How I Purchased My First Investment Property At 26
Why You Should Get An Investment Property
Getting an investment property is more simpler than one would think, and it is super beneficial. There is a reason why most of the rich and successful have investment properties. It is a great asset that appreciates overtime, it pays your back on a monthly basis, and there are excellent benefits. I can sit here all day and tell you that going this route is great, but I’d rather break it down for you so that you can under stand why I would recommend it.
There is a reason why people such as grant cardone, Warren Buffett, and plenty of other successful businessmen and businesswomen Invest in real estate. it is one field where the resource has continuously appreciated throughout history. Depending on what you do with your real estate, whether you’re living in it, or it is an investment property, you can use it in order to Benefit you in many ways.
Those who were successful in business typically have a sense of allowing their money to work for them. Instead of working hours for dollars, they would rather have their money Do all of the heavy lifting, while making more money at the same time. how is this possible?\
Robert kissaki talks about this all of the time. He talks about having something that is in the form of a business system where the owner is not trading hours for dollars, but rather there is a replica table system that is generating profits while the owner is not doing anything. for many of us, the goal is to obtain freedom in life, which means working less hours so that we can enjoy life.
if you have ownership of real estate, you have the ability to buy a house and pay it off. Once it is paid off, you no longer have house payments or a mortgage. You don’t have to pay rent. You are now the sole owner of a property in the land that accompanies it. Because of this, your net worth now increases dramatically. You also have sustainable assets that make you more valuable monetarily.
If all of this is foreign to you or if it sounds like I’m speaking another language, do not worry. Let me help you break this down a little bit more. If I want to get a car loan and I have bad credit, I can go and try and purchase a car and they will probably deny me. More chances than nothing, I probably do not own anything in this scenario. However, if I have other assets such as a 401K, investments, another property that is bringing in cash flow, I am able to show the bank that I am capable of sustaining payments for a car even though I have bad credit. They may still deny me, however I have given myself a much better chance of getting approved.
something that recently had happened to me previously about five years ago is that I had gotten laid off from my job. A new contractor came in and eliminated a ton of jobs including mine. In the matter of 24 hours, I went from working, to sitting on my couch and watching television. Since I had an investment property, I knew that I had money coming in every single month and so this soften the burden of having to have a job in order to bring you in funds and putting food on the table.
It really felt great knowing that I had a backup of some Ave of funds coming in every single month. It was substantial enough for me to not worry. The house was making me money even though I was not working. That my friend is the goal of an investment property.
When you have an investment property, things can get a little expensive when it comes to repairs if there are any to be done. Some people may view this as a negative thing. I don’t know if you watch any television, but while Donald Trump was the president, it came out that he only had to pay just a little bit over $700 for taxes in America. The man is darn near a billionaire on paper. How did he get away with paying less than $1000 for taxes? Easy! Investment properties.
I do not have time to get into all of the specifics but when you have an investment property, you can write off almost every single thing that you have used or spent that goes Towards the property. this can be commercial real estate or it can be a residential house. in my case, I purchased a duplex, which is two houses that are together as one. I have a maintenance crew that does landscaping, I have somebody who has to cut down a huge tree in the backyard, and I have to supply Internet and the property. I am able to write every single one of those expenses down when it comes to tax season.
Let’s take this a step further. Being that I have a duplex, I live on one side and I rent out the other side. I originally wanted a four Plex which is 4 units. I wanted to live in one while renting out the other three units. In both cases, people are paying me to stay in one of my properties while I live practically for free. At the same time I am able to write off every single expense such as the Internet. I need it anyway, but I allow my tenants to access it. Since it’s in expense, the net practically means I have Internet for free.
There are other cool tricks such as creating an LLC which is a business, putting your house under that LLC, and then purchasing a car under that LLC. Technically that car is now a business expense which allows you to write that off as well, but that is a whole different story. The point here is that there are many tricks to the game, and all you have to do is play it, starting with an investment property.
Types of Investment Properties You Can Buy
At the age of 26, I did not have a ton of money. As a matter of fact, I had just started a real estate course, and I was interested in creating freedom through passive income with investment properties. I saw that other successful people did this, but I did not know how.
I began to listen to a ton of speakers in the finance industry; those who dealt with investments and real estate. One speaker was one of the leading accountants in the country and he spoke about how he purcahsed a 4-plex (a 4 unit property) for his daughter who was in college, had her in as the owner of one of the units, and she collected rent from those in the other units. When she graduates, he now has a 4-plex property in his portfolio.
That is the type of information that blew my mind. It was something that I would have never heard of. But the question still is, what types of investment property can I buy, and how much money do I need? As I continued to listen to this guy, I realized what I could buy and it was extremely affordable.
For the sake of the article and to stay on track with them of this blog article, I will touch on the following types of properties:
Single Family
This is a typical home that a person most likely grew up in, unless they grew up in a rental apartment complex or something of that nature. A single family home is simply a property that houses
Duplex
Triplex
Fourplex (4-plex)
What Is An FHA Loan
This is the secret for my purchasing my first property. I was not aware of the type of money and the process of getting my first property. On the cd I listened to, the guy talked about being able to get a multi-family property up to a fourplex without having to bring a ton of money as a down payment. The FHA is a government assisted program that allows you to get anything from a single family home, up to a fourplex, with minimal funding.
THIS is how the rich get richer and how wealth begins. Imagine having a fourplex with 3 renters in them while you live in one of the units for free. Your mortgage is being paid for by your tenants, and if you play it right, you can have extra money that can be applied to making extra payments towards the principal.
