If a Rental Doesn’t Pass This “Test,” Don’t Buy It

**Dave Meyer** (0:00)
If you are about to buy your first rental property or about to pick up another, I need you to stop and watch this. In today's market, investors are rightfully more nervous before dropping a down payment. Down payments can be tens or even hundreds of thousands of dollars that you've worked hard for. And if you put it into the wrong property, it could set you back years. But of course, if you put it into the right property, you could fast track your financial independence. So, how do you know which one is which? In this episode, Henry and I are sharing the stress tests we run before buying any rental. If a property doesn't pass, we walk away, no matter how good the deal looks on paper. So, if you are nervous to put up that next down payment, this episode is going to help. Whether we give you the green light to relax and go out and buy that property, or give you the red light to stop you from buying a very bad deal. Imagine just how much that piece of mind is worth.
What's up, everyone? I'm Dave Meyer, here with my co-host, Henry Washington. Today, we're dipping into the Bigger Pockets forums to answer a few of your questions about real estate investing. Let's jump right in to the first question. All right, Henry, this is a good question. Very curious your opinion on this one. It comes from Kate Thomas, who says, we're looking at spending 100 grand out of pocket to buy a three two single family home as a longterm rental in Woodstock. She also says, nerves are setting in because that's a lot of money.
It is, but she wants to know, is this how everyone feels or is this my intuition saying, play it safe, leave the money in the stock market. We've wanted this for years.
What do you think?

**Henry Washington** (1:51)
To give a true opinion on this, I would definitely need some more information. But on its surface, to answer her question, is this the way you always feel? Yeah, yes, it is.
I've done hundreds of deals and I still get nervous when I buy them, when I either use money, even when I don't use money of my own to buy them, I still get nervous. I still think, oh, should I do this? I don't know, like to this day. So yeah, that's pretty normal.

**Dave Meyer** (2:20)
Do you think there are people who don't? I get that way every single time.

**Henry Washington** (2:24)
There's probably people who don't. I don't know. I'm just not that guy. I still get nervous.

**Dave Meyer** (2:29)
You're writing a check for Six Figures. That's a lot of money.
You're right about this, Kate. It is a lot of money. The one part of this, though, I would challenge is saying that playing it safe in the stock market is necessarily safer than real estate investing. I don't know if that's true. Let's presume for the moment, Kate, that you're buying the deal right, that it's cash flowing, that you have cash reserves, that you're buying at a good price in a good location.
If that's the case, then I think you can make an argument that real estate is safer than the stock market, depending on who you are. I mean, I think the stock market is very highly valued, and I think that real estate risk of going to zero pretty darn low. If you really think about how much money you can lose in a situation like this, buying a single family home, let's presume you're using fixed rate debt. I wouldn't say that's more risky than the stock market, but I do understand feeling a little anxious about it.

**Henry Washington** (3:32)
The only way to really lose buying a property like this is if you sell it before it becomes profitable, right? So as long as you can hold on to this for 10 years at a minimum, like you'll look like a genius at some point, I'm sure, even with modest appreciation each year. Plus you're putting $100,000 down, which should, I assume, help with increasing the cash flow and hopefully putting money into your pocket, and you're buying yourself equity, and hopefully you're buying with some sort of a discount and walking into a little bit of equity as well. So it's a safe-ish place to put your money given a lot of the assumptions you and I are deciding to make about this deal.

**Dave Meyer** (4:14)
Yeah, we're assuming that you listen to this podcast, Kate, and are going to buy this right. I do think though, one of the reasons why this happens so much, where you get really nervous, is because the normal thing is just to stick it in the stock market. Like if you go talk to your friends or whomever, you're probably your financial advisor, they're like, just stick it in the stock market, that's safer.