Stuck on First Investment

[Jeffrey B.]

After reading a few OOS investor horror stories of investing in class C neighborhoods. I'm stuck at pulling the trigger on my first property bc of stories like this. I'm looking in the Midwest and the class C to C+ properties barely cash flow with conservative numbers and the appreciation in these neighborhoods are questionable. I’m worried about vacancy and theft in these areas. I've looked at both SF and MF.  These properties are all under $250k. Should I wait until I have more cash for a down payment, so I can buy a better performing property in a better neighborhood?

I’ve been pitched on a Short term rental play that only requires 10% down as a vacation loan. But honestly with how bad the STR market has been the last few years and with the uncertainty of the current/future economy I don’t see it getting better anytime soon. The exit strategy isn’t as simple as a lower priced asset.

I’ve been thinking about new construction as I listen to more and more of the Rent to Retirement podcasts. Less capex for the first 10 years, builder incentives, decent rates, and some of them are already have rents in place.

Maybe I should put my $50k in the S&P but the reason I wanted to get into REI was for the diversification and growth potential. I’m sure I’m not alone out there. Any advice or thoughts? What would you do?

[Kevin Sobilo]

@Jeffrey B. a few thoughts:

1. Note how your whole post is about risk vs reward, not about owning and operating.

2. You are looking at ACTIVE real estate investments, but don't seem focused or motivated about the WORK involved in doing it LONG TERM. 

3. When I bought my 1st investment property is was a SEVERELY distressed BRRRR deal. I was NOT concerned about losing money. I figured if I lost some money, then I "paid for my education" because I needed EXPERIENCE more than I needed to make money on that deal. I did make money but that was a BONUS!

4. Unless you are REALLY interested in the ACTIVE part of active real estate investing, perhaps you should look for more passive options to invest with partners who do the work or even through a syndication. 

5. Putting $50k to work without YOU doing more is only ever going to get you a modest return whether that is 5, 10, 15%. 

Think about it, if all you are going to invest is $50k and do it passively how much mental effort is it worth putting into the decision making?!? 

6. Someone being VERY ACTIVE with $50k might do a BRRRR deal and in 6-12 months have a cash-flowing rental and $50-75k (after refi) back in the bank to do it all over again! This is why people get so jazzed up about these sorts of strategies.

7. Bad things WILL happen! You express concerns about market appreciation (which you cannot control and likely not even predict well), vacancy, theft, etc... Bad things ABSOLUTELY will happen! Thats why the EXPERIENCE of DOING THE WORK actively is such a big part of the success of active real estate investing. 

So, those bad things are real, but with experience the issues can be budgeted for, mitigated, and handled effectively and efficiently. 

8. As your post went on, you seemed to gravitate to what "sounds easier". You mention new construction specifically. 

If you could earn great returns EASILY in that niche, wouldn't every investor flock to it?!? If so, wouldn't that drive UP the purchase prices and drive DOWN the returns?!? 

There is nothing wrong with that niche, but there are no panaceas out there giving you great returns easy and risk free. You have to make it happen most of the time yourself one way or another to get really good returns.