I get asked all the time how to fund real estate investments. There are many ways to fund real estate investments. Most real estate investments are funded the old fashioned way, a mortgage. But there are a lot of other ways too…
Mortgages to Fund Real Estate Investments
When you start looking at mortgages, you will find that there are many different flavors of mortgages; a conventional mortgage, an FHA mortgages, a commercial mortgage, adjustable rate mortgages, home equity line, etc. All of these types of funding can provide the capital required to participate in real estate investing. There are also some very creative ways to do it with seller financing, cash, and partners. These are all advanced topics, and should probably not be used on your first deal. It is possible, but you need to understand the process, inside and out, so you do not get burned on a deal, or burn someone else. In the most extreme case, some creative financing can cause you to serve jail time.
Start Small to Live Large
One thing I would advise someone who is not already living in their own home is to go out and find a duplex, or 4-plex. Make sure you do the due diligence to understand the economics of the deal. Look at potential income, expenses, and cap rate, return on Investment, etc.
After you have decided this is a great deal, buy it and MOVE INTO IT. If you were paying rent somewhere already, you can now skip the rent payment and make a home payment. You can get an FHA, owner occupied loan, with little down. An FHA loan can be used on an owner-occupied 4 unit or less property. The property might not be where you want to live long term, but this is one of the sacrifices that can propel you to your next deal, and possibly many others. After you have lived there two years, you can sell and use the additional equity in your next deal. Remember, there are no income taxes on the gain of a $250K gain on a home sale.
If you do not sell, you will have had the rental property for a couple of years on your taxes, and can use the income to help you qualify for the next mortgage. You have a great rate on the mortgage, and used very little equity to get into it.
Living In Your Own Rental
The advantage of living in your own multifamily property is huge. I already mentioned the mortgage and income advantages. You have all of the write-offs that any other investment property has. You get to fix up the property you live in, and write off the expense. You can even move between units, and rent out your previous one, to make sure that all the units in the property get upgraded. Since you are living in the unit, fixing it does not require longs trips (and motivation) to drive to the rental with your tools.
If you are on site most of the time, you can keep a close eye on your tenants. You can see if they are violating the lease. You can make repairs very quick and keep your tenants happy. This experience will prove valuable in the future when you manage property from a distance, or hire a property manager.
Renting Out a Room
If you are already living in your own home, renting a room out in your existing home can also be a way to do this, without having an extra outlay for a new mortgage. The advantage is you get extra money. The disadvantage is you have someone in your own home, with access to your ‘stuff’ when you are not home. If you do this, you will want to make sure your tenant is a 100% solid tenant. Someone who has a solid job and solid credit score. You want to make sure it is someone whose criminal record is impeccable. You might want to consider a friend or relative, which in itself carries a bit of risk.
Regardless of what way you start to invest in real estate, you need to LIVE BELOW YOUR MEANS (LBYM). If you are spending more that you make before you start to invest, you will spend the money that should be set aside for vacancy, maintenance and tenants deposits. If you are spending all that you make, adjust your lifestyle first.
What have you done to improve your capital position to acquire real estate? Have you ever considered starting as an owner occupied investment property?