Should a rental property put cash in your pocket each month or build serious wealth over time? Cash flow versus appreciation is the oldest debate in real estate investing, but the answer depends on several factors. Today, you’ll learn how to pick the path that fits your goals and get the most out of your investments!
Welcome back to another Rookie Reply! We’re tackling three questions straight from the BiggerPockets Forums. First up, an investor who wants to house hack a small multifamily home is torn between cheaper towns with more cash flow and pricier towns with more appreciation. We have the answer!
Next, a high-income earner is weighing multiple investing strategies, from Section 8 and the BRRRR method to value-add deals and sober living facilities. Ashley and Tony go head-to-head on the best next step forward. Finally, a broker wants to learn the investor side of real estate, from acquisition to exit, before putting her own money on the line–and we discuss what to look out for when getting started!
Ashley:
Today’s rookie reply is about choosing a lien before you buy. A lot of rookies have savings, a market in mind, or professional experience, but really the hard part is narrowing down those options enough to take action.
Tony:
And today’s questions come from the BiggerPockets Forum, and we have a Connecticut rookie choosing between cash flow and appreciation, a high income earning beginner deciding what strategy actually fits with his life, and a broker who wants to understand the investor side before putting capital at risk.
Ashley:
This is the Real Estate Rookie Podcast. I’m Ashley Kehr.
Tony:
And I’m Tony J. Robinson. And with that, let’s get into today’s first question. So this question comes from Luke, and Luke says, “I’m a rookie investor looking for my first deal. I’m located in Central Connecticut and have saved about $50,000 for real estate investing, and I’ve decided that I would like to house hack a multifamily to get into my first property. I want to buy within about a 30 minute radius of Hartford, but not necessarily in Hartford itself. I’m curious what towns have worked well for others who’ve used this strategy. It seems like towns with the most inventory of multifamily homes have lower price points and property taxes, but may not appreciate as much compared to higher income towns like West Hartford and Weathersfield, where prices are higher, but there is a greater upside for appreciation. Do I focus on finding properties in nicer neighborhoods within the lower income towns?
Do I wait for more assets to hit markets in the higher income towns? Do you think appreciation or cash flow is more important for a first investment? I’m open to recommendations on towns and areas to look into, and I’d love to connect with other local investors.” All right. Luke, if we had a nickel for every time someone asks cashflow or appreciation, the truth is that real estate can do both, but it’s really up to you what you want to optimize for. And I don’t think me nor Ashley nor anyone else can answer that question for you. It’s like, what is more important to you? Where are you at in your life? What is your goal with real estate investing? If you are someone who wants to retire from their job early, then yes, maybe focusing on cash flow makes more sense because you househike a deal today, lived there for a year, repeat that same process next year.
And over the course of 10 years, you’ve got 10 beautiful house hacks, small multifamilies in Connecticut that are all cash flow and great. And maybe now you’ve got some optionality around jobs and life and what that looks like. If you’re someone who loves their career and loves what you do and you have no desire to retire before you turn 65, then yes, maybe appreciation is a better play. And over the course of 30 years, you’re not going to house hack forever, but say you house hack again for the next 10 or 15 years and you look up in 30 years and you’ve got a bunch of close to paid off properties, maybe you’re in a really, really good position. So I think it’s hard for us to really say cashflow or appreciation without us knowing what’s your motivations? What do you actually want?
Ashley:
I want to touch on the question he asked about should he find properties in nicer neighborhoods within the lower income towns or should he save up more and to invest in these higher end neighborhoods? And I think you need to look at the properties there in the markets to fully understand what it takes to invest in there and not only with how much capital. When I first started, I invested in those lower income towns. I was attracted to the $20,000 duplexes and I found out a lot of those were actually more headaches. And the properties that I kept in my portfolio, those were the ones that were better areas. There was less crime. There were better school districts. And because of that, I had a better pool of tenants to choose from, which gave me less headaches. The properties that were $20,000, they were pigs with lipstick slapped onto them.
