In our last video we talked about what interest is. View the video below to find out how your interest rate affects you.
This is the first of a series of short videos examining interest and its impact on your house payment. This video discusses what interest is and why you have to pay it.
Investing in real estate can be lucrative. It can also destroy your financial future if you are not careful. So, how do you make sure that it is profitable, and how do you get started?
Guaranteeing profit is impossible. However, if you create a solid plan and follow that plan, you are going to have to work hard not to retire a millionaire. If you go it without a plan, you run the risk of getting burned.
Where Do I Start?
Start with why, then comes what, and then comes how.
Goals: Decide what your investment goals are, and the timeline you will need to reach them. For example, if you are in your 20s, you don’t need to worry about immediate income and can buy some property that will pay for itself in rent now and generate income in 20-30 years during your retirement. If you are in your 50s, your goals may be different. You will likely want property that is generating immediate income. Your goals will also help you determine what type of property will meet them, and whether you need to flip a few properties first to generate cash to buy longer term investments.
Research: You have a firm grasp on how the internet works, social media, smart phone, and how to make a spreadsheet. If you don’t, you probably know someone who does. Have them help you. Start on some forums like Bigger Pockets and read the blogs on sites like Zillow or Realtor.com. Get a handle the terms and how the process works. Don’t forget to consider repairs during this phase. Line up contractors you trust, and start getting a feel for the costs involved by visiting stores like Home Depot and Lowe’s. You will want to be able to guess at the cost to repair a property by the time you start looking at them, or have a contractor you can call to help with this.
Plan: Now that you know what you want to accomplish, do you have the cash you need? Will you need to finance? Where will your down-payment come from? If you have a television, you have probably seen the ads that say you can flip property using other people’s money. While there is a way to do that in a sense, it is not actually buying a property and turning it for a profit. (It is wholesaling, which we will cover later.) To truly flip a property, you will need your own money. If you don’t have the 25-30% down that most lenders require on a non-owner occupied property, don’t give up. This is where collaborations and partners come in. You might want to look into that.
Your First Investment
After you have formulated your plan, you are ready to consider your first investment. Obviously, it is going to depend on your situation. However, for most people your first investment should also be your primary residence. For this, there are a couple options:
Live-In Flip: If you don’t like the idea of you and your friends buying and renovating a home together (which has a tendency to destroy relationships), and easy way to get started is the live in flip. My first home was an unattractive condo that I bought before I knew what flipping a house even was. All I knew was that I could get into it with almost nothing down, just the few thousand dollars that I had saved already. After I moved in I cleaned, stripped horrible wallpaper, changed out green carpet, and painted. Less than a year later, I sold the property for a nice profit that covered the down payment on my next property, where I did the same thing and made an even bigger profit. The beauty of doing this is that you have to pay to live somewhere anyways, so there are no “holding costs” on the flip. You could take a few months or a few years to sell it, but in the end, you will profit from it.
A Small Multifamily: In lieu of living in your flip, you can buy a 2-4 unit building and occupy one of the units. You then rent the other units out, ideally covering your “rent” in the process, and at the very least, significantly reducing your “rent.” By living in your multifamily property, you are able to decrease your expenses, while locking in the lower rates that are available to owner-occupied property. When you move out, the low interest rate stays in place and your payment stays the same, while that property becomes the first in your collection of real estate investments.
The benefit of the two options above is that you can utilize low-down payment methods to get started, such as an FHA loan. FHA loans allow homeowners to buy a property with just 3.5% down payment. That is significantly different than the 25-30% needed for a non-owner occupied property.
FHA has a program that allows you to incorporate the repairs of a property into the loan itself, so this helps you finance both the purchase and the repairs. You can use this loan on both single family and small multifamily properties, which means you can combine all the benefits of the live-in flip and the small multifamily strategy into one, feasible plan.
Start by Building Relationships
If living in your investment doesn’t sound like it’s for you, you can begin with building relationships with established investors in your area. Attend meetups and investing clubs (yes, this really is a thing). Learn from their experiences. Listen to stories, learn what made them successful and pay attention to their failures. Hopefully by doing this you can avoid your own. Eventually, some of these people may be good partners for you. At the very least, you will learn the ins and outs that the television shows don’t show you.
