The Best Rentals for Beginners (& How Much Money You’ll Need) (Rookie Reply)

Ashley:
This week’s rookie reply is all about hesitation, strategy and what to do when things don’t go according to plan. We’ve got three real estate questions from real estate investors who are wondering, should I wait? Should I buy? Did I already make a mistake?Yeah, that’s right. We’re going to break down what you can actually do today, whether you’re starting with just a few thousand bucks or you’re sitting on several hundred thousand dollars in cash, welcome to the Real Estate Rookie podcast. My name is Tony j Robinson,And I am Ashley Kehr. So let’s get into our first question today. This question is pulled from the BiggerPockets forums. So Keegan asked, I am very new to real estate, and I wanted to ask what the best first time investment would be to start looking into and how much approximately should I have saved up to do this? Well, Keegan, I wish though we could give you a very, very specific answer as to what that should be, what strategy, but instead, we’re going to give you a blueprint as to how you can discover what is the best strategy for you based on what your why is and why are you investing in real estate as to what your W2 job. Is it for extra money for your family? Is it for retirement in the future? Choosing your strategy is very dependent what you want out of real estate investing. So Tony, what are some of the first things you should ask yourself when you are thinking about what strategy to get into?I think motivation comes down to maybe four different potential options. You have cashflow, which is first of mind for a lot of rookies who are thinking about investing in real estate. You have long-term appreciation, long-term wealth building, right? The value of your property going up, the loan balance going down. You have tax benefits. There are some folks who really want the tax benefits to come along with investing in real estate. Those are probably the three big buckets. If you talk about short-term rental is another asset class. You have the vacation component, but generally in real estate, cashflow, appreciation, tax benefits. So I think starting there first and understanding, I guess even taking it a step further, forcefully ranking from most important to lease important, those motivations are the first step because I think it’s rare that you’re going to find one strategy, one property that equally satisfies all of those motivations. Usually there’s some sort of trade off if you want really high cashflow, maybe you’re giving up some of the appreciation and vice versa. If you want really good tax benefits, what does that look like If you are buying in cashflow, heavy markets is going to be the same. So I think fortunately, ranking those is the very first step.What are some of the beginner friendly strategies to start with instead of buying a motel right out at the bat? The first one that comes to mind, and everyone’s going to rant at me at the comments or so sick of hearing this word, but house hacking. House hacking is one of the easiest ways to get into real estate. Either you already have a primary residence that you can rent out rooms or maybe you have a separate unit, but also you’ll get the best financing from a bank at least on a property that is your primary residence. And you need a place to live anyways. So unless you’re a nomad, but you’re getting killed in two birds with one stone by having your primary residence is also your investment property. And I think the strategy of 2025, that is all the big hype, is co-living. And if you haven’t already, check out at biggerpockets.com/bookstore. You can check out the co-living guide that was just released there to find out more information about co-living, but it’s a lot of rent by the room. Some take it as far as to building community where they’re hosting pizza parties and stuff and people want to live in these properties because of the community that you build in your co-living house. So house hacking, co-living. What would be another rookie friendly strategy that you would suggest, Tony?I think another one that’s really great for rookies are turnkey rentals. Turnkey rentals are exactly what they sound like. There are properties you can buy today that are already renovated, tenants placed management in place. So it’s literally you just writing a check and then collecting your income on top of that. And for rookies who are maybe more pressed for time than they are for capital, turnkey rentals could be the potentially best path forward because it reduces a lot of the friction that rookies might get into. I just want to also circle back to the house hacking. Like you said, I know we’re kind of beating a dead horse here, but I think part of the hesitation that people have around house hacking is that they have a very narrow view of what house hacking actually looks like. But house hacking can take a lot of different forms, shapes and sizes depending on what type of property you buy.
You could buy a single family home, and to Ashley’s point, you can do the co-living strategy where you live in one room, you’re renting out the other rooms. You could buy a single family home where you live upstairs and you rent out the fully furnished basement, and there’s a separate kind of walkout. So there’s a separate entrance. It feels like two separate spaces. You can house hack where you buy a property with a single family home like a primary home and then an A DU in the back. And either you live in the A DU and rent out the main house, or you live in the main house and rent out the A DU. You could buy a compound where there’s single family homes on one property. So I just really want to encourage people to change what their definition of house hacking looks like because there’s so many different ways you can go about house hacking.
