And you’re anxious.
You’re getting cold feet. Why?
Your resolve was to buy your first investment property by the end of the year. It’s October now. Somehow you have not been able to make it happen.
What happened to your burning desire to become rich by becoming a landlord?
Somehow you are not able to put together the down payment or mortgage qualification. Or you are not confident to take the plunge. You’re not sure of the reason now. Could it be that you’re scared of the future responsibility of being a landlord?
How many times have you attended similar events? All the attendees seemed so excited about buying properties there. You felt like participating in a race to achieve an imaginary real estate goal. Are you afraid you’d feel left behind if you went there?
With each passing day, you feel like you are losing the opportunity to become rich.
Whatever it may be, you know you have been complacent long enough. You have to take the first step into real estate investment.
In this blog, I am going to show you how you can take that elusive plunge with smooth transitional steps. These low down payment and easier mortgage qualification strategies have been followed by many small landlords both in the US and Canada.
It’s Ok to Feel Intimidated
Let’s start with the challenges.
Challenges are a part of every beginning, wouldn’t you agree?
In your case, saving a down payment and qualifying for the mortgage are your immediate challenges at this stage. Are you overwhelmed by thoughts of future responsibility? That may be one more.
But the important thing is that you are aspiring for a big thing. And you have a resolve to go for it. You know real estate appreciates over time. Once you buy one property, you’d become more resourceful. And you’d be able to go for more. You have seen people doing that all the time.
Now let me tell you, you are on the right path!
I am not kidding.
You are attempting to find a way to move forward. You are reading this article and may have read some more of similar articles. Isn’t that proof enough?
Now let’s talk about why you don’t need a million bucks to start your real estate investing business today.
Don’t Avoid Challenges, Work Around Them
If you follow these strategies, you won’t need a huge down payment nor will require a higher personal credential for mortgage qualification. In addition, you would also get intermediate landlording experience.
Option 1 — Start your family instead of doing business!
Here are the 5 steps I am proposing, This strategy would enable you to buy your first investment property as well as your primary residence in smooth succession.
- First, Buy your primary home(single-family property) instead of an investment property and start living in it
The first-time homebuyer can buy the first home with 3.5% down payment in the US(5% in Canada). This is possible because of the government-regulated programs like FHA loan (for the USA)or CMHC mortgage(for Canada).
These programs also offer very relaxed qualifying criteria for the mortgage. As an example, you may qualify with the FICO — credit score as low as 580 or even lower for FHA loan. You may qualify even in case you have filed bankruptcy in the past.
This first step helps you to become the owner of the real estate without a large down payment and tougher mortgage hurdles.
2. Rent out a portion or a room and start practising landlording
By renting out a part of your own home, you start practising the landlord skills. It also helps you to quickly save money.
3. Wait till the value of your primary home increases
This is an important step. You are paying the mortgage installment which increases the mortgage equity. Sooner or later the value of your house would appreciate. Your financial strength would increase because of the accumulation of equity and value appreciation.
4. Use that time to save for the down payment of the next house
Save aggressively to collect down payment for the 2nd property. While you are waiting for the net equity of the house to increase, this step of saving more down payment would bring you closure to your next real estate acquisition. This is the time to work aggressively to save.
5. When you have enough down payment, buy your 2nd property — an investment property
At some point, you’ll realize, your time has come for the 2nd purchase. You might have saved up some down payment amount. You would have enough equity accumulation in your existing house. That may trigger more financing from your mortgage lender. You may utilize it to add to your saved down payment to buy the next property, an investment property.
This is how you acquire an investment property even if you don’t have lots of money of your own.
Let’s now move on to the option-2.
Option 2 — Don’t shy away from living around your tenants
When I say multi-unit property, I meant 2–4 unit property. From the lender’s point of view, 1–4 unit properties are eligible for FHA/CMHC loan with the reduced down payment. Remember, this is our main objective, to get started with little investment.
There is a condition attached to such a mortgage. The owner should occupy one of the units. It’s called owner-occupied rental property.
Let’s say, single-family home in your area is available for 300K, the multi-unit would cost somewhat higher than that. You still pay 3.5%-5% down payment.
The benefit of this option is that a part of rent from the rented unit would be allowed to be considered for mortgage qualification purpose. You should check with your mortgage advisor for the exact guideline.
Once you acquire owner-occupied multi-unit property, the rest of the steps remain just the same as the first option.
This is how option 1 and 2 compares.
- The amount of initial investment would be somewhat higher when you buy the multi-unit property.
- We can’t guess about the mortgage qualification unless we have actual numbers for the multi-unit property. The option-1 would not consider the rental income for the mortgage.
- The multi-unit rental income would be significantly higher as these are self-sustained units. Most likely this would create a positive cash flow. That may make a huge difference in your pace for collecting the down payment for the 2nd property and ultimately your long-term goal.
- Caution: The landlord responsibility is significantly higher for the multi-unit option. You should use your own judgement to take them on at such an initial stage
So you can see now? How to become a landlord even if you don’t have big investment money.
Option 3— Buy a primary home and convert that into an investment property
This is a bit tougher option and it depends on your circumstances.
- Buy your primary residence with a reduced down payment of 3.5%-5%. And start living in it. FHA/CMHC loan conditions require the buyer to live in the house for a minimum 1 year before he can convert that into a rental property.
- After living in your primary residence for 1 year, you have an option to buy your 2nd primary residence, also with FHA mortgage with the reduced down payment. That is if you get a new job in a different area and you are forced out to live in that area. Or if your family outgrows and need a bigger house.
In this circumstance, you can buy the 2nd home just as if buying the home as first time home buyer.
So now you own 2 houses, both bought at 3%-5% down payment. And one of the houses is your investment property.
As you can see, all the 3 options provide you with the opportunity to start the real estate investing business with a very little down payment. All the 3 options allow you to practice landlord skills before you go big at the later stage of your career.
How Your World Changes Once You Choose Either of These Options
Once you own more than a couple of property, there are chances your capacity to excel and take more risk would dramatically increase.
You’d feel confident because of your increased net worth. That would be the result of rising equity and appreciation account in each of your property.
You’d collect more rent because of the increased number of tenants. That cash flow would allow you to take quick decisions on the maintenance and repairs issues. That would, in turn, make your landlord operation more efficient.
You’d feel like conquering the world!
This is especially true because in the back of your mind you’d always remember how little you invested to start this business.
No wonder real estate investing by an individual investor like you is an extremely popular niche of the business.
Come On…Life Is Waiting To Applaud You
Real estate decisions are long term decisions. So It’s ok to feel pressured thinking about the consequences.
But if you want to change your life, sooner or later you’d have to come out of your comfort zone and take action.
The strategies discussed above show you how to get over the psychological roadblock you would experience. These are low-risk options to enter the real estate investment business. These strategies would allow you to develop and practise essential landlord skills. These skills would help you go big and buy several properties.
So it’s now or never. Choose your option.
Start respecting your judgement.
Take your path towards shinier future with confidence.
You have done enough homework. Take out that thick file which you have prepared with all the useful information gathered from those seminars.
Add one more page to that file.
List of the professionals who are going to help you crack your first real estate deal.
Start Making Calls!