If done right, real estate investing is one of the best ways to build wealth. I bought my first rental property at 22 years of age, but at the time, I didn’t know I was investing. In fact, I just purchased the home as my primary residence! It wasn’t until 18 months later I moved out and became a landlord for the very first time.
It felt incredible. I was making serious strides on my net worth every single month. In fact, this property helped increase my net worth $60,000+ in just a few easy years. Best of all? I lived over 1,000 miles away and had everything taken care of for me by a property management company. It was perfect…
Or was it? Unfortunately, I did a lot of things wrong. It did ultimately work out in my favor (no horror stories, thank God), but it could have been a lot different.
Let me protect you from my mistakes.
Getting Started with No Excuses
One of the biggest hurdles to getting started in real estate is coming up with some money to invest. This is a valid struggle for most people, but unfortunately most people use this as an excuse to explain away their lack of effort.
That might sound harsh (I guess the truth hurts). The reality is that most financial opportunities and “good luck” are a result of hard work, research, and diligent effort. In fact, some home purchases can even be made with 0% down!
If you want it bad enough, you can do it.
That being said, there is a fantastic way to get started in real estate with almost no money, and you don’t even have to get approved for a mortgage. How? I thought you’d never ask.
Introducing Real Estate Investment Trusts (REIT)
Some people want to buy homes and build their real estate empire. Maybe that’s your goal, but a very simple way to get started is to provide money for other people to do all the work. It’s a win-win for everybody: You provide money (even if only a little) and get a nice return on investment while the real estate investors have your money to fund their deals.
The simplest way to invest in a REIT is join Robinhood. Best of all, When you sign up, you’ll get a free stock up to $500. Once joined, search for REIT and find one you like. You can do any extra research you want, but here is a simple (and affordable) example:
Not only is a REIT a great way to get started in real estate with very little money, it can also be used as a means of saving money to fund your first real estate deal. Many people (including myself) have a hard time saving money by keeping it around in a savings account. Putting your savings in a REIT makes it harder to touch, but can be easily removed when you need the money for a down payment or another investment.
On top of being a step harder to withdraw, a REIT will give a higher percentage of growth (maybe 7%) each year compared to a savings account (maybe 1-2%). This is just another way to start building wealth faster.
Ready to move on from a REIT to a physical home? Let’s talk about the best way to make this happen.
Buying Your First Rental Property
Likely the easiest way to get approved for your first rental property is actually NOT through buying a rental. Instead, it’s through buying a primary residence (a home you yourself live in).
My first rental property started as my own home. I lived there a little over a year and then converted it to a SFH (single family home) rental.
Getting approved was easy. That’s because banks are much more eager to loan money for a primary residence.
Think about it. When the going get’s tough, are people more likely to give up an additional rental property, or their primary home where they live and raise their families?
Everybody needs a place to live, but not everybody needs additional rental properties. Banks see rental properties as higher risk.
When a bank sees something as higher risk, they make it worth it by requiring higher down payments (probably something like 25%), giving higher rates (maybe 4% instead of 3%, as an example), and having stricter income requirements (remember, you’ll have to continue paying for your current place of living in addition to the rental property).
When you buy a home as your primary residence, you may even get away with 0%-3.5% down (although, this may not always be recommended).
Let’s take a look at my experience.
How I bought My First Home
I purchased my first home at 274,400. Here are some numbers, for you freaks out there:
Following the advice of Dave Ramsey, I bought this home with 10% down on a 15 year loan. I still had some debts, but Dave doesn’t need to know about that 🤫. Unfortunately, the 15 year loan may have been the reason things didn’t work out (more on that later).
Maybe to you, these numbers are small. Maybe they’re huge! $30,000 down might be spare change in San Francisco, but this was a hefty sum for me to come up with as a 22 year old living in the middle of nowhere. I was moving to the Austin, Texas area and homes were a lot more expensive than what I was used to.
The exact numbers themselves do not matter. Rather, focus on the percentages. It could just have easily been 10% on a $2,744,000 home. Or, 10% on a $27,400 home (those actually exist, by the way). Instead of making excuses when you can’t afford a down payment, buy a smaller home! There are plenty to choose from all across America (or wherever you live).
Wondering how I came up with a $30,000 for a down payment? I’ve released a course and PDF on how I built a full time income online. The perfect deal finished at the perfect time allowing me to make this happen. This course will teach you to do the same.
In order to get approved for this mortgage, I did not use self employed income. Self employed income sucks for home buying because you usually need two years of income and any deductions lower your overall income 😵.
Instead, I literally just started a W2 position (no two years required) where my monthly debt-to-income would remain above 50% making this purchase. No spouse income needed.
