Buy Now vs. Wait and the Best First Rental for Beginners

0:00Should you buy a rental property now or wait until you've saved up more money? Buy now and if prices rise and interest rates drop, you'll get appreciation and beat the competition. Wait and you could put down more and have bigger cash flow and be in a relatively stronger financial position. If we had just enough money for a down payment and we were starting from scratch, this is what we'd do right now in 2025.

0:30Hey, everyone. I'm Dave Meyer, head of real estate investing at BiggerPockets. And today on the show, I'm joined by my friend and on the market co-host, James Daynard. James, thanks for being here. I'm excited. This is my favorite kind of show. There's so many things that get popped around. I just love digging into like the little specifics. All of the success I feel like is hidden in those specifics on these individual circumstances. And the cool thing about this is that we have great questions today that even if they don't apply perfectly to your situation. Going through the thought process and hearing sort of the different criteria, the metrics, the thought process that James and I have in answering these questions, I think will help you understand how to drive your own portfolio forward better.

1:12And the questions we have today are awesome and are probably applicable to almost everyone listening out there. First question we have is from an investor who's debating whether to buy a deal now or save up more cash. We're also going to talk about how much rehab is too much rehab for a first-time investor. James, that's right up your alley. We'll be talking about what's driving the insane, unrealistic expectations out there for many people in the real estate game. And we have a couple more questions about flipping houses as well. James, you ready? Oh, I'm always ready. So the first question, I like this because it's from someone named James in Seattle, just like you, but this is a different James, also in Seattle though, who says, I'm looking to purchase my first property for a house hack.

2:00Realistically, I could save up about $25 ,000 by the time my current apartment lease is up next year. That sum is not enough for a conventional loan. So I'd have to take out an FHA loan with PMI and a higher rate if I decide to buy next year. The alternative is I save up for a larger down payment and use a conventional loan. Part of me just says, get started faster. So you stop paying rent and start paying for an asset. And then the other part of me says, waiting and having a bigger down payment will give you more cash flow, both in the short term and the long term. So there's a lot of math that goes into this and I'm having difficulty weighing the pros and cons.

2:40I guess I should explain what PMI is. If you put less than 20 % down on an FHA loan, you'll have something called PMI, which is private mortgage insurance, which is basically just another fee on top of your principal and interest that you're normally paying because the lender is essentially taking on more risk on you because you're only putting 3.5 or 5 % down. And so they charge you for that in monthly payment. And it just adds more expense. So it does hurt your cash flow. But the benefit is that you get to put three and a half or 5 % down to control an asset. I think it's a question almost every investor has asked themselves at one point or another.

3:17So James Daynard, who's also in Seattle, tell us how you think through this kind of question. You know, I love the house hack strategy. My first property was a house hack condo. I moved into it, was able to cut my rent down over like 60 % on my mortgage at that time. People get so confused about the strategy though sometimes because there's so many different opinions. And the purpose of the house hack is to get you into ownership so you own the asset, but also to make sure that you're growing, whether it's you owning or saving money every month. And I think the first step always is, what's your monthly payment on rent?

3:52What can you go buy a property with$25 ,000 down? Where do you want it to be? And can you qualify in those areas? And then you have to look at that variance between the rent and what your monthly payment is. Yeah, that's just the right way to think about this. I get what you're asking is like, what is my cash flow going to be in the future? What is my PMI? But I think the math that James, who asked this question, was alluding to said there's a lot of math trying to think it out. I think James just nailed it on the head. Like, how much money are you going to save? how much better is your run rate, your savings rate in a given month going to be if you keep renting or if you house hack?

4:30Because even paying PMI, right? Like you still might have a financial benefit. And I think that's important. Don't get trapped on cost because cost, it's just a cost of the deal, right? If it gets you into a better financial situation in two years, who cares if you're paying PMI? Who cares if you're paying any expense, like hard money, I pay a lot in interest because it gets me into the deals I need. And I think that's where people get really stalled up. But you have to kind of audit like, hey, what is my goal in two to three years? It's always that question that jams everyone up. Should I wait and put more money down to get the cash flow up?

