You have probably seen plenty of HGTV shows telling how to buy homes as an investment. Whether you own one house or many rental properties, real estate can create wealth. Wealth includes real estate equity as well as an income stream. So you may be wondering how to get into real estate investing. Well there are several ways that depend on borrower finances and the local real estate market. Most importantly, make sure that you treat real estate investing as a business. Explore all options, consult with experts, and even make a business plan. This article explores the route of buying a first home as an investment and building a real estate investment portfolio from there.
Buying a First Home for a Future Rental – How to get into real estate early
You don’t have to go straight into being a landlord. Buy your own house first. Even though you live in the house, you are still investing in your future. You own real estate so you are a real estate investor! So the purpose of the article is to make sure all areas are considered for best possible results. When buying a first home, there are lots of financing options. Some offer such affordable options, a buyer may choose no money down. These options include VA loans or USDA Rural Development home loans. VA or USDA offer an easy path to owning that first home because of the affordable payments. Now if a buyer has down payment, it may help future cash flow in a rental situation. The lower the payment, the better chances of covering the payment with rental income.
Buying a first home also brings other advantages. Number one is it is all yours! You can do what you want within reason. Also homeowners may realize income tax benefits that renters may not. Plus you are investing in yourself and not helping a landlord get rich. Once a first time buyer feels ready to own the next property, the house could be converted to a rental. Even Veterans could use a VA loan again for buying another primary!
Nothing of course is a guarantee as values may go up or depreciate. So foremost, make sure that you are happy with the home and that you can afford the home.
Buying a Fixer Upper
First of all, buying a fixer upper does not guarantee tons of equity right away. There are always risks of buying a home in need of work. You can watch any of the HGTV shows to quickly see once something is removed there is a big problem unforeseen. So getting a home inspection is very important. Additionally if the home does not meet the mortgage or appraiser requirements, a rehab mortgage may be necessary.
Are you a handyman? If a buyer has the knowledge and time to remodel a home, this could save a lot of money. But be warned that many think it can be done and then finds out a professional must be hired. Whether the project got too big or the owner just doesn’t have the time. So account for the costs either way.
Access to a contractor or handyman. If you are not able to fix all problems or renovations, use a contractor. Ask around for knowledgeable contractors that charge reasonable rates. There will be repairs that come up so having a handyman available is important to keep your investment in good condition. Plus it will keep your tenants happy.
Choosing the Realtor – How to Get into Real Estate Investing
What is the market rent? Even though you may purchase the home as a primary residence, ask about the market rent. Considering the rental market for the home is important. Because if you switch it to an investment property, it is helpful to know and plan up-front.
What is the trend of the area / neighborhood? Does the neighborhood look to be on the way up or down? Are there projects coming up that could help or hurt the value and ability to rent?
School districts? Consider the strength of schools in the area for your children and future tenants. A strong school district will attract families with children. Those areas may be more stable or appreciating.
What are renters looking for? Knowing the amenities tenants want is paramount. So number of bedrooms, proximity to stores and schools, 1 or 2 stories, and yard size should be considered. Some areas draw renters that want low maintenance too. It could make sense to even offer a lawn service for tenants!
Buying a Multi Family Dwelling as Investment
How to get into real estate investing right away is to buy a multifamily dwelling. These 2 – 4 unit homes allow a buyer to live in one unit and rent out the others. 2 unit buildings are called a duplex, 3 units is a triplex, and 4 is a quadruplex. Even though there would be rental income, lenders will treat it as a primary residence in this case. So favorable financing along with the ability to receive rent are very appealing!
What if the rent from the rental units could cover the mortgage payment? That would be amazing! Then you could build wealth even quicker by the tenants paying your mortgage. Down the road, you could move out of the primary residence unit and rent it out. Then the buyer / investor could buy another home as a primary residence. Maybe even another multifamily residence!
Funding Retirement with Rental Properties
Some choose to fund retirement years with rental properties instead of investing in the stock market. Many start early with the plan of paying down mortgages by retirement age. Maybe even have the mortgages completely paid off by retirement. Then the properties could create an income stream during retirement years to supplement social security and other retirement income. Basically retirees would have a business to run, hopefully part-time, through retirement.
Tax Advantages of Converting a Primary to a Rental
As mentioned, buying a home as a primary residence first has a lot of advantages. The IRS helps property owners with certain tax advantages. While living in a principal residence, typically homeowners may write off mortgage interest, property taxes, and possibly some closing costs. After converting the property to a rental, there is even a potential window that the property may be sold without paying capital gains. Plus owning rental properties allow for certain tax advantages while building equity. Make sure to thoroughly discuss plans with your CPA.
Experienced Rental Property Owner Options
So what if you’re a seasoned real estate investor and own several properties? As you become a more experienced property owner, it can get tougher to find lenders. More properties means filing a schedule E on tax returns, which details out expenses plus profit or loss. Once property owners reach 4 financed properties, many lenders are not able to finance any other rentals. But we offer the Fannie Mae Multiple Financed Properties program. So this allows investors to finance 5 – 10 total properties. Learn more about rental property mortgage loans here. Although, keep in mind that there is typically no limit of properties owned when purchasing a primary residence.
Keep in mind to always represent the property being purchase as to what it really is. This means do not say that a home will be a primary residence when it is really going to be a rental. Some buyers pretend that a home will be a primary residence so that a lower down payment and interest rate is possible. But it is mortgage fraud which brings severe penalties. So don’t do it! Also, the ideas mentioned in this article do not represent investment, financial, or tax advice. Consult a tax professional, financial advisor, Realtor, and mortgage loan officer when considering rental properties. Finally, never buy a property as a primary residence and convert it to a rental right away. There is nothing wrong with converting to a rental property years later. But it would be fraudulent to represent as a primary residence and immediately convert to a rental. So hopefully this helps in understanding better how to get into real estate investing.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.