By getting involved in local real estate groups, you will also make contacts that will guide you to wholesalers, real estate agents and financiers that won’t take advantage of you. Each time an opportunity presents itself, you can evaluate it to see if it’s the right one. If you need help with this, ask. Investors love to help each other, especially when it’s your money they are discussing and not theirs. When you are ready to pull the trigger, you will know.
But What About Wholesaling?
Wholesaling gets a lot of attention, because the ads love to talk about how easy it is and how you can make thousands of dollars in your spare time with no money.
Wholesaling is a real thing. You get a property under contract at a discounted price and sell it to an investor who will flip it. Sounds easy. So why isn’t everyone doing this? Let’s think about this. Do you have homeowners lining up to sell you their home for less than market value? If not, you have to find them. I’ve done it, and so have a lot of other investors. However, it is not as easy as it sounds. In my experience, most people who try to get into wholesaling never make serious money, and stop because they find that it is harder than they thought. Granted, it’s a business that you can start with little money, that has flexible hours and the benefit of learning the business of real estate without investing a lot of money, but it is still a job that requires time, dedication, motivation, and marketing. A lot of marketing.
Start thinking about your goals and go from there. Do your homework. Remember, no plan = no profit, and you aren’t doing this to make beautiful homes for others to live in out of the goodness of your own heart, right?
“I don’t have enough for a down payment.” If I had a dollar for every time I have heard that, I would have a down payment! And guess what? Almost all of the people who have said that to me are home owners now.
Real estate has changed. You no longer need 20% down before you can even think about buying a home. There are programs out there with as little as 3% down needed, and even some with zero. No, they are not those “bad” loans we remember from years ago. These are legitimate programs from legitimate lenders. Sound too good to be true? It isn’t. But, if you are one of those that wants to go the traditional route to home ownership, saving for a down payment isn’t what it used to be either.
Let’s use $500,000.00 as a purchase price as an example. We know prices can be higher than that, especially in southern California, but there are many areas where you can buy a very nice home for much less than that, so for the sake of this example, we will use that number. $500,000.00 x .03 (3%) = $15,000.00, which means you will need $15,000.00 for a down payment.
Great! Now, how do you get there?
We all know your savings is not going to grow by leaps and bounds like it might have 30 years ago. All this means is that you will need to make little sacrifices. Let’s start with your Starbucks habit. At an average cost of $4.50/drink, that is almost $1500.00 in one year. I lost you, didn’t I? Don’t want to go the next sixty years without coffee? I don’t blame you. I don’t want to go the next sixty minutes without it, so I wouldn’t expect you to. That is okay though, there are other ways to save that you may not have thought of.
• Cable – at almost $300/month now, cutting out cable television could save you $3600.00 in one year.
• Coffee outside the home – If you make coffee at home, you will spend an average of $15/week, assuming you buy good beans and creamer of some sort. Compare that to the $30.00 for your daily latte, and you are saving another $750.00 in one year. Also, let’s be real here…we know some days there is more than one latte, so lets bump that up to $1000.00
• Cancel the lawn service and the cleaning lady. You can do anything for one year. After that, go back to it, but cleaning your own house and mowing your own lawn will save you $6000.00 in one year. Yes, really.
• Razor blades – this is a ridiculous expense. You can spend $60 or more on one month on razor blades. Sign up for Dollar Shave Club instead. You can get a razor and good blades for as little as $3/month. If you have to have the best, the Executive razor and blades is only $9/month. That is $600.00 in one year.
These things alone are $11,200.00 in one year. Pretty close to that $15,000.00 mark, isn’t it?
Now, let’s look at a few more.
• Alcohol – how much do you spend on alcohol? I bet it is around $500/month, when you total what you drink at home and everything you spend going out. Let’s be conservative and say $300/month. That is $3600.00 in one year. Now, if you stopped altogether, that is the balance of your down payment. However, I know that is unrealistic. What if you had one less when you are out with friends, and cut in half what you drink at home? There is another $2300.00 each year.
• Uber – your Uber budget? You can cut it in half with UberPool. I can’t put a number on this because I don’t know what it is, but you can add accordingly.
• Dining out – cut it out, with the exception of twice a month with friends. It stinks, but it is called sacrifice for a reason, and it’s a small one to make to get to that $15,000.00 number. This could be what does it.
So there you go. Zero to home owner in one year!
Can you do it? I challenge you! 😊