They had been cosmetically updated, but they never actually had a good renovation where there was quality work done to the property. But unfortunately, because these were lower income towns, if I was going to go and do a full renovation, I wouldn’t be able to recoup my money because there was a cap that you could charge for rent. You couldn’t increase the rent, even if you did granite countertops, even if you did all brand new drywall throughout, updated the electric, updated the plumbing, you couldn’t increase the rents because nobody could afford over a certain amount in that market. And so I ended up offloading. Now those properties got me started. They did. And actually my timing was amazing. I sold most of them for double what I purchased them for, but that’s definitely not a guarantee and that was just luck. But I think you need to understand fully what actually goes into buying a nicer property and a nicer area compared to a lower end property that’s going to need more work.
So if you’re super handy, you have a lot of time, maybe one of these properties is better for you. You have the time to manage it. You have the time to put a great tenant in there to manage the tenant. You have the time to take care of the maintenance, the repairs. You want to make sure you have a lot of reserves, but I want you to compare those two and think, what do you actually want to deal with? Because when you’re looking at different classes of neighborhood, there are different issues that you’re going to deal with.
Tony:
And he also mentioned that he wants a house hack, right? So the other layer that we have to consider is just personal preference. He’s going to be living there. So for these areas where maybe the price points are lower, is that a place where you’ll enjoy living, where you’ll feel safe or is that a place where maybe you’re just not going to really enjoy being? So I think when you are house hacking, that is maybe the only type of real estate investing where you can get really emotional because
Ashley:
It’s going to be your home. It’s your house too. Yeah. If you’re living
An hour from your job because you could afford a property there, you’re probably going to be miserable on that commute and then you’re going to be spending two hours a day commuting and it’s going to kind of offset the whole purpose of investing in real estate to make your lifestyle better. Okay. So coming up, a 25-year-old with strong income has several investing paths in front of him. We’ll talk about how to choose the first strategy without trying to build the whole business at once. Okay, welcome back. So Luke is trying to narrow market. Our next question is from Mason who is trying to narrow a strategy. He has done a great job growing income and keeping expenses low, but now the challenge is choosing where to focus first. So Mason says, “I’m 25 and worked hard to grow income from 45K to 185K the last two years while keeping expenses the same.
I’ve always wanted to get into real estate growing up as I looked up to our landlord, super cool guy. I’d like to turn it into a business full-time eventually and feel ready to start while working full-time with my current financial situation. If any are terrible options, I’d like to know. I would like to help people, whether it’s providing people places to live or showing someone later down the line how to do the same thing. I’ve been considering Section eight, Burr and Dallas. I enjoy seeing things come to life, value add, single family homes, cosmetic start, or sober living homes since I lived in one for a while. I’m now three and a half years sober. And again, I want to help people.” Okay, Mason, this is awesome. And I think real estate is definitely an industry where you can have a moral compass, you can help people and you can make money.
Tony:
I think I also just want to give him credit, right? I mean, he 4Xed his income in a really short period of time. And we talk a lot about on the rookie podcast about the strategies to the Xs and Os of real estate investing, but one of the things that I feel like we don’t talk a lot about is getting a bigger shovel, being able to grow your income because investing at a $45,000 salary is much, much harder than investing at a $185,000 salary. So just for a lot of rookies, things just get easier when there’s more money to work with. So just kudos to Luke on that part. But the bigger question here is what strategy, right?
Ashley:
He definitely needs to narrow it down because if you’re looking at all different property types for all these different strategies, you’re going to get overwhelmed fast.
Tony:
There’s no right answer. And I feel like it’s so hard to tell someone like, “Hey, this is a strategy you need to focus on.” Because for every strategy that he listed, what do we have? We have Sober Living, we have Burr, Section eight, value add cosmetic. Some of those can be
Ashley:
Combined
Tony:
Into
One. Yeah. You could burr into a Section eight and then Burr and do sober living. But there are people who are uber successful in every single one of those strategies. And there are also people who are uber unsuccessful in all of those strategies. So the strategy is agnostic. I think it’s more so about which one aligns best with who he is, what his resources are, what his strengths, his challenges, all those things. Which one do you feel aligns best with who you are? Now for me, just kind of reading the question, sober living just kind of seems like one that you’re going to connect with the best because you said, “I like helping people. I’m three and a half years sober. I stayed an actual sober living facility.” That feels like the one that’s going to naturally align best with you and has really, really great upside in terms of being a good investment.
So you’re checking both boxes, helping someone and getting a really, really good return on your own investment.
