The Pathway to Wealth: Buying Your First Investment Property
Real estate is arguably the best way to attain true wealth. In real estate, you can wholesale, fix and flip, or hold long-term cash flowing rental properties. For purposes of this article, we’ll focus on the number one way to build wealth in real estate, which is long-term rental properties. Ever wondered how to get started? There are many different strategies you can utilize to buy your first investment property. This article will share a few ways.
FHA (Federal Housing Administration) Loan
To me, the best way to buy your first investment property is by utilizing an FHA loan. With an FHA loan, all you need to put down is 3.5%!! Imagine owning a giant building with just 3.5% down! And guess what if you don’t have the down payment? There are plenty of down payment assistance programs available such as @HomeIllinois. So please don’t let money be the reason why you can’t acquire your first investment property. These programs allow you to essentially buy the home with no money down. A quick tip is to always ask for a closing credit to reduce your cash out of pocket at closing. Closing costs include things such as lender fees, title transfer fees, etc. As real estate investors, our goal is to have as little of our own money tied into the property as possible. This way, we can acquire not just one, but two, sometimes three or even four properties after buying our first one. It’s the power of leverage.
With an FHA loan, the strategy is to “live” in one unit (with or without some Airbnb rentals) and rent out the other units to tenants for them to pay your mortgage and put some money in your pocket each and every month. You would essentially own a home that you not only didn’t put up any money for, but you also don’t pay a mortgage for. This is known as infinite return (ROI). You should always aim for a 4-flat (a building with four units) if you’re prequalified for one since you’ll have more tenants generating you cash flow each and every month. How can it get better? All you need is a 580+ credit score to qualify! You will need some reserves (i.e. money in the bank), but it can be in the form of a gift from a family member. It has a fairly low interest rate no matter your credit score since the loan is backed by the government. It’s best to get a house that’s already fixed up as it will make you feel a little more comfortable in not having to deal with the amount of work that comes with distressed properties. Excellent way to acquire your first property!
For simplicity sake, a conventional loan is basically the same thing as an FHA loan, but with much less restrictions. The down payment is still fairly low (5%). Lastly, you can get down payment assistance, but I would recommend the FHA loan over conventional for your first property. Your second property may be better off as conventional. The same strategy described above can be applied to both a conventional or an FHA loan.
A 203(k) loan is a rehab loan for a fixer upper (a property that needs work). It can work well with a foreclosure since most foreclosures require some work and you can get the property at a deep discount. I, however, don’t recommend the 203(k) loan for your first property because it can be very time-consuming and may dissuade you from real estate as a whole. If you love fixing things, this is the type of loan for you. If you want a nice property that’s already pretty, then stay away from the 203(k) loan. Still a great option to acquire your first property.
Hard Money (BRRRR) - Buy, Rehab, Rent, Refinance, Repeat
A hard money loan is a form of a loan that’s mainly used to acquire fixer uppers. It’s called “hard money” because the interest rate is pretty high and the terms can be a little ridiculous. Hard money lenders usually require 10% down, but some go as low as 0% down (this is very hard to get). They often give you money for the rehab costs as well which is a huge plus, especially for someone who’s just starting out in real estate with not that much money to invest. Terms are usually six months to one year.
Now let me introduce you to one of the best ways to build wealth. It’s known as the BRRRR strategy. Once rehab is complete on a property, some people flip (sell) the property for a profit. The problem with this is that you’ll end up paying a lot of money in taxes. If you’re a true wealth builder, you can rent it out to a tenant for a few months, then refinance (refi) the loan and pull out/withdraw/cash out on some of the equity that has been built up in the property. When you fix a property, the property value usually increases by far more than the amount of money you’ve put into the property. For example, you buy a foreclosure for $50,000 and it requires $20,000 in repairs. The After Repair Value (ARV) is $150,000. That’s an $80,000 spread. Lenders will usually refi the property at 80% of the value via an appraisal, so your new refinanced loan amount would be about $120,000. You take $70,000 and pay off your old lender for the money they lent you for the purchase price and rehab costs. You now have $50,000 cash sitting in the bank!!! Best of all? It’s tax-free since it’s a loan! Of course, we must factor in closing costs, etc. but you get the point. Repeat this strategy 10 times and you’ll be a millionaire in no time.
These are some of the different ways you can acquire your first property. You can use an FHA loan, a conventional loan, a 203(k) loan, or a hard money loan. Don’t let money hold you back from buying your first property. There’s plenty of money out there right now to help you do your first deal. You just need the willpower, desire, and knowledge to do so. So go out there and buy your first property!!
If you have any questions or comments, please don’t hesitate to reach out.