And to Ashley’s point, the financing is amazing. In addition to FHA 3.5%, conventional 5%, there are also 0% down loans. There are home buyer assistance programs that can help you with your down payment, and we’ve definitely met folks who have gotten into primary residences with zero down. So if you really, really want to talk about reducing the cost of acquisition, house hacking could be the absolute best strategy. So again, I know, I know Tony and Ashley keep talking about house hacking, but it’s because right now today we think it’s one of the best ways for Ricky’s to get started.Okay, well now we need to debate this in the comments comment. If you are sick of hearing about house hacking or thumbs up if you want us to keep talking about house hacking. So the second part of this question was how much money do you actually need to invest? And this will really be market dependent and what strategy you choose. But a really good rule of thumb is to think about, okay, how are you going to fund the deal? Does that require a down payment? Okay, so let’s say you’re putting 20% down, you also need closing costs to pay. So even though you’re paying that 20% down, or even if you’re using a VA loan that’s 0%, you’re still going to have fees, you’re going to have to pay for the inspection, the appraisal, different things like that. I think sometimes the VA pays for an appraisal actually, but there could be closing costs. That plus if you’re doing escrow, you’re going to have to fund your escrow in advance. So that’s paying a year’s insurance premium, that’s paying your property taxes somewhat in advance to fill your escrow account. So your attorney fees if you have to use attorneys. Tony, typically, what do you think closing costs are going for around these days? Like 2% of the loan, one and a half,2%, somewhere in that ballpark is probably a good estimate. And when we say 2%, we’re talking 2% of your purchase price. So if you buy a home and it’s $100,000, $2,000 is what you’ll spend potentially in closing costs. But I think maybe even putting this question first would’ve made more sense because the strategy that you choose is so dependent on this financial question and you want to ask yourself how much cash do you have available for down payment, closing costs, et cetera. And then how much can you get approved for on a mortgage? And answering those two questions will really give you some clarity on what strategy does or doesn’t make sense. If you have $3,000 to your name and you can get approved for a $150,000 loan and you live in California, chances are you don’t have enough saved up to get into real estate investing.
Now, if you have $3,000 to your name, $150,000 loan approval, and you live in West Virginia, right, which from a median home price is the cheapest state in the United States, you can probably afford to go out and buy some sort of house hack. So getting clarity on how much capital do you have to deploy into real estate, what kind of loan approval can you get, I think will give you some clarity on what type of strategy you should have. So if you want to answer the question, how much do I need first ask yourself, how much do I have?Yeah, that’s such a great point, Tony. I think not only just the down payment and your closing costs that you need to actually purchase the property, but the biggest thing you needed to is your reserves in place. So along with having, so if you have $20,000 and you’re like, oh, well that’s what I need for the down payment, you also need to have reserves in place. And the rule of thumb is three to six months of your expenses. So what are the expenses that you have on the property, your mortgage payment, your insurance, your property taxes are the three that I like to use. But you could also go ahead as to basically if the property is sitting vacant, what expenses do you still have to pay and cover those for three to six months? If you can’t find a tenant or something happens where the property is vacant or you need to evict someone, if you have a W2 or you have another source of income that provides you a large cushion of discretionary income where if something were to break a property were to sit vacant, you could cover those expenses with your W2 income and it not be detrimental to you, then I think you have more of a cushion to go on the three months.
But if you don’t have a lot of wiggle room in your monthly income coming in, where if something detrimental happened that you couldn’t cover it from your personal income, then I would go on the six month side. Best case scenario, that money just sits there and you can put it into a high yield savings account and you make a little money off of it. Worst case scenario, you spend that money on upkeeping the property, paying down the mortgage payment for an eviction to get somebody out of a property. But you have to have the mindset going in that this money is meant to be spent. This is not my life savings, this is money. So aside from those three to six months reserves, you should have your own personal or family reserves that if all of a sudden your son has a huge medical bill, you are not pulling the reserves from your property to actually go and fund that bill.
So above and beyond what you need to actually close and acquire the property, you need to have other cash. And that’s why when people say, I did a zero down deal, I got into a deal with no money. Some people probably do this with no money, they literally have no money. But you want to do those no money down deals and still have those savings, still have those reserves in place, that is the best kind of no money down deal. So just because those no money down deals exist doesn’t mean you should physically and literally have no money to your name.Well, Keegan, I know that you asked a very specific question, how much money do I need? But the truth is, it is not a black and white answer. And the goal, I think of what Ashley and I gave you is questions you should be asking yourself to help you evaluate what levers you should be pulling or what data points you should be looking at to help you make that decision for yourself. Because it is a very personal question. We’re going to get into some more stuff here, but first we’re going to take a quick break while we’re gone. If you guys haven’t yet subscribed to the Real Estate Rookie YouTube channel, make sure you do that. Every podcast, if you’re listening to this on your favorite podcast player also shows up on YouTube. We’ve also got a lot of content on there that was built just for YouTube. So if you guys just search for realestate rookie or head over to youtube.com/at realestate rookie, you’ll find us there. But we’ll be right back after a quick break.
