“I want to buy my first rental property, but how do I pay for it?”
It is REALLY easy to get caught up in the excitement and anticipation of owning a slew of rental properties and quitting your W2 job and traveling the world when you have enough properties to give you financial freedom. Whew! But how do you get from here to there?
Hopefully, you started by doing your homework and defining your goals and developing your real estate investment strategy. If you have done those things and narrowed down the market where you would like to make your purchases, then the next step is to figure out how to fund your first purchase. There is a myriad of options for you to consider, but I will briefly highlight some of the most popular ones for new investors to use. (And then you can do more homework to dig into the ones that interest you!)
Inheriting property. Many people inherit property when a family member passes or when it becomes necessary for them to live with family or in a care facility. If this describes your situation, then work with a property manager to prepare the property for renters (stay tuned for Blog #5 in this series) and boom you have completed the first step to building your real estate portfolio!
Cash. If you have been building your savings and are ready to use it to start building your real estate portfolio, then you may want to use your own cash to finance the purchase of your first property. By working with a realtor, a wholesaler, or directly with property owners (FSBO) you can negotiate the deal, pay cash, use a lawyer to close the deal and then rent it out. Many real estate investors do this and then acquire a mortgage on the rented-out property and use the equity in their property to purchase subsequent properties.
House Hacking. If you do not currently own ANY properties, you can purchase your first property (single family or multifamily) using a low-down payment FHA or VA loan programs. For 0-3.5% down you can purchase a property and live in it yourself. The important thing to know…you must live in the property for at least a year. If it is single family at the end of that time, you can stay in it or purchase another property and rent this one out. If it is a multifamily property, hopefully you place tenants in the other unit/s and can use the extra income to make a down payment on another property.
Seller-Owner Financing. Finding seller-owner financing today might seem like hunting for unicorns, but it IS out there…you just have to look for it. Be prepared to provide a down payment and to possibly have a shorter loan period with higher interest rates. I also would highly encourage you to have your own lawyer to represent you in reviewing the mortgage document and deeds of trust.
Other people’s money. Many new investors seek out a seasoned real estate investor for mentorship and guidance as they grow their portfolios. As relationships are built and your reputation and networks grow, you can seek private investors to fund your real estate purchases. This is a good option for people who are really good at finding the deals but don’t have the cash or credit to fund them. Approach other investors who do have the cash and use their money for either a percentage of the return or agreed upon interest with repayment.
Regardless of which method you use to acquire your first rental property, the key to becoming a successful real estate investor is to buy your first property...so START now!