Get Your First Few Deals Without Being Rich.

If you’re like me you’ve read numerous articles and books about other people’s success and none of them explained how to get started without being rich. I got my first deal without it costing a single dollar. It all comes down to sound knowledge of how lending works and how to leverage that knowledge without breaking the law.

“Attempting to succeed without embracing the tools immediately available for your success is no less absurd than trying to row a boat by drawing only your hands through the water or trying to unscrew a screw using nothing more than your fingernail.” – Richie Norton

Financing

If you plan on investing without a lot of cash there are only a few things you need to know.

Buying a house as an investmentis expensive. You will typically need 25% down and the interest rates will be 0.5-1% higher than a normal loan. Buying an owner occupied (you live there) property on the other hand will only require 3-5% down (plus closing costs) and comes with a lower interest rate. After you live in it for a year you can sell it or rent it out and keep the same loan terms. This is the cost of getting a good deal with someone else’s money.

Lenders lend money based on risk. If you are living in the home there is less risk of default because you would be homeless. So, they give you a better deal than if renters lived there and they were the ones that became homeless. Here is the key. Homes bought with an owner occupied loan can legally be turned into rentals and sold as flips after you live there for a year. If you live there less than a year you are committing fraud because you agree to live there when you get an owner occupied loan. Moving for extenuating circumstances is the exception. After a year you have met the owner occupy commitment so you get to keep that loan, turn the house into an investment and not get into trouble for fraud.

Doing this a second time gets a little trickier. If you are buying another house in the same area and rent out the first house, lenders will catch on and it will be harder to find someone willing to give you a loan even though it’s legal. From a lender’s prospective you are getting their money cheap, increasing the risk and not paying for it. They make pouty faces when you do this.

In order to qualify for a second owner occupied loan and turn your first house into an investment you will have to accomplish one of two things:

• Have 30% equity (own 30% of the current value of the home) in the first house. OR
• Have at least 2 years of landlord experience and proof of income from your tax returns and leases.

When searching for a property keep in mind that lenders will only allow you to use 75% of your rental income to help you qualify for another loan. The 25% is for vacancies, repairs and other costs of being a landlord. This is important because if you do not make 25% more than the mortgage your rental house will count against you when the lender decides how much you can afford for the next loan.

Example: If you’re house rents for $1,000 a month and the mortgage is $1,000 a month then according to the lender you lose $250 a month and they will subtract that from your income when determining how much of a loan they will give you. Always try to make 25% more in rental income than the mortgage so you can keep investing.

The hands down best way to get an investment property is by using a VA loan, which is only for veterans. I’m not suggesting you join the military to start investing but if you are a veteran you have a huge advantage.

VA Loan Benefits

• No down payment
• No mortgage insurance
• Great interest rates
• Seller can pay for all of your closing costs.

Excluding the costs of inspections you can buy a house for free with a VA loan. This is what I did. While living there you can rent out part of the house and save up a little money for the next deal. After a year you can turn it into the investment of your choice.  

Brett Lee

Real Estate agent/investor/advisor Portland Oregon