You have been dreaming about buying an investment property as long as you can remember.
You know that real estate prices rise over time. Even the value of your primary home has appreciated quite a bit since you purchased it 5 years ago.
No wonder why everyone wants to buy an investment property. You also want to do the same and make money in real estate. A lot of money!
You want to become a Real Estate Mogul!
But you know this is just a dream. It may never happen.
You don’t have any savings that can be used as a down payment for your first investment property.
But is there a way to make it possible?
Yes, there is.
You can leverage your home to buy your first investment property. And then the next. And then many more.
In this blog post, I m going to show you how you make this happen:
Recognize, Your Home is A Wealth-Creating Tool
Your primary home is ‘an escalator to wealth.’
That’s what the self-made millionaire David Back says.
The point he is making is based on the historical fact that real estate appreciates over time.
So if you have already bought a home, you are on the right path to creating wealth for yourself.
[If you haven’t already, you can buy a home with an FHA loan (CMHC for Canada) with a down payment of just 3.5%(5% in Canada) and with relaxed mortgage qualification. Check out with your bank/lender.]
The chances are ripe that after some years of home ownership, you have quite a bit of wealth accumulated in your home.
Let me explain.
There are 2 wealth components accumulating in your own home while you are living in it and paying the mortgage installments.
- Equity accumulation — while you repay your mortgage by installments, a part of your installment goes towards the equity(principle) you borrowed. That, in turns, accumulating back in your home.
- Value Appreciation of your home — home value typically appreciates over time
This accumulating wealth is a huge resource and presents a great opportunity. You can leverage it to borrow a down payment for your first investment property.
Five steps to the First Investment Property
Step # 1: Know Your Net Equity
Your first challenge is to create a down payment to buy your first investment property. You are going to borrow the down payment money against the accumulated wealth in your home.
This wealth is technically known as net equity.
In a simple term,
Net Equity = Current Value — Mortgage Balance
So hypothetically, if you sell your home today, you’d receive the profit equivalent to the net equity.
Step # 2: Meet with Your Banker
Once you know that a significant amount of net equity has accumulated in your home, it’s time to meet with your banker (or mortgage advisor) and discuss your plan of buying an investment property.
Depending on the accumulated net equity and your borrowing ability, they may have 2 low-interest options for creating the down payment:
- Home equity line of credit
- Cash-out refinance
Heloc-Home equity line of credit is a low-interest borrowing option
At this preliminary meeting, you’ll get the general idea of how the down payment and the mortgage would come together for your new property, your first investment property. You’ll also come to know how the new mortgage will work based on your personal financial credentials and potential income of the investment property you’re going to buy.
Without good personal credentials, it might be a significant challenge to put everything together.
It’s worth noting here that if your credentials such as credit and income are not good enough, it’s not the end of the world for you.
You can take a step back, make a plan to improve these credential and start working on that plan. Same if the accumulated net equity in your home is not large enough. Here are the additional steps you may have to take.
- Start working on improving your credentials like income, credit etc.
- Wait for your primary residence to appreciate further
- Work aggressively to reduce the mortgage on the primary home
Step # 3: Researching
Now is the time to start doing homework. Start surfing online to learn about property investment options. Websites like Zillow.com and Realtor.com(Realtor.ca) are good resources. Attend seminars and webinars. Meet up with someone who is already a landlord.
Start gaining knowledge of these subjects.
Here are some topics:
- Type, price-range and area of the property
- How to calculate the cash flow/profit of the rental properties
- Landlord-tenant laws
- Different factors affecting the real estate market
- How to deal with the tenants
My advice is to hire a realtor. As you know there is no cost to hire a realtor as the buyer of the property. But hiring a realtor will speed up the process of your research. It’s important to hire a realtor who has experience with buying and selling rental properties.
Step # 4: Mortgage Pre-approval
Your endeavour to become a Real Estate Mogul is entering into a serious phase here.
Mortgage pre-approval, also known as mortgage pre-qualification, will serve the following purposes:
- Determination of the purchase price
- To know the exact amount of the mortgage you can afford, which will give you the amount you’ll pay as the monthly installment after the purchase.
- You’ll be alerted before you start your property search in case of any problem in your credit.
The mortgage pre-approval is a strong weapon in case of multiple offers. You don’t want to lose out against the competition when you see a good cash-flowing property.
Step# 5: Property Hunting, Buying and Close
The most crucial step on your path is to locate the right property.
Start seeing the properties. Your realtor can be of great help now.
A good property choice will have long-term positive consequences and vice versa. If you have done all your homework, you’ll have a clear idea of what you are looking for.
