Financing to start a rental portfolio?

5 Replies

Hello BP Family,

I really NEED to start building passive income via rentals. I just watched the great video that @Brandon Turner did, How a Newbie Can Start Building Wealth Through Real Estate.  I was SO encouraged until I seen in the video where it showed $68,000 needed as the down payment. I don't have anywhere near that. Yes, I can always go for cheaper properties than the one he used as an example in the video but still. I don't have $20,000 to even put down as a down payment.

How are people like myself able to obtain my first property without a large down payment? Do most people really have 20-50k in capital to just through at these properties?

Feeling discouraged.......please help :(

We had purchased our first two owner occupied properties with low down payments, and light renovation needed.  At that point, I didn’t expect to do any rentals, so we weren’t saving up particularly.  We spent some time learning how to do repairs around our property, and used our salaries to pay for flooring, or paint, or kitchen cabinets...and when we sold, we made some good tax free money.  

We ended up turning the second house into a rental and buying a new fixer.  So that is how we got rolling in the early years.

I do suggest that method, as we benefit from debt pay down, appreciation, inflation and the renovations that we do.  

Additionally, the Dave Ramsey method to use a debt snowball to pay off credit cards, and to get intense about saving, also worked for us.  We have used mutual funds, bonus payments at work, inheritance funds, birthday money...we just set aside all extra funds so that we could have down payment funds for the next rental or renovation.  

An extra job for this purpose is another thought.  An Emergency fund is highly recommended in the beginning, and will be absolutely required by lenders as you accumulate rentals (but it will be called “reserves.”)

Take your time.  This is a long game.

I recommend you build a strong foundational understanding of real estate investing.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by @Brandon Turneror The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control your finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by @Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the biggerpockets podcasts. This will help clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. Biggerpockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up.

5. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

@Kerry Baird - Thanks for info on this. Yes, I've known of your strategy for a while. There was a book I read long ago where they called it "leap frogging" from property to property but still, there are so many stories and colleagues I know that are in their mid 20's and they have numerous properties. Now, I never really looked in public records to see if the own it but they may or may not be telling me the truth. Lots of people these days exaggerate and lie so it's hard to know. However, @Brandon Turner is a young guy and for him to own 15 properties (100 doors) at that age, they must have a way to find how to obtain 50k down payments. I know sellers offer financing, some put money down, lines of credit. I am now just gathering the info on how this is all done because if they are doing, I AM GOING TO TOO! I can't afford to be on the sidelines any longer. Enough is enough.

@Nathan G. - Thank you so much for all the wonderful info!! I'm surely getting my finances in order now like never before! I will be picking up those books you mentioned especially Set for Life. Watching all of the BP podcasts now! However, can you answer the question in short on how people, like Brandon, may be picking up these properties that need very large down payments? I mean, if most lender (not seller financed deals) are requiring 20-30% down, are you telling most people just have this money laying around to do so? I'm just amazed by this. I could understand 5-15k to put down but if these properties are like the one Brandon did in the video, should I expect to have to put down 68k or the like on rentals? Is this the norm?

@Sunny Wilson All of my investment property were purchased with money I saved up. I put down 20% plus closing costs on all of them.

I don't know all of Brandon's deals but I believe he got some hard-money loans, borrowed money from relatives, and at least one of them involved a credit card (which he doesn't recommend).

You can read "Investing In Real Estate With No (And Low) Money Down" to get an idea of some differents strategies or you can scour the blogs and forums and collect the information for free. In my mind, this kind of advice is dangerous because it implies you can buy without putting any money into the property. What you'll discover is they may not put any of their own money in but they are borrowing the money from someone else. Example:

John hears his dad mention he received a $15,000 bonus for Christmas and he's not sure what to do with the money. John convinces his dad to partner with him by buying an investment property. They find a house for $70,000 and John's dad puts down 20% or $14,000. John hops on the Biggerpockets forum and tells everyone he bought a house with "no money down" when the truth is he put money down, just not his own money.

There are a variety of ways that a buyer can get the money from other sources. I feel it's dishonest to say you purchased with "no money down" just because it wasn't your money. It's a common tactic used by get-rich-quick gurus.

Some options do exist but they are difficult and rare. You can convince someone to sign their property over under a "Subject To" deal. I've even known some sellers that will do owner financing with no down-payment and below-market interest rates. The key is to be educated in the various options and keep your eyes open for ways to implement them.