How to Get Started in Real Estate
One of the best ways to get started in real estate that I have found, is to maximize your leverage with the bank using an owner occupied loan.
This is a technique that is used often by people who are buying their own houses to live in. The bank usually only requires between 3% and 5% at a minimum of cash down payment in order to buy your own home. They do require that you live in that home for a specified amount of time, often only a year or more. One thing that is often overlooked though, is that those same banks are willing to loan with the same low money down options on a duplex, triplex, or four unit building. Remember though, you will actually have to live in the unit for at least the required amount of time.
Normally, a bank will require 20% to 30% down on a loan for an investment property. That money can be borrowed, and as you expand your portfolio you'll want to use those options, but getting started with only 3-5% down is extremely attractive compared to this. In some ways it can improve the return on investment greatly. If you don't have your own home to live in yet, this is an excellent way to get started.
This is how I got started, and it worked out really well for me. I bought a 4-plex for $150,000, put only $6,000 down. Closing costs were wrapped into the loan, so I didn't have to put anything else down. After paying the mortgage and all expenses, I was getting $150 per unit per month in passive income. If your expenses aren't unusually high, you will recoup your initial investment in the first year with those kinds of numbers.
Many real estate investors that I talk with look back on their first couple of buy and hold deals as sometimes the best investments they've ever made, because they were able to use this creative strategy to get their foot in the door with relatively very little money down. If your family situation allows you to move into an investment unit like this, do it!
Comments (2)
Hey Anthony, great question!
Looks like you've got a great start already. I like your idea to move into the small multifamily properties (2-4 unit buildings.) In many cases you can share costs and get those for less $$ per unit. The numbers on your 2/2 SFH (single family home) look pretty good so far, though I don't love inheriting tenants. I've done it, but ideally I like to vet them myself. It's nice to pick up a unit already rented, but in my market it's not very hard to rent them out myself, and depending on where you are in Atlanta, it might be easier than where I am in Utah!
Many banks will just ask for 20-25% down on a SFH, where you'll need to pony up ~30% for a small multi in most cases. Watch closely where your debt to income ratio lies in all of this. Depending on what your personal income is, the bank may not be willing to write more loans than the two you have. Adding a credit line on one of your existing homes is a terrific strategy, provided you have a decent amount of equity, but do know that once it's borrowed, the bank will look at that as part of your debt to income ratio. Creative financing can be a good solution, asking the sellers to carry the note, and you pay them monthly including some interest. That's been very successful for me, but not many sellers are able to go that route.
If I were in your shoes, I'd sit down with your lender and explain your goals. A good lender will see how much business you plan to bring them and help you get to where you're headed. One massive benefit to the credit line secured by your house, if you have enough equity, is that you can use it over and over again without having to qualify each time. So if you only plan to hold your property for a couple of years, you could pay the line of credit off and do it all again without having to ask any lenders permission to do so, or pay closing costs!
Skyler Smith, about 9 years ago
Skyler, I own two single family homes. My first is in SC, I bought it Feb 2014 and lived in it until late Dec 2014. Jan 2015 it rented and is currently rented. I am one month ahead on my payments. My second home, I currently live in, is in Atlanta. I bought it Feb 2015. I am looking to buy another home in roughly 6 months or so, or if possible, this weekend. I have found quite a few homes around the $100k range or less that are currently rented but I was wondering what path I might take to purchase a home that is all ready rented for roughly $100k (give or take maybe $20k).
My original plan was to remodel my kitched for about $15k (its outdated by 23 years) and then use the equity in the increased value of my home to buy my third, for $200-$300k. My thought process is that if I can spend $200k'ish then I can get a great 2-4plex home. In the last week I have done some more research and found many more homes all ready rented for much less than $200k, as I mentioned above, and some are single family, in fact, most are. Caveat is that they are all ready rented and will be for at least 6 months all ready. Example-2b/2ba/2car garage for $64k with $795/mo rent with 8 months left on lease.
What options do I have for financing? Is it possible for me to even consider this yet? Should I wait one year until I have one year equity on my new home and 2 years equity on my second and use that as my 20% down?
Thanks for all your help/advice. I could use it. Thanks!
Anthony C., about 9 years ago