Hello, I'm in my mid-twenties and am starting in real estate investing. I realize that I have time to my advantage right now and want to utilize this time as much as possible because we all know we don't get time back. I understand there are a lot of different ways to make money in real estate but I am most interested in buy-and-hold to build net worth. I would like to buy my first rental property in the San Antonio or Austin market as soon as I have found the right property and have 20%.
I am trying to save up money for 20% down right now. Have you ever gotten into a buy-and-hold property with less than 20% down? If so, how did you negotiate such a transaction?
Any advice/suggestions on what to do and not do when getting started on buy-and-hold investing would be greatly appreciated! I am motivated and determined to make this venture a success. Thanks!
When I first started (while I was still in college) I bought a duplex using an FHA loan. I lived in one side and rented out the other. After a couple years and earning a little more money I was able to repeat the process with another duplex... and so on. Under FHA you only need to put down 3.5%. Granted you have to reside in the property yourself, but it's a great way to build net worth, earn passive income, and live rent-free (or close). FHA will allow you to buy up to a 4-plex, which means you may be able to produce good cash flow with low out of pocket. This may not be the strategy you were looking for but it worked for me over the last decade and allowed me to pay off a duplex, leave corporate america and invest in real estate full time. Hope this helps.
@Seth Teel give great advice. They've dubbed it House Hacking here on BP, and it provides an incredibly powerful strategy, due to the low down payment requirements as an owner occupied property. Additionally, as long as your credit is good, you'll likely get a really favorable interest rate. It's a great strategy, especially while you're young and can easily move every year. Not only do you acquire the property for a low entry point, you can have the rent on the 2nd unit pay your mortgage.
@Bryan Byrnes as @Seth Teel said, house hacking is a great strategy! Also listen to podcast 89 by Engelo, its very inspirational and he is very passionate about what he does. Honestly I would just listen to all of them. You can learn something from each one. There is also a lot of great resources on the site. If you go under the resource tab, there is a whole thing about tenant screening.
My other advice is to be patient. Can't say that enough, because when you aren't patient you can make bad decisions. Always make sure the numbers work, especially with buy & hold. So take your time, learn the formulas, network and build relationships and you can do this strategy very successfully.
Good luck in your new adventure!
Hey Brian, welcome to BP! I also am a big proponent of house hacking, or buying your way to a number of homes by first buying them for use as a personal residence. I purchased my first home at 26--a bank owned home needing repairs--using a 5% conventional loan. The downside to this is that banks require private mortgage insurance (PMI), but in our case we added a lot of value with a remodel and refinanced it, so the PMI payments will be ending next month, only 3 years after we purchased it.
I acquired a rental using hard money and refinanced it as a strategy to reduce my down payment obligation because I found a property that needed little repair and had good upside.
Last year my wife and I bought a bigger home for us, again using the 5% conventional loan. Now the first home we bought is a rental that has $50k equity (we invested $20k included down payment) and, though it doesn't provide much in terms of cash flow because of the 15-year amortization refi, does cover repairs and returns us principal reduction (read equity) of about $8k a year. The new property has 3 rental units that, when fully rented, will reduce our mortgage payment to just a couple hundred dollars.
This is my start, and I think I'm done house hacking for now--my wife is, anyway :)--but at 30 now we're in good position to invest because we have no house payment, some cash flow from one rental, and solid equity return on another. We did 5%, but with FHA you can do 3.5% I believe if you wanted to just buy a rental and not go the house hacking route there are programs for HomePath homes in which you can buy investor properties for as little as 10%. Whatever you do, good luck and have fun!
@Seth Teel I'm just starting out myself and looking to use an FHA loan on a duplex. I was wondering though, don't I have to find a duplex that already has a vacant half that I can move into within 60 days of purchase? I guess I could include duplexes where someone's lease is about to expire. Did you run into that at all? Thanks for posting your experience here too, it's good to find like-minded people!
@Doug Farmer The property does not have to be vacant, but yes you have a short amount of time to get moved in (60 - 90 days). You could buy a leased duplex and keep one tenant and vacate the other depending on their lease structures or you can buy a tenant out of their lease (usually doesn't cost much). I have only purchased vacant duplexes for my personal investments, but several of y clients have purchase fully leased properties and then moved into them. I don't advocate skirting the law, but FHA isn't check to make sure you are fully moved into the unit in the specified amount of time. If you move in is a few days off I don't see this as an issue (it's more about intention).
One issue I have run into has been buying a distressed duplex that would not meet FHA guidelines without improvements. In my specific case I was buying a HUD foreclosure and 2 days after I put it under contract someone stole all of the copper pipes and the HVAC coils. HUD would not replace the copper nor would they offer a discount because they had multiple offers. In this case I was allowed to use a "repair escrow," close on the property, and had to complete repairs and have a HUD rep inspect prior to moving in. Essentially I closed and repaired, but did not take possession until repairs were completed. Keep in min HUD will only allow a certain amount of "repair escrow" in this case it was around $5K in repairs.
@Hattie Dizmond @Tyler Blackwell Thanks for the advice. I forgot to mention, I currently own a primary residence in Buda right now (have been in house for 2 years). I'm a little concerned that this house won't make a decent rental property based on my current mortgage plus taxes, etc. and if it can generate enough positive cash flow to make sense going this route. I didn't have REI on my mind 2 years ago or else I would have looked into this scenario before buying. Can you give me advice on where I can find rental rates in the area of Buda? Are your resources online or is it a matter of networking/talking to the correct investors/real estate agents that can provide accurate rental rates?
I don't know what others are doing to find rental rates, but I've done pretty well just looking at rental listings on Craigslist for my local area. You get to see other properties with similar characteristics and base your rent on how much better (or worse) your property is versus a comp house. Love Craigslist!
@Bryan Byrnes Here is a link from a thread a couple of months ago that hits home to our area in Buda/Kyle. Let me know if you have any specific questions... If you send me your address through PM, I could give you my opinion on the rental rate.
@Seth Teel awesome, I had to go look up "repair escrow" but it looks like there are 3 FHA loans: insured (no home damage), uninsured with repair escrow up to $5,000 (some damage), or uninsured (bad damage). That's probably way oversimplified, has it been anyone else's experience? For those who have used the FHA 203k loans are those of the uninsured variety? @Bryan Byrnes I'm still brand new at this so I can't really advise on anything but hopefully someone else has some ideas.
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