5:05Should I wait and wait for the market to drop? And then what happens is you wait too long. And the savings account just doesn't earn what you need it to do. And the only time I'm an advocate of waiting is if you can take that$25 ,000 and invest it and make, you know, then like a 8%, 9%, 10 % return higher than you can make on the savings every month. And, you know, I think people just get so jammed up and it really just comes down to cost. And if it's not, take that$25 ,000 and you can still go buy another piece of real estate or invest with someone else and still get into real estate and maybe you rent.

5:40There's nothing wrong with renting. Agreed. You know, I've owned almost every house of mine, except for when I was in California, I rented for three years. I agree with you. I rented for five years recently. When I moved to Seattle, I thought about renting for a while too. Just whatever makes more sense. I'm open to it. Let's just use some real numbers because maybe an example here would benefit. Let's just say your rent, the Seattle, pretty expensive. Let's just assume you have a one bedroom. It's probably two grand here. Seattle's an expensive market. If you could house hack, and even with PMI, you're only coming out of pocket$1 ,000 a month.

6:19That's$1 ,000 in post-tax saving that you are getting, which$12 ,000 a year. To me, I don't know your personal financial situation, but that seems worth it to me. You're just saving now$12 ,000 more while you are starting to pay down your mortgage and you own an asset and you have the opportunity, if rents go up, to increase your cash flow and pay out of pocket even less. That, to me, even if you're paying PMI, makes sense to me. If, for example, though, you were paying$2 ,000 a month in rent and you did the FHA loan and PMI and now you're coming out of pocket$1 ,800 a month, then I don't know if it's worth it.

7:02Like at that point, it's like, oh, 200 bucks a month to take on an asset, the work, there is some risk in it. You know, then it's not worth it. But like if you're meaningfully changing your lifestyle and able to all of a sudden save up significantly more money than you were before, I don't care if you're paying PMI. I think most people who get into house hacking in the first place pay PMI. I think that's the most common example is people do an FHA loan. And so for me, like James said, I wouldn't get caught up on that cost. I would just think, is this benefiting me at the end of the day? And this is why it's so important for people to write down what their goals are in one, three, and five years.

7:42Because if you have goals and you're pushing yourself and they're a little bit higher, that's where maybe you will be more inconvenienced. And that's important because in Seattle, rent can be expensive, but you can go further outside the city, live a little bit further out and get some bigger homes to where maybe you can house hack and rent out three to four bedrooms. And then you will cash flow. Yeah. But it comes with the inconvenience. And that's really what I think a lot of people forget. It's like the owner occupied flip, the house hack. Those are inconvenient processes. You might not have a house for a little while.

8:17You might have some roommates and rent them out. You might have some rotating people, some extra dirty dishes, but is the pain worth it to you? And so, you know, I always encourage people don't listen to what everyone else is doing. Listen to their strategy, write down your goals and then match the strategy with your goals. Not just because Dave's doing or I'm doing it. It needs to match up with your lifestyle. So great question. I think this comes up a lot, but I think you just do the math, right? Figure out how much it will save you or what you would do if you would wait and compare those two things.

8:46I wouldn't think so much about the PMI. If doing it now is going to save you more money, go ahead and buy that deal right now. Yep. All right. Great question. And thank you. Both James is from Seattle. Our second question also comes from Seattle. We picked regional ones for you here, James, but these are applicable to any market and anyone. But just because James and I both live in Seattle, I picked some from local investors here from BiggerPockets. So the question here comes from a guy named Graham on the BiggerPockets forums who said, I finally decided to get serious about investing and wanted to get your perspectives for a first timer.

9:20I'm leaning towards purchasing a single family or duplex for less than$200 ,000. Should I look into a one, move-in ready unit, two, a unit that needs cosmetic rehab, or a unit that needs significant work? With my budget, there may be units that fit the bottom two criteria, but is cosmetic or significant rehab too much to bite off for a first timer? Appreciate any advice if you were in my shoes and had to do it over. Let's just like hone in on the core of this question, which is if you are starting out, almost regardless of budget, do you try and buy move-in ready unit, a unit that needs cosmetic rehab or a unit that needs significant work?

10:03This is a first timer. How would you approach it if you were doing it again? You know, I'm a big value add person, but you don't have to go heavy, right? When I first started buying properties, you know, I started with condos that were really beat up. They're kind of hoarder style condos. And so they were simple because I could get them trashed out, do the carpet, do the paint, do the countertops, do the appliances. I think if you're a new investor and you don't have a construction background, go with the cosmetic because the significant rehab, there's going to be so many mistakes that we make on these big projects that are going to slow down the time, which is going to be a loss of income on a month.