Alright guys, welcome back. So our second question today comes from another BiggerPockets member, and this question says, I have $200,000 in cash and no other debt besides a $1,930 monthly mortgage pausing. Really quickly, congratulations to the person who asked this question because that’s a great spot to be in. But continuing, it says, is it dumb to buy real estate right now when I’m getting a great risk-free return on my money? Or is there still a way to jump in with higher interest rates? So I’m assuming when this person says I’m getting a great risk-free return of my money, that they must have it in some sort of high yield savings account or something to that effect because they’re getting a good return right now. Is it dumb? Again, a bit of a loaded question. I’m not sure if there’s a really black and white answer here, but I think again, Ash and I can pull on some threads here to try and get a better understanding of, hey, does it make sense or does it not make sense?Honestly, my first instinct to react to this question is don’t use all of it, keep some of it. Maybe you only use half, maybe you only use 50,000 and you try out real estate investing. Just because you have 200,000 doesn’t mean that’s how much you need to deploy or you need to implement into a real estate strategy. So I think it’d be a great scenario to, okay, what investment can you do with just 50,000 of it? So that way your risk is a lot lower because you’re not risking your whole pile that, okay, you have 50,000, you buy your property. Worst case scenario, you sell it and you can’t get back. It’s somehow depreciated by $50,000 in value over three years or whatever, and you lost that $50,000. In most cases, and this is not all, obviously depending on the property that you purchase, if you hold onto that property and you dump money into it, the chances of it not appreciating or not cash flowing could be slim.
So I think you really have to look at your market as to what actually is the risk. So are you going to do a turnkey rental? What’s your risk there? If you’re going to do a rehab, your risk is obviously not maybe estimating your rehab project and you have to actually dump in more money to the property. But the things I like about real estate investing is you have control over it, okay? So you have control over your money, your investment. So to me, is that actually more risky or less risky? So it can go both ways. Your property could be doing bad because you made a bad decision, or it could be going great because you actually made the decision on what to do or not do. So I think you really need to take into account as to what is risk for you.
Does risk mean losing that $50,000 that you invest in the property? What actually needs to happen for you to lose that $50,000? That means you buy it today. Say you’re buying a property for 150,000, you’re putting $50,000 down, you have a hundred thousand dollars mortgage. The risk you have is that in a year, two years, this property is not performing. You’re not cash flowing, you’re having to come out of pocket. That means that for you to completely lose all of that money, your property would have to do really, really, really, really, really bad. But you have the option to sell. You have the option to dispo that property before you wipe out your $200,000 in reserves. If you get to the point where you are pulling out a ton of money every month, you have the option to get rid of that property before you get further into a hole. So I think Tony, your Shreveport property is a good example of this where you decided to exit and it didn’t exit as quickly as possible, but you still didn’t lose $200,000 on the property. So maybe just if anyone hadn’t heard that story before, maybe just talk about that real quick.Yes, it was the second property that we had purchased while it was stabilized and rented, it was fine. But after that first tenant moved out, we decided we wanted to sell the property because we were transitioning over to short-term rentals free at that capital. But that tenant had kind of trashed the place, so we had to do some repairs to get it rent ready or not rent ready, but ready for sale. And we noticed that we were getting a lot of the same feedback during the walkthroughs basically. Long story short, we found out there were some foundation issues. We had to cut up the floor, spent a bunch of money getting repaired, made the property send it empty even longer. It took us a lot longer to get the property sold because of these repairs. We ended up losing 30,000 bucks on that deal to get it sold.
So like Ashley said, it was a good deal at some points, not so great deal near there at the end. But lessons learned, and I still wouldn’t undo that deal knowing what I now know today. But Ashley, you make a lot of good points, and I think the first point you made of don’t invest the whole thing is a really important one. You can choose how much of the capital you have that you want to invest. But I think the other piece, and it sounds like for this person asking the question, that it really is kind of like a monetary ROI based question. So I would just model it out, what return are you currently getting on this money sitting in whatever account is currently sitting in, and what do you project to get by investing this in some sort of real estate deal? And just for round numbers sake, let’s say that you can get 5% in a money market account or whatever CD or whatever you have it in, and you can get 10% by putting it into a real estate deal.