Ashley:
I think I’m going to challenge that one because I think that one is the heaviest lift for first time investor because unless you’re buying it turnkey already where it’s, because this is also an operating business, which a short term rental would be too, is you’re going to need to know do you need any licensing requirements? Do you need any permits? How do you manage it? So I think there’s a whole other side to this to think about when doing sober living as to will you just provide the housing and another company will come in and manage it? So all of those factors, what do you have time for? Do you have time to not only research the real estate part of it, but also the sober living element of it too? We have done a couple great podcast episodes too of sober living where they break it down and explain the overall thing, but it does seem like it’s a lot more work than just managing a long-term tenant.
And it seems like once you get the systems and processes in place and it’s repeatable and gets easier. But that would be my challenge on that, that if he’s already working a full-time job, as in would he have time to know how to start that up? So I think I’m going to say no on that one. And I think I’m going to say starting with a burr. If he can’t do a house hack, I’m going to say do a burr and add value to a property. It sounds like he has the capital to buy the property and to cover the renovations, do the burr, get that property going. Then maybe go into the sober living.
Tony:
The only reason I disagree with you,
He’s 25. He doesn’t mention wife, doesn’t mention kids, 25, big income. This guy should be working 60 hours a week anyway, right? Yeah. And I think that he might actually have an advantage doing the sober living because he’s already lived it. He’s experienced it. So he’s seen it from the inside of how to actually operate it. But I was just talking to my son about this. So my son’s just graduated from high school, he’s 18. And I told him, I was like, “You can’t be broke and well rested. You got to pick one.” So it’s like if you’re going to be broke, at least be broken like hustling. So same thing. It’s like you’ve got the time. There’s no one else depending on you. Sounds like you’ve already done a really good job of growing your income, keeping expenses in line. But dude, if you grind for the next five years even, his life as a 30-year-old could be completely different, completely different.
So get to work, man. Mason, just go grind it out.
Ashley:
It’s been a really long time since you’ve given us a quote that you’ve given Sean. You used to give them all the time. That’s true. I was collecting them for a book to put together.
Tony:
That’s true. All right guys, after the break, a real estate broker who knows the transactional side of real estate investing wants to understand the actual real estate investing side before putting her own money at risk. So we’ll talk about what to learn, how to learn it, and how to be a good investor from start to finish. All right. Our last question comes from Jennifer and she already understands residential transactions as a real estate broker, but she wants to learn how investors think through the deal from acquisition to exit. So her question says, “I’m looking for recommendations and just useful resources that teach investors the investor side of real estate transactions from beginning to end. I’m already a real estate broker, so I’m already very comfortable with the transactional side of real estate transactions, property values, negotiations, contracts, inspections, and the processes from offering through closing.
What I haven’t done is invest in and flip real estate for myself. And I’d like to learn that side properly before putting significant money at risk. I’m also not married to one particular investment strategy yet. I’m interested in learning about single family homes, multifamily vacant land, rehabs, wholesaling assignments, and any other strategies before deciding where I want to focus. What I’m having trouble finding is a resource that really connects all the dots. How do experienced investors determine their maximum acquisition price and required margin? How are rehab costs, carrying costs, financing costs, ARV and risk factored into the numbers? How is the acquisition funded or structured? How does proof of funds work when using different financing strategies? What is due diligence and how is it different for different strategies? And then ultimately, how do you execute the exit? What’s the resale, assignment, refinance, rental, et cetera?
All right, it’s a great question. There’s a lot of questions in the question, but I think the fundamental thing that she’s asking is how do I build competence in one area? I think of it almost like a funnel where it’s like when you’re first starting out as a real estate investor, the goal is just broad exposure to as much information and as many different strategies as possible. So the first step is what you’re doing, consuming podcasts like the Real Estate Rookie podcast, binging as many YouTube channels as you can find, training your algorithm on TikTok, Instagram to teach you things as you’re going through, but just broad exposure to a lot of different strategies. And I think naturally, as you start to think about your own personal goals as an investor and as you think about which strategies actually align with those, naturally you’ll start leaning toward the one that starts to resonate with you.
But I think the biggest thing where a lot of aspiring real estate investors get stuck is analysis paralysis. And how do you teeter that line of, I want to be educated, but I don’t want to –
Ashley:
Make a mistake.