Pay attention to some common sense rules:
- Newer properties will be costlier than older properties
- Newer properties may appreciate better than older properties because of the age factor
- Properties in big metros will appreciate more than in smaller town
- Rentability and saleability is directly related to the population of the town
- The time and efforts to manage rental properties depend on the size and numbers of tenants. For example, a single-family home will need a lot less attention than a multi-unit property.
- The multi-unit property tend to generate positive cash flow compared to the single-unit property.
It may prove to be a prudent decision to buy a property that is easily manageable as a first-time landlord i.g. newer property with a single tenant.
Once you locate a good suitable property, you make a move to buy it. As a homeowner, you have already gone through the process of buying a house once before.
- Make the offer
- Negotiate the offer
- Sign the conditional purchase agreement with the seller
- Secure your funding (the lender will appraise the property)
- Conduct the home inspection — special attention should be given to every aspect of the inspection as most investment properties are tenanted and not owner-occupied
- Sign the final purchase agreement
Up the Ante with Meticulous Landlording
From a long-term perspective, your real career starts from this step. Your goal is not to just buy one investment property.
Remember, You want to become a Real Estate Mogul!
Some conclusions from years of experience are as follows:
- Always follow the landlord-tenant law of your state/province
- Perform tasks diligently, and be prepared to keep learning
- It’s hard work but a very rewarding in the long-term
- This is not a get-rich-quick endeavour
There are some competing views about the time and efforts required to perform the landlording job. Here is what you need to understand:
If you continue with your diligent and hardworking approach, you’d learn fast and master the art of landlording. That will result in you managing your property efficiently and with less time. This will energize you to keep moving forward towards your long-term goal.
On the other hand, if you lose your grip by taking it easy, you may run into trouble sooner or later. That would turn you off from venturing further into the expansion of your business.
You have a costlier option to delegate the landlording and maintenance responsibilities to the property management company.
Continue on Your Path to Glory: Get More Properties
You are on a mission to become wealthy by buying a multitude of investment properties and become a Real Estate Mogul.
After buying the first investment property, the procedure to buy the next property remains more or less the same. Wait for some time(probably a few years)for your existing properties to appreciate in value. You’ll be aided by an additional income source of the rental income from your first investment property this time. This may help you to create another down payment quicker.
From here onwards, your growth will depend on how smart you are in utilizing your resources and creating more resources with the help of those existing resources.
Let me elaborate.
This is the list of 7 probable income accounts(resources) you’ll have when you own your primary residence and one investment property:
- Your own income
- Your spouse’s/partner’s income
- Primary home’s equity (which is still growing by your repayment)
- Primary home’s appreciation (still adding to your wealth)
- Investment property’s equity (growing)
- Investment property’s appreciation (growing)
- Cash-flow from the investment property (income minus expenses)
Now, in addition to the income accounts, you’ll have expanse accounts too. But my point is that you’ll have more space and opportunity to maneuver. With every addition of an investment property, you’ll add 3 income accounts to the above list.
It’s important to understand that until you acquire several properties, the mortgage qualification at each acquisition will significantly dependent on your personal credentials. After you have owned many properties, it will be less dependent on your personal credit or income as you’ll have more resources to service the addition to your debt.
Here are some tips to advance your growth from this stage.
- Always remain ready to grab the DEAL(whether buying or selling)
- Use the best realtor and mortgage broker — they can bring you the best deal and can make a significant contribution to the pace of your growth
- Never underestimate the power of knowledge — keep learning
- Invest in your properties to increase the cash flow
- Keep in touch with experienced investors and landlords to learn about creative and aggressive ways to expand your business
It’s up to you to determine what amount of acquired wealth is large enough so that you feel like being Real Estate Mogul.
For example, some would consider the net equity of one million dollars as a huge achievement. For others, 10 million would be regarded as not enough.
A few contributing factors other than the money:
- At what age did you enter the business and how long are you going to continue?
- How large is your portfolio and how are you managing?
- Are you enjoying being loaded with responsibility?
- What is the amount of total cash flow per month?
In my experience, at some point working up the success ladder, you’ll find yourself quite content with what you have been able to achieve.
Until that point, you have to keep kicking!
It’s Fun Sitting on a Huge Real Estate Portfolio
You have seen a dream of becoming a Real Estate Mogul.
Now it’s your turn to show the world you are also going to make a lot of money!
You have the whole gameplan ready. Leverage your appreciated home value to get started on your path to glory. Walk at your own pace with your focus on the goal.
It’s now or never.
Move forward with courage and confidence!