I think it isn’t much of a secret that real estate can be a powerful tool for us financially. Most home owners can look to their home as an asset that has allowed them further luxuries. So why not own more than one?
At 40 years old I am not banking on receiving Social Security Income. Though, I have to give them credit, it’s still pumping out income for people even though 20 years ago I was being told it would be dried up by now. Anyway, I’m not personally banking on collecting it. So what will I do when I no longer can work? Let alone when I reach the age where I don’t want to? Given the licensing that I have as a Mortgage Loan Originator and Lending Manager, I am restricted in what I can publicly discuss. One of those restrictions is talking about retirement planning. I am not a financial planner and cannot discuss income strategies, but I will spend the balance of this post addressing how you can use my company and lending team to secure for yourself additional homes that you could rent out. You’ll have to do the math yourself, but realize what happens in 30 years to a 30 year mortgage. Remember to think about the rents too.
Down payment is probably the biggest challenge to buying rental property. For a Single Family home, we require at least 15% down right now and reward you handsomely for putting an extra 5% down for a total of 20% down. In January it’s rumored that we’ll offer a loan requiring only 10% down with no mortgage insurance. But for now, it’s 15% down. On a duplex it’s 20% down and on a fourplex it’s 25% min. Since fourplexes usually start at $300k or more, that means you have to put down $75k. That’s why a lot of people get stuck. How about using your 401k for a down payment? We’re fine with that!
So the reality is that you need some savings to get to buy real estate. Saving is hard. It’s true, but baby steps. It comes in steps and everyone can do it. Do you have a regular savings plan yet? If so, increase the amount today. If not, then start today. I know of several great financial advisors that would happily set up an auto draft of $50/mo for you into a separate account. Anyway, save and increase how much you save as often as possible.
Are you bad at saving, but great at getting out of debt? Do you own your car free and clear? You can refinance it and use that for your down payment! Seriously! Does it make sense to do that? Call me! Let’s discuss it!
Another great down payment buster is converting your personal residence into a rental property if you’ve lived in your home for some time and are thinking about an upgrade. This could be a great idea. Especially if you lived in a multi-family home or a small single family home. In a future article I’ll address reserves or savings requirements for qualifying with rental properties, but since primary residence homes require so much less down (0% in some cases, 3-5% in most others), converting a current home into a rental while buying a new primary residence home could be your ticket to real estate accumulation.
As I mentioned in the beginning, I’m not a financial planner and these strategies can be very complex. Along with what value I can add to your decision making process, you should consult other trusted advisers such as a tax professional, CPA, investment adviser, or financial planner.
Next post I’ll get into the 2nd greatest challenge I see investors facing, cash flow. But in summary, saving is critical to owning real estate. 401ks and equity in cars are acceptable sources of down payment. And converting current homes to rentals could also hold the key to your real estate success.