Tony:
Make a mistake, right? And I think the way that I think about it is that as a rookie investor, you have to, and really not even as a rookie investor, anyone who wants to do anything entrepreneurially, like anything that requires risk, we have to separate the ideas of comfort and confidence because they sound super similar, but they’re actually different things. And comfort only exists when you’re doing something that you’ve done before. For me, I’m very comfortable sitting here talking into a microphone about real estate because we’re on episode 781. So I’ve done this a lot. So I’m very comfortable on this microphone because I’ve done it. Confidence doesn’t necessarily require comfort because if I’m doing something brand new, the first time I sat in front of this microphone, I was nervous because I’d never done it before, but I was confident in my abilities to do it well, which is why I still did it.
So for the rookie investors that are listening, I think you have to accept that your first deal is going to feel uncomfortable. Build the confidence, but stop waiting for the comfort to appear because it never will.
Ashley:
Yeah. I think that’s a great point as to the analysis paralysis and really it’s all in your mind. A lot of it is mindset. I think you are overwhelmed with information about how to get started. It is definitely hard to give yourself a clear action plan, but you are also consuming all of these things that have gone wrong or even all of these things that have gone right that maybe you’re not doing the right strategy or not doing this right because this person did it better and got this result. And I think the first step is to really narrow down and define as much as you can, like defining your strategy, defining your buy box, defining what for due diligence, what’s a hard no for you? What are you going to accept under due diligence? But I think you have to look at all of the other people that have bought a property, not even an investment property.
Look at everybody that makes it from viewing the property to closing on a property. Sometimes real estate investors, especially with all of the knowledge out there, get so stuck in their head. I think one of the questions was the process of going from making the offer to closing. Think about how many people do that every single day that have no knowledge about real estate investing at all.
So I think that we get into our heads a lot and I think that it is a huge mindset shift that you need to remember that you already know more than a lot of other people know and that’s going to be your advantage and that’s going to be your head start and you’re never going to feel that comfort that Tony was talking about. We’re still doing bad deals. I have a property that’s been for sale for a year that I haven’t sold. Tony’s got one for two years for two years. Even if you have been doing it, I’ve been investing since 2013, there still are going to be mistakes made. There still are going to be lessons learned. But I will tell you what, that very first deal, that second deal, that third deal, since I bought them so long ago, they have made me so much money over the past 10 years where if I would’ve just kept waiting and waiting, I wouldn’t have had that opportunity of increasing rents to increase the cash flow appreciation over that time, mortgage pay down.
And now those properties have given me financial opportunity. And so don’t let analysis paralysis or that you don’t think you know everything because you already know more than most people out there.
Tony:
And I could tell she knows more just by the detailed question that she’s asking, right? It’s like you’ve already done a lot of the research. So for me it’s like, hey, what is… Brandon Turner used to talk about the most important next step, right? And I think that’s what Ricky investors should focus on is like, “Hey, what is the most important thing that I need to focus on now to continue to make progress?” And then the last thing I’ll say is that we can also reduce, because that’s usually what creates the fear for us is the risk of making the mistake. But if we simply take a smaller swing, then even if we do mess up, it’s not as impactful because it was small stakes to begin with. So say you have $100,000 to go invest into a property, what if instead of investing $100,000, you only invested 30,000 of that?
And hey, let’s go play with this 30K because even if I lose it all, I still have $70,000 left over. So can we start smaller? And sometimes that’s an easy way to bridge that gap and make the first deal feel less scary.
Ashley:
I think about this all the time, people with 401 s, millions of people just hand their money out to their 401 s, no questions asked, you get your job. Do you even know how to get your money out of your 401k? Do you know what form you would fill out or what process you would take to get that money back? Do you know what you’re invested in? Do you know if you even get dividends? Do you know anything about your 401? And I think people invest so much money into that. And with real estate, you could be putting the same amount of capital, but you have more control. You don’t have control over the S&P 500 unless you’re influencing Apple stock by buying Apple computers every single day to increase sales or something. But my point is that if you make a mistake, you also have the ability and the control to fix that mistake or to correct it somehow.
Well, thank you guys so much for joining us today on this episode of Real Estate Rookie. I’m Ashley and he’s Tony. If you guys are watching this on YouTube, make sure you are subscribed so you get notified when we have new video releases like this. If you have any questions that you want answered in our next rookie reply, you can go ahead and put them into the comments of this YouTube channel or you can message into the BiggerPockets forums and I bet another investor will answer it before we even get to it. Thanks so much for joining us.
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