I felt so blessed to be able to buy my first home at such an early age. It was always a dream of mine. On top of this, it was in an appreciating area near Austin, Texas.
Unfortunately, this did not make the best rental property. Mainly because the mortgage demanded too much money per month with a 15 year loan. I made serious strides on my net worth, but I just could not justify the negative cash flow (especially after my Taxes went up):
|Monthly mortgage + tax, etc||$2,500|
|Cash flow||$Really bad|
I was losing money each month in cash flow, but my equity went up around $1,200 each month. Even more considering appreciation.
This increase in equity was not enough to justify the negative cash flow. Why not? Because the negative cash flow appeared as a debt that restricted any future home purchase.
I had two good options:
- Refinance or reamortize to a 30 year loan to help with cash flow, or
- Sell the property and move on.
I chose the latter. Selling the house is opening new opportunities for me (it’s under contract, so fingers crossed 🤞🏻). The opportunity cost of keeping the rental was too high for me.
How to Know if a Property is a Good Investment?
Without hours of number crunching, a good way to measure if a property is a good investment is to take 1% of the purchase price and expect that amount in rent.
This means my home (at $274,400) should have brought in $2,740 a month. Instead, it brought in $1975.
|Cost of home||$274,400|
Obviously, I was far off. This rule doesn’t always work, especially in areas with higher home costs or newer homes that need no work. Just use 1% it as a general guideline.
There were some other houses for sale in the $230K range that would probably have rented for around the same price. Looking back, these would have been a better choice, but we weren’t exactly aware of what was best. We just bought whatever we liked.
Having a rough time making the numbers work? Let’s talk about how to jump-start your real estate game.
Fast forward 2-3 years after my first home purchase. I am now looking at buying my next primary residence. This time though, I’m doing things a little different. I’m buying a duplex!
A duplex (or any other multi family home 2-4 units) allows for you to live in one side and rent out the other. The best part? The bank is willing to see a duplex as your primary residence as long as you live in one unit. You may need to put more down (I’m doing 15% with conventional financing, but FHA 3.5% works as well) or have slightly higher rates, but as a benefit they’ll take 75% of the rent as your income.
If the rent is $1,000, they’ll consider your income to be $750 higher.
This actually makes it much easier to get approved.
Considering that you may be able to get 50% DTI (debt-to-income), this rental income actually increases your monthly debt allowance by $1,500. The unit does have to be currently rented, though.
A bigger mortgage is not always the goal, but it allows you to obtain a nicer property that produces more income, and can ultimately help you build wealth faster.
Word of Warning
Before you go buying the largest MFH (multi-family home) you can possibly afford, consider the risks.
Yes, a portion of the income from the units count towards your income, but future vacancy is possible. Because this may be your place of living for a while, you do not want to be too leveraged. If you can’t afford to make the payments without rental income, you may want to consider a cheaper duplex.
One of the things that came up when discussing this option with my spouse is whether or not we would like sharing a home with another individual or family. Here are all the reasons why we decided to give it a shot even though it’s not our end goal:
- A properly set up duplex is very separate living.
- A duplex, triplex, or fourplex is not limited in size. At one point, I lived in the basement of a very nice, large home. I’m sure the owners did not have too many “shared living” vibes.
- If done right, you can easily move out and rent out all the units to pay the mortgage in full (and even cash flow). This should give you the freedom to get another mortgage for your next primary residence.
- Multi family homes can be a good way to get into multi-unit investing while keeping simple financing rules similar to single family homes (no LLC required, no 25% down required, etc).
- If you like the duplex and can afford the mortgage on your own, you can always use the other half for yourself. Maybe turn one half into a home business office (the idea’s tempting me, honestly).
- Sick of long term rentals? Try converting half to an AirBnB or old fashioned bed and breakfast.
Life’s Biggest Expense
Housing is one of the largest expenses people have (in addition to food and transportation). By house hacking, you could reduce your cost of living drastically. This may just give you enough extra money each month to help you invest and work your way up to millions.
Earning an extra $1,000 a month through a duplex rental? This may free up $500 extra a month (we probably have expenses, a higher mortgage, etc).
What happens when you invest $500 a month for the length of a mortgage? Magic happens:
Now, not only do you have a paid off duplex probably worth $400,000+ (appreciation from $200,000), but you also have $600,000+ invested.
See how one small choice can make you a millionaire?
This is what I want to do. I want to make smart decisions. I want to be smart with my money. People may say “you’re just lucky”, or “you make more money than me,” but the amount of money you make is not the issue here. A duplex can be bought with 3.5% down and is easy to get approved for.
Most people, if they want it bad enough, can make their dreams happen. The only problem? Most people don’t want it bad enough.
What are your thoughts? Do you think house hacking is the way to go?