Is that additional 5% to you? Because it’s, again, a very personal question, is that additional 5%? Is doubling your return worth the risk associated with investing in real estate? And if you can answer that question, yes, I feel that it’s worthwhile to assume this additional risk to get double the return, well then it’s a step that you take. But if you’re like, man, I would need three x, I’d need a 15% return to really make this worthwhile, well, at least now I’m only going to invest in real estate if I can hit this benchmark, anything below 15%, it’s a no. Anything above 15%, it’s worth me looking into. And I think when we can give ourselves guidelines on the decisions that we make, it becomes easier to then make those decisions. So ask yourself, what is the premium you would to make it worthwhile to actually invest into real estate?Well, we have to take our final ad break, but we’ll be back with more after this. Okay, welcome back. And so our last question is from the BiggerPockets forums, and this question says, need advice. My rental property hasn’t appreciated. After one year, what would you do? Hey, BB community, I’m looking for some advice and perspective from experienced investors. I bought a property in Stockbridge, Georgia about a year ago for 225,000. It looked like a solid long-term investment at the time, but I’m starting to question if it was the right to move. Here’s where I stand. The purchase price, 225,000 current value after one year is still around 225,000 with a no appreciation total investment so far around 70,000, including the down payment, closing costs, agent fees, like renovations, et cetera. The cashflow is only about $200 per month before expenses. The tenants, I’ve already had two tenants in one year, both have moved out, which has added some headaches and turnover costs.
If I sell today after the agent commission and selling costs, I’d walk away with about 40,000, which means I’d be down 30,000 from what I’ve invested. My original goal was the long-term passive income, but at this point, I’m wondering if I should hold on and hope for appreciation and better tenant stability, sell now, cut my losses and redeploy the cash into something with better returns or less friction. This has been a bit discouraging and I don’t want to make emotional decisions just looking for input from others who’ve maybe been through the similar situation. Any thoughts? What would you do in my situation? Okay, so the first thing I guess that I would mention is I haven’t owned a property that’s seen a huge jump in appreciation in one year, except from maybe 2020 to 2021.I would agree completely, Ashley. I think the biggest thing that I would preach to the person that asked this question is patience. Looking at real estate over long periods of time, five years, 10 years, is where you really see the growth in property values. And much like if you look at a chart of the stock market on any given week, it can go up, it can go down, it can go up and go down. When you zoom out five years and you zoom out, zoom out 10 years, there’s a very clear upward trajectory on the value of the stock market. It’s the same for real estate. If you zoom in too closely on one specific time period, it could look like you made a terrible decision. But as you start to zoom out, that’s when the real wealth starts to grow. So I think definitely don’t do anything. Your cashflow positive, are you cashflow positive? I wouldn’t do anything at least for another four. Now, if things change and maybe you just really emotionally hate owning this property, like if you’re just really not enjoying owning this specific asset, then maybe there’s another case to be made for selling this and trying to purchase something else. But if it’s relatively low headache, your cashflow positive, I would give it, I think, a little bit more time to be the judge on whether or not the appreciation is what you hoped it would be.And then to kind of touch on the tenant turnover, you’ve had two tenants in one year. Why is that? Is there a way that you can, is there some reason that they’re moving out? Is there a way to find a solution to whatever that pain point might be? Is it just it’s, are you asking them to leave? Are they breaking their lease? Why are they breaking the lease? I think I would really look at the operations of the property too, as to what can be done differently. So somebody actually wants to stay in the property, and so that your lease agreement holds up so that when they’re signing a year lease, they’re staying in the property for a full year. One thing I’ve also learned over the years is don’t rush renting your property just because you want to get somebody in place. It’s better to wait for a tenant that is completely approved instead of one that is kind of iffy, but you want to get it rented, so you’re going to take a chance on them. So take a look at that too, as to why have you had that much turnover in one year? Or maybe does the property need to be changed into a different strategy? Do you need to rent by the room? Could it be a short-term rental? Midterm rental? So there’s other options like that to try to,I love that last point, Ashley, because if you already have the asset, is there a better utilization of that property? And that could maybe unlock at least some additional cashflow while you’re waiting for that appreciation to actually play out. But it feels like we’re saying the same thing. A little bit of patience here is going to go a long way.Well, thank you guys so much for joining us on this episode of Real Estate Rookie. I’m Ashley. And he’s Tony. And we’ll see you guys on the next episode.