Personal Properties: Creative Financing for the Real Estate Newbie
As an active BiggerPockets Forum member, I see TONS of new investors wondering how they can get started in real estate with a great salary but no assets or savings. Honestly, I bet if we searched for the most popular title you would see “No Money Down.”
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Heck, one of BiggerPockets’ own even wrote a book on that subject. While there are tons of additional great books, podcasts and forums posts on this subject, many people ignore the simplest, the easiest 0%-5% down.
I know this is controversial, and there are many different camps on this philosophy. I have seen a lot of articles on why not to buy houses as personal properties, but I wanted to give my two cents on why I am a believer in this being the most “valuable” type of borrowing.
- Lower Down Payment & Interest Rates: If you buy a house as a personal property, you can put 0-5% down, and pay .5-1% lower in an interest rate. I know when we were running the numbers a year ago, we even noticed that this lower interest rate has reduced our payments close to what a 20% down payment and higher interested rate equate to!
- Tax Savings: Depending on your tax situation, being able to declare your mortgage interest off schedule A of your taxes could have a great benefit.
- Lock in Potential Depreciation: Once you own in a neighborhood, if it appreciates, you are able to experience this appreciation. While the same is true if the market falls, if you have an “exit” plan of being able to rent your home out, this becomes much less of a worry.
- House Hack: If you own the house, it is a lot easier to sublease. We have had many friends who have lived rent free by simply putting up with roommates. They have had other people paying for their mortgage and “house expenses” while they are building other baskets!
- Easier Ability to Purchase: There are TONS of programs for first time home buyers or even home buyers. We have had a much easier time qualifying for our personal homes versus the ones we buy as investments from day one.
- Ability to Get Your Foot in the Door: We got started at 23 and 25. As corny as this sounds, getting started in the traditional way, buying our first house, we got to learn a lot. Let’s just say Home Depot was on first name basis with us. So now when things go wrong we have a good idea about what is going on even if we hire the handy man instead of doing it ourselves!
- Higher Leverage Possibility: Since personals have less of a required amount down and tend to be more “lenient” (again bank dependent), it is easier to buy a lot more house, a duplex, or fourplex to leverage and begin your real estate career. While it definitely is not always a great plan, if you have ways for others to pay off your mortgage (house hacking, multi-family, etc.), it can be an awesome asset.
While there are lot of negatives to this strategy, there are also many myths!
- Waste of Money: We have bought in areas where our mortgage payment was less than rent, so someone else ends up paying. That’s not even taking into account the role that taxes or appreciation plays.
- You Need 20% Down: I see a lot of people comment that you should have at least 20% down before you buy a house. Many more mention refinancing. Personally, we try to do a loan ONCE. Therefore, instead of pulling money out, only buy once with as little down as possible. This way, when we move on or have roommates, someone else is paying our mortgage.
- You Have to Hold Long Term: Many people buy personals and move on when their life requires it. Upgrading due to an increase in your family, moving to a new location, etc.
- Smaller Profit Margin: For me this is a no duh! Of course, if you put less in the house, your mortgage is going to be higher and therefore your cash flow is going to be less. On the other hand, this means you are going to have less paid into the house and that your tenant will be paying off your asset (which is my ultimate goal). This is why I look at “cash on cash” returns. So my profits are based on what I put into the home!
Buying personal properties is by no means the answer for EVERYONE. There are definitely some downsides, so go into it with your eyes open. Remember the crash of 2008!
That being said, we stumbled upon this because we didn’t know better, and honestly, it has been one of the biggest assets. Don’t get me wrong; we have advanced to the pure rentals, so it’s not the “solution.” For us it was an amazing starting place and allowed us to learn a lot, while only “gently” being thrown to the wolves.
How did you structure your very first real estate deal? What did you learn? What would you have done differently?
Don’t forget to leave a comment below!