- Insider interviewed dozens of investors who have achieved financial independence through real estate.
- Some of them bought their first properties without a lot of money up front.
- Their strategies include exploiting FHA loans and “house hacking”.
Investing in real estate can be an effective way to build wealth.
Insider interviewed dozens of investors who gained financial independence through their real estate portfolios.
Successful investors agree that it’s not necessarily easy. Buying a property takes time, dedication and tenacity. But “it’s pretty simple,” said Seattle-based investor Todd Baldwin, who has made more than $1.5 million from real estate in 2021. “If you just buy real estate and you keep it for 20 years, you’re going to sell it for a lot more than you paid.”
A big hurdle for potential buyers is the upfront money needed to make a down payment and cover closing costs.
Here are four strategies Baldwin and other now financially independent investors used to afford their first properties.
1. Use an FHA or VA Loan
There’s a misconception that you absolutely have to put down 20% and save tens of thousands of dollars in cash to buy a property, said investor Ludomir Wanot, who bought his first property with less than $10,000: ” It is not the case at all. . You can get your foot in the door without too much upfront money by using an FHA loan.”
FHA loans are government-backed mortgages that give people the ability to buy a home with lower credit scores and down payments as low as 3.5%.
Wanot ended up using what’s called an FHA 203(k) loan to afford his first property: a single-family home in need of repair that he and his brother bought for $138,000. This type of FHA loan finances the purchase and renovation of a home. Without it, they couldn’t have afforded the renovations, which ultimately cost $30,000. But since they factored the renovation costs into the loan balance and reduced by 3.5%, “we didn’t have more than $10,000,” he explained.
Note that one of the conditions of using an FHA loan is that you must purchase a principal residence and live there for at least one year before renting it. You’ll want to understand all of the requirements for an FHA loan before using one, but, in general, it can be an extremely useful tool if you’re trying to get into the real estate game.
If you have previously served in the armed forces, are on active duty, or are the surviving spouse of a veteran, you may qualify for a VA loan, Wanot added. It is a type of mortgage loan guaranteed by the United States Department of Veterans Affairs that requires no down payment, no private mortgage insurance (PMI) and offers the lowest average fixed mortgage rates.
Understand the resources available to you. You may be eligible for down payment assistance, which could allow you to buy a property with little or no money out of pocket, provided you can provide proof of a good credit rating.
“What I’ve realized over the years with buying properties is that cash is king,” said Wanot, who owns 13 units in central and western Washington and runs a business wholesale real estate. “The less I can get into a property with money, the more properties I can keep buying.”
2. House hack to reduce your fixed costs and free up more money
House hacking is a strategy of renting out part of your home and using the income to cover some (or all) of your housing costs. This is how Baldwin and other investors got their start.
When Baldwin was renting an apartment in his early twenties, he realized he could actually save a ton of money if he bought a place and found roommates.
He found a 6-bed, 4-bath home in a suburb outside of Seattle, Washington for $506,000. He put 3.5% down, meaning he paid around $19,000 up front, he said: “Granted, I was incredibly lucky to have a lucrative sales job that paid well over $100,000 which definitely helped me buy my first property.”
Baldwin and his girlfriend (now wife) at the time moved into the master bedroom, kept the smaller room as an office, and rented out the other four rooms. Rental income more than covered the monthly mortgage payment, meaning they went from paying $700 in rent to living for free and turning a profit, he said.
House hacking means finding compatible roommates and having a lot less space, but it can be an effective way to save on housing costs and free up more money to invest in a second property. That’s exactly what Baldwin did: He continued to buy rental properties over the next two years, and by age 25, his net worth exceeded $1 million, mostly from rental income, he said. he declares.
3. Buy with someone else and share the initial costs through syndication
Sean Allen, who used real estate investing to pay off $81,000 in debt and build a net worth of $1 million, started with $8,000 in savings. It wasn’t enough to buy a house on his own, so he settled into his first property with a friend.
Together they had about $16,000 in cash. They worked backwards and figured they could afford something around $60,000. This purchase price would allow them to deposit 20% ($12,000) and have $4,000 remaining to cover closing costs.
They both lived in Southern California and thought they were probably not going to buy a $60,000 property in that market. So they started looking in Greensboro, North Carolina, where Allen went to college.
They flew to Greensboro to meet with a real estate agent, looked at the properties, and found one they could afford: a 2-bedroom, 2-bathroom uncovered property they got for $53,000. They put in a 20% down payment (about $10,600) and did a few small home improvement projects, like cleaning the carpet and adding fresh paint to the walls.
After finding tenants, they started earning around $220 a month. Everything was paid into an account for future real estate investments. Today Allen owns six properties, is debt free and financially independent through his real estate portfolio.
Becoming a real estate investor started with a conversation in 2013 with Shea.
“It’s very important to facilitate conversations about what interests you with as many people as possible. If you’re interested in real estate, you might find a business partner, loan officer, fellow investor, mentor, tenant, or a roommate,” Allen said. “We often hesitate to talk about money, debt, and investments because they’re personal. But one of the things I’ve learned is that you can learn from the lessons and mistakes of others before you make the same. It will save you money, time and stress.”
4. Increase your income by combining several jobs
Dion McNeeley lived paycheck to paycheck for years before he could afford to invest in real estate.
“I got to 40 and never had $1,000 in the bank,” the 51-year-old told Insider.
Inspired by his brother who was able to retire in his 50s through smart real estate investing, McNeeley decided to start saving for an investment property in 2011. At the time, he was making $17 an hour working at a commercial truck driving school and support her three children.
For the next two years, McNeeley focused on saving for a down payment on a property. He worked overtime at truck driving school and earned an extra $350 every month playing multiplayer online games like Ultima Online and World of Warcraft.
“In games like these, some items are hard to get or take a long time to acquire. I would gather the resources to get the items,” he explained. “In Ultima Online, it was virtual real estate – players could own houses – so I would take the time to create the house, any size, from a small cottage to a castle, and Each game has its own economy and its own learning that economy has consistently made several hundred profits per month.”
By 2013, he had managed to set aside $20,000 in savings, which ended up being enough to buy his first investment property: a $300,000 duplex. He financed it with a conventional loan and put 5% down, or about $15,000.
McNeeley moved into one unit of the duplex and rented the other. This is where he really improved his situation and was able to save a lot on housing costs. He went from renting $1,500 a month to just $300 to live in his own house, since the rental income from the other half of the duplex almost covered his entire mortgage.
“I was able to instantly add $1,200 a month to my savings rate,” McNeeley said. He was already thinking about his next property and proceeded to expand to 16 units and achieve financial freedom within the next decade.
He still has several sources of income today: He derives rental income from his portfolio of properties. In addition, he still earns a salary from his day job at the truck driving school, where he rose through the ranks to the position of president of the company. He also does expert testimonials and earns money through his YouTube channel.
Think beyond your day job, he encouraged: “I make a lot more money spending two hours a month in real estate and one to two hours a month testifying as an expert than I don’t make any money running a truck driving school. The mistake a lot of people make is selling their lives one hour at a time and not realizing that you make a lot more money when you get paid on value. that you produce.”