A lot of people aspire to get into the world of real estate investing but they find just getting started to be the most daunting part.
Take a look at anything that is built, it does not happen in an instant. It starts with the foundation, and grows from there. Along the way you will make some mistakes, have some setbacks, and some great victories. The most important thing is to just get started.
One of my favorite quotes of all time is by hockey legend Wayne Gretzky when he said “you miss 100% of the shots you don’t take.”
Let’s say that you are not fortunate enough to have received a major inheritance and you have to work hard for your money. You go to your job every day and you work so that you can pay your bills and have some fun. You try to save some of that money so that you can invest and build a retirement.
How can you own real estate when even a junky property cost more than what you have saved? The answer is that you are going to have to make some personal sacrifices, but not that many. If you can stick to this simple plan I am going to lay out and follow it diligently, you will find yourself with a nice little real estate portfolio with out needing much cash.
Step 1 – Buy a duplex (triplex or 4plex OK too) with FHA or Conventional Financing and put 3.5% (FHA) or 5% (conventional) down to make your purchase.
Your plan should be to live in one unit and to rent the other(s). You will want to limit yourself to just properties that need a little work so that you are not cash strapped. If the property needs a lot of work, your banker may be able to fund those repairs with a different type of loan, but that isn’t as much a beginner scenario.
After you have lived in this duplex for a year, you will have proven to the bank that you have rental experience and you would have fulfilled any residency obligation stipulated by your mortgage.
Its time to add another property.
Step 2 – The same as step 1. Buy a duplex / triplex / 4 plex that you can qualify for owner occupant financing for.
Note – The owner occupant financing is going to afford you the lowest down payments and interest rates. This will allow you to maintain more of your cash and have rentals that cashflow nicely.
The first duplex along with the half of the second duplex that you rent should be covering all of your monthly housing expenses and you should be officially living for free at this point.
Step 3 – Same as step 1 again. After this step, you will have acquired now 3 rentals in just over 2 years from the start. You will have 5 units that are rented and one that you live in.
You should not only be living for free at this point (housing wise) but you should have some positive cashflow.
Step 4 – Buy the house that you want to live in. Most mortgage companies are going to limit you to 4 owner occupant type mortgages before they force you to start putting a larger percentage down.
By the time you have acquired your 4th property in just a little over 3 years, you will have 6 rental units and a residence.
For most people the 6 rentals will more than cover the mortgage on your residence. And look at you now, you have approximately $1 million in real estate that is being paid for entirely by your tenants.
That money that you save every month by living for free can go towards other lifestyle improvement, more investments, or principal reduction.
Just remember that you have to be smart about the use of your cash, and the use of credit. Cash is king, use as little as possible to grow each step. It is more valuable in your hand than it is tied up in equity.
Also don’t underestimate the importance of having excellent credit. The ability to borrow money from a bank at an interest rate lower than what you can invest it at, is fundamental to being a real estate investor.
This is a simplification of what it takes to build a real estate portfolio, but you get the idea. Buy, rent, and grow. You will never be any younger than you are today, so the sooner that you start the more time you give yourself to grow.
Thanks,
Ryan