10:38And if you go over, you're just doing a lot of work and you're not getting cash flow to probably be at the same numbers as a cosmetic renovation. And so, you know, I'm a firm believer that you don't want to go too deep. People make this mistake all the time because they're working on a budget and they just buy the cheapest thing they can find. That's not always a good thing. No, you're going to pay more in the long term. And you're going to learn a lot. If you want to go to school, then, hey, it's education and investment. But, you know, starting steps. And one thing on this question that is jumping out to me is, do I purchase a single family or duplex?

11:13It depends on the opportunities in the market. I would say three years ago, single family, that would be what I'd be looking for because multifamily was in a lot higher demand because rates were lower. Now with the current market trends, two to four units, they're not selling as well as single family. And so there's a lot more opportunity. And also when you're trying to buy a rental, when the rental property is in the middle, where it's a cosmetic fixer, their rents are typically not as high too, because they're like average. You can make that property a prime property or a premium property in your market for low amount of cost and get a high kick on your rents.

11:48And so like, if I'm looking for anything right now, and I was a first time investor, house hacker, you know, get going on my investing, I'd be looking two to four units because there's the lowest amount of demand. And when you're buying in the area with the lowest amount of demand, you get the best possible deal. Yeah, I'm 100 % with you on this one. I think, you know, for probably 80, 90 % of new investors, the cosmetic rehab is the best first deal. You could buy an existing unit if you want, but you're probably not going to get the same level of cash flow and you're not going to learn as much.

12:18And I buy some stabilized units, but my first deal, I did cosmetic rehabs. And you know what? I learned plenty. I didn't need to, I was still messing up on a cosmetic rehab, you know, like I didn't need to do a heavy value add to go to school. At least for me, I was had no construction background and even just doing simple stuff like a bathroom reno or painting or resurfacing a driveway. Like I had never done any of those things and it was stuff that still I learned, but it was a manageable amount of learning that like I could take on at an appropriate pace. I didn't have to do it all really quickly.

12:59I was already getting rents. I could do these things, you know, stagger them one at a time so I could build out my network of contractors. I could do research on what I should be paying for these things and the best ways to go about them. And to me, that was like the right blend of getting the right return and learning at an appropriate pace. So it wasn't so overwhelming that I was getting discouraged and panicking and having to spend tons of money. But I was, you know, eating some humble pie about what I knew and was getting an education in real estate at an appropriate pace to set me up for a career in real estate.

13:36So for me, I think those are always the best. What that means, some people call paint cosmetic. I think people can go a little bit further than that. I think, you know, paints, floors, I think even kitchen, bathroom rentals, like those things I think are manageable for a first-time investor. It's really like the structural stuff that honestly, I've avoided pretty much all of my career because I just, I don't want to mess with that. James, you quickly got into that, but I think, you know, just the surface level stuff is manageable for any first-time investor. Yeah. Stay away from moving walls. Yeah.

14:12That's where cost compound. And if you don't, you don't know what you don't know. It's easier to negotiate a flooring installer than an electrician and a framer because you're moving walls around. That's a lot more complex and definitely take your steps. I mean, I made the mistake of, hey, I did a couple flips, bought a couple of rentals that were condos. I had massive success. I was like, I'm Superman. Then I went and bought a huge fixture and I got my clock cleaned in 2008. Best education I ever got. Great question. I love this question and I love it so much because I think it has a concrete answer.

14:45There are so many questions in real estate. It's like, oh, it depends on this and your goal on this. But I think for most people, like cosmetic fixer is the right answer for their first deal. So I'm glad we can give such a clean response to this one. We have more questions coming up right after this quick break. So stick with us. Most banks will give you a line on your primary residence and stop there. Avon looks to underwrite the equity in your investment property, the second home you have, the property you hold in your own name, and put a line of credit against it on a visa card. Same asset, same logic.

