First time investor

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I am a recent college graduate. I have had one year of real estate experience in the past and I am looking to buy my first rental property. My plan is to use either a conventional loan with 3 percent down or an FHA loan with 3.5 percent down, live in the house for one year, and then move out and rent it.

As I have been running the numbers for a cash on cash ROI, I am noticing that my it is coming out negative after I include things like $200 a month for property tax, $200 a month for insurance, $25 a month for vacancy's, $25 a month for evictions, $100 a month big repairs, and $100 a month for smaller repairs and maintenance. However my gross yield percentage is normally decently high. I understand that putting more money down would help, but I do not have the funds for a large down payment right now.

I wanted to ask for advice on a few things.

- Is it normal for returns to be low or negative in the beginning when using a low down payment

- What would you recommend someone in my position focus on for their first property

- Do you think I should use a property manager or manage it myself, and why

- Do my estimated expenses sound reasonable, or am I saving too much or not enough

- How much should I think about saving for vacancies, evictions, and big repairs like a roof or HVAC

I want to make sure I am approaching this the right way and not just trying to make numbers work on paper.

Thank you for your time and I would really appreciate any advice you can give.

[Dan Nelson]

These are really good questions and honestly the fact that your numbers are coming out negative tells me you’re doing this the right way.

Most people make their first deal “work” by ignoring half the expenses you just listed. You’re not doing that.

1) Is it normal for returns to be low or negative with low down payment?
Yes—especially in today’s market. If you’re putting 3–3.5% down, your payment is high relative to your income. That compresses or wipes out cash flow early.

That doesn’t mean it’s a bad deal—it just means your return is coming from:

• equity paydown
• appreciation
• rent growth
• forced value (if you improve units)

A lot of strong investors’ first deal looks like this. The mistake is expecting it to cash flow like a 25% down deal—it won’t.  You can always find a positive cash-flowing property somewhere.  The question is do you want it? Would you rather have guaranteed cashflow in an area that is more challenging to manage or a property you like in an area you like.   If you choose the second option and do not putting 25% down, it will likely be negative.  

2) What should you focus on for your first property?

If you can move rents meaningfully, the deal fixes itself. And over time you will refinance out of out of FHA loan and mortgage insurance. As the property appreciates in value and interest rates lower, you will improve cashflow on its own.

3) Property manager vs self-manage
At your stage—you should 100% self-manage.

Here’s why:

• You’ll save 8–10% of rent (which is the difference between negative and breakeven for you).  And more importantly, you’ll learn how this actually works.  If you hate managing the property after 1 month or 36 months, turn it over to a property manager then.  At that point you will understand the building and tenants better when things come up in the future.

If you skip this, you’re basically investing blind.

4) Do your expenses look right?

A few notes:

• Property tax + insurance → depends heavily on the property, but not crazy
• Vacancy at $25/month → that’s light (closer to 5% of rent is safer)
• Evictions → I wouldn’t budget monthly, I’d treat that as a rare but real risk
• Repairs/maintenance ($200 total) → reasonable for a smaller property

Overall:
You’re closer to reality than most first-time buyers.

5) How much should you save for big stuff (vacancy, roof, HVAC, etc.)?

This is where people get killed.

You want:

• 3–6 months of total property expenses as reserves (minimum).  Most people don't have this to start, so you have to build it up over time if you don't

You don’t need all of that cash day one—but you need a plan to build reserves quickly.

Big picture (this is the part most people miss):

Your first deal is not about cash flow.
It’s about:

• getting in the game
• learning how to operate
• positioning yourself for deal #2

You’ll look up in 2–3 years and the numbers will look completely different.  Starting is the hardest part.  I spent years analyzing deals and I really regret not jumping in at something I felt I could make work.  I really only learned how to do this when I started doing it.  Good luck - I am excited for you!