% make sense?

My background - Pre-approved for $900,000 for a 4 family, 800,000 for a 3 family, 700,000 for a 2 family. Shooting for the lowest down payment, which could increase cash on cash return and keep some cash for the next property in 6 months - year after the purchase of the first deal. (Q. 2) Does my strategy make sense? (Q. 3) Is it too risky for newbies to jump into high priced properties or expensive markets?

Please help!

Thank you.

Jose M. · Answer

Thank you! This is very helpful. I will definitely stick to the 1% rule. In terms of risk, I am fine with it as long as the numbers makes sense.. especially if instead of earning 200 per door, it could potentially be 1000 per door.

I was curious on what folks thought about going low money down to save cash for the next property .. but it all depends on the numbers.

This is an exciting but scary time! thank you again!

Glenn Istre · Answer

Hi Jose,

Q1: The short answer, yes someone can deviate from the rule. However, it does increase the chances of you having to cover the expenses that exceed income. The long answer is that the deal has to make sense. Will the rents cover all expenses? Your Cash Flow will take a major hit and being a new investor means you will have expense you did not consider. This can cause problems if you have to cover the expenses and don't have the adequate cash to cover said expense. Also, don't expect to be pocketing money at the end of the month because what little cash flow you have will go into an account for repairs/maintenance/vacancy/unknowns. With little cash flow it could wipe our your profits if anything happens. You could end up with a 0% cash on cash return and even a loss.

Q1A: .9% could make sense if your cash flow is enough to cover any major/minor expenses.

Q2: The theory makes sense but practice and theory rarely go hand in hand.

Q3: Risk is subjective. If you are willing to take the risk is entirely on you. I personally would not take that risk. You most likely have heard this but "Live where you want, and invest where the market makes sense."

Sorry, I could not offer more insight as there are too many unknowns about the property to determine the probability of success.

I hope this helps.

Does dis make sense? Newbie,little money down in expensive market

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