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18:54Welcome back to the BiggerPockets podcast here with James Daynard answering listener community member questions. before we talked about saving up or buying now. We also talked about the right level of rehab or condition of a property to buy for a first-time investor. Next up, we have a question. It's kind of just more of a comment I wanted your take on, James. From Charlene in Virginia Beach. She said, sorry, but let me rant for a minute. I've been talking to a lot of people lately who want to break into real estate with zero experience. Most of them just took a class from some random guru and now expect 100 % financing on the purchase and 100 % on the rehab.

19:37Then when I give them a realistic number, they call me a scammer. Honestly, it's frustrating and it feels like a waste of time. For context, I manage an assisted living facility, broker money, and also do fix and flips. I've been in real estate for quite a while and know firsthand it's not easy. The business takes skin in the game, experience, and realistic expectation. What's going on with this mindset? What do you all think is driving this trend? There's a lot in here, James. I think you and I share some of the same thoughts about this, but take it away. Let me know what you think. You know, gurus, they're selling a dream, right?

20:14And the thing is, it is a dream that you have to put together when you don't come from a lot of money. And I mean, I got started in real estate and I didn't have a lot of money. I was working at Red Robin and I was saving tips and I was saving everything I could, but they didn't mean I had enough money to buy a house. And, you know, and so I kind of took the service approach of going and wholesaling, working with some investors, building the relationship, and they funded me the deal. But, you know, everyone wants the dream and they think it's easy because someone's talking about it and it's not.

20:46And, you know, for people out there, you can work with someone to borrow money. You can get a hard money loan for 85%, 80%. You can borrow a second. You can partner with somebody. Those are realistic investment platforms. Those are not unrealistic. What is unrealistic is if you're new and you don't have any experience and you don't want to put in the work to start building the experience to just go expect to go get all this money. You have to put in the work no matter what. And that's what people are doing is they're skipping the work. You know, like if I have a contractor that doesn't have any money and he's never invested before, but he came to me with a good deal and a plan to fix the house.

21:25That's a good opportunity to get 100 % financing with somebody or a partner. But if you're new, don't focus on getting the deal and the money. Get the experience. That will attract better things. I couldn't agree more. I think there's a lot here. First and foremost, it is social media. A lot of people sell unrealistic dreams. I think that is just at part of the core of this, is there are a lot of folks out there who are saying, you can do this, low money down, no experience. All you got to do is go out there and call a million lenders or call a million banks. Like, I'm sorry. It's just, it doesn't work that way.

22:01Actually, James, at one of the walkthroughs you and I did together here in James, there's a young guy who came up to me because I do some private lending, seemed like a really smart, interesting, hardworking guy. And he was like, I don't have a lot of experience. Like what would I have to do to get you to lend to me on a flip? I was like, there's literally nothing you could do. I wouldn't do it. Like there it's true. Like you have no money and no experience. Like I'm not going to do it. So I was like, what you have to do is like, go find a way to be a partner on a deal. Go get 5 % of a deal, go get 10 % of a deal, go work for James or someone else who has experience as a PM, like, or save up money.

22:40But like, if you're coming to me and saying, I have no scale and no money, like what I could lend to anyone. I could lend to an experienced flipper. I could lend to someone who has money, who just needs help with cashflow management. Like, why would I choose you over everyone else? The answer is I'm not going to. And so like, I just think that expectation needs to be set. You can start with no money and no experience, but you have to take off a bite-sized chunk. You can't have it all when you have nothing to contribute. And I'm sorry that I know a lot of people say out there It's just hustle and effort.

23:15That is true, but that hustle and effort needs to be extended for a realistic timeline. It needs to be over a year or two years or three years before you're going to get someone to actually commit to you. If you think that you're going to walk in with nothing but your own attitude and get someone to part with hundreds of thousands of dollars, I'm sorry, but you're insane. That's just not going to happen. Yeah. I mean, my own little rant right now is, you know, one thing is their social media and other platforms and conferences, they're really good, right? You can learn a lot, but also they can be a little bit bad.

23:49You know, I have seen a lot of newer investors get access to capital because they start raising it, right? Because they're promoting their deals. And I think that's great. Capital is the engine for growth, but don't abuse it either. Holy smokes. Like the one thing I've learned in my life is don't abuse debt because no matter what, debt will roll you if you don't use it correctly and you don't need to be greedy. Yep. You know, for those who are new though, because that's a frustrating thing to hear, there always is a way, you know, go find someone in the market. Like Dave said, go work for them.