Do you want to set yourself, your family, and future generations for a legacy of wealth? Here’s the secret! Don’t buy a HOME first, buy an investment property! Whether your goal is to amass as much fortune as you can or simply enough to live a comfortable lifestyle and leave a legacy for your future generations. Investing in real estate is the most common vehicle that many millionaires utilize to get there. It’s a proven strategy for success. So how can you get started?
Well as you know, the earlier you plant a tree, the more time you’ll have to enjoy the shade that it brings. It starts with the first property. You have to be intentional with your goals when purchasing real estate. When you’re financially ready to buy your first home, don’t just buy a home for yourself right away. Buy an investment property that will pay you a monthly income and allow you to live there. A home is not an asset, because it’s actually a liability since it isn’t producing income.
Ok got it! So what can I buy for my first investment property then? Look for a multifamily property like a duplex, triplex, or quadplex as your first property. Why? Because unless you’re already really rich where you can afford large apartment complexes, this is what most first-time buyers will be doing. In addition, as an owner-occupied buyer of a residential multifamily property, these will be the lowest out-of-pocket purchase costs. This investment strategy has been termed “house hacking” by many investors. Depending on your local market’s numbers and stats for: rents, unit count of your property, and purchase price. There are 3 possible results ONE from the purchase of your first owner-occupied investment property.
Scenario 1: Your tenants’ rental income helps to lower your mortgage and other home expenses. Meaning it’s not enough to cover all your bills of living at that property, but it can drastically help you offset your bills.
Scenario 2: Your tenants’ rental income offsets your mortgage and other home expenses. It’s a net zero situation, which means you’re living for FREE! Your tenants are covering all of your living expenses!
Scenario 3: Your tenants’ rental income provides you with a positive net profit after everything is paid per month. This is the holy grail, the rental income that your property produces is so good, that you actually make a profit after all your property’s expenses are paid.
Ok, take my money! I’m ready to start! How much do I need? Below is a chart showing exactly the minimum down payment amount you will need depending on the number of units and the type of loan that you intend to use. So as you can see, if you can utilize an FHA loan, it would allow you to need as little as 3.5
% down payment. Note that you should also factor in 3% for closing costs, insurance, appraisal, inspection testing, title work, and other things due at closing.
| Minimum Down Payment Required Table | ||
| Home Unit Count | FHA Loan | Conventional Loan |
| 2 | 3.50% | 15% |
| 3 | 3.50% | 25% |
| 4 | 3.50% | 25% |
There are other loan programs like VA loans for veterans that don’t require any down payment. Meaning you can get in a home for 0% down! In addition, if you qualify there are down payment assistance programs, grants, and or secondary loans to cover the down payment costs available out there. Depending on your market, the program’s requirement limits, and rules will dictate whether or not it can be used to purchase a duplex or larger.
Using this information, you should be able to acquire your first investment property for the least out-of-pocket amount you need to get started. Generally, most loans require that you live there for a minimum of one year. Once you’ve saved up enough funds to repeat the process with a new property. You would acquire that new property and move into that one, allowing you to now rent out the old unit you used to live in. This will help bring in even more income for that property.
A few things to keep in mind, you can only have one active FHA loan at a time. So you will either need to refinance your FHA loan to a conventional loan or utilize either a conventional loan or non-QM loan for your next purchase. This just means you may need to bring more out of pocket. In addition, each person is only allowed a max of 10 conventional loans. Once you cap, then you need to move to commercial loans or non-QM loans.
In conclusion, house hacking is the simplest and lowest-cost way to get started with building your wealth through real estate investing. Learning how to leverage the lender’s money to help you accomplish your goal is also very important. If you know of anyone who may benefit from this blog post, please share it with them. And if you live in the greater Milwaukee WI area and want to get started, let’s connect! I’m here to help!