How Much Money Does It Cost To Purchase An Investment Property?
In one of the previous sections, Types of Investment Properties, you have a choice to choose what you want to go after. This was the most exciting part of purchasing my first property! You’re talking about a black man who knew nothing about being a landlord, and I thought that you had to be mega-rich in order to do it!
“That’s what white people! Only white people have that type of money.”
That is at least what I thought and be raised in my communities to believe.
It wasn’t until I listened to the funding CD from Johnny, that I began to move from an impossible imagination, to a realistic goal.
After I got passed this paradaigm shift mentally, I realized that I had to find how much this things actually cost. According to Johnny, I could find a duplex, triplex, or a fourplex (quadplex), and bring a very minimal amount down. This was done with the FHA loan but the trick was that I had to live in one of the units for a year. I wasn’t married during this time! That’s wasn’t a problem at all!
I purchased my house in 2013 for $156,000. The real estate market was much different back then but I will still give you a breakdown of what the prices were. Even yet, at the age of 26, anything over $1000 was a lot of money to me. When I looked at everything ranging from choosing between a single family house to rent out, up to a fourplex, I had to choose what was best for me. Here’s what a quick synopsis of what you can expect.
Typical investment will be between 100,000 dollars and $300,000. generally you will want to get something that has three to four bedrooms. if this is not possible within this price range in your area, you may have to subtract a bedroom.
in a three to four bedroom house, families word anticipate to have one to two bathrooms. This is important because if you purchase a home using an FHA loan, you have to make sure it is suitable for a family in order to get the most rent amount out of it.
It is not normal to have someone living and the other rooms while you are living inside of the single family house, but perhaps you may entertain the idea of having roommates that pay you rent each month.
You can do this for a year or two or three, and when you get tired of it and you want your own space or you want another investment property, you will have had your mortgage paid for, and you should have been able to save money torch your next purchase due to the great you’ve been receiving.
Duplex:
Typical investment ranges from 70,000 the 250,000. the numbers are a little bit lower for this one because duplexes come in various shapes and sizes. My duplex that are currently have has three bedrooms and 2.5 bathrooms. it is practically two big houses attached to each other. that is not the norm for my area.
when I was shopping four properties originally, I stumbled across a duplex that was $50,000, downstairs was being renovated and had two bedrooms and one bathroom, while upstairs was fully renovated it had two bathrooms and two bedrooms.
another property I looked at who is a duplex with one bedroom and one bathroom downstairs and one unit, and then three bedrooms and three bathrooms, with new appliances and new tile, upstairs in the second unit. upstairs is gorgeous and downstairs was mediocre.
as you can see, all properties are not made equal. you will have to do what is best for you. my wife grew up living in apartments all of her life, and she did not want to feel like she was living in an apartment. there were other properties that made better sense monetarily, but the one that I purchased made better sense for our marriage.
I purchased this one with an FHA loan and I only had to put down $6000. at the time, I had saved up enough money, but needed a little extra 4 unaccounted expenses for closing. that’s another subject for another blog post if you’re interested. however I needed a few $1000 extra and my parents gifted me the extra cash.
Triplex:
The typical investment for this type of property it generally ranges between $80,000 two $350,000. I love these type of properties just simply because they’re different. You see a lot of four unit apartments into unit apartments, but very rarely do you see 3 together. I’m weird like that.
there was one property that I looked at and it needed a lot of work on the exterior. it had three separate units, all with different amount of bedrooms and bathrooms, in one of the units seemed as if you had to climb Mount Everest on stairs in order to get to it. if you fell down the stairs, no one will probably come for you because it was too high up.
the owner really didn’t want the house and he was selling it for dirt cheap, but it was in a interesting neighborhood (aka the “hood”) and it would have cost a ton of money to fix all the exterior issues on the house. Nonetheless, I still wanted it!
I would have lived in one of the units that only had one bedroom, and I would have printed out the other two units! one of the units would have rented out for $500 and the other unit would have rented out for $600!
It makes perfect sense! however I’m not too sure that I would have made it up Mount Everest with all of my bags of groceries from Walmart. to top things off, I would have been scared to climb Mount Everest at 10:00 PM in that neighborhood, especially being that the only way in was walking around the house to a dark, wooded, backyard.
I’m sure my wife would not have liked that. to this day she doesn’t know my desire for that gorgeous property. I guess some things just have to remain a fantasy.
when it comes to purchasing the house, anything that was a Triplex or Fourplex, you have to prove that you have what is called reserves. this is probably the downside of this method, and it is also why the duplex made the most sense for me. read twisted end of this section as I explain more deeply later.
I would have had to brought about $4000 to the table for closing on this property. WHAT!?! Crazy right!? however I need it to show that I had three months reserved based upon the estimated mortgage amount. I did not have that, and so once again another reason that I was not able to take advantage put this property.
Fourplex:
this type of investment what’s the most expensive starting at $250,000 to $400,000. one of the first things you may notice is the beginning price points of this type of property. Generally, a fourplex will have two bedrooms and at least one bathroom. one of the things that make these much more different than all of the other options of properties is that you will typically have the separation of all utilities.
Sometimes in a duplex or triplex, sewage, electrical, or maybe even HVAC utilities maybe coming off of the same lines. this is definitely not the case for every time. but in the scenario of a fourplex, there will typically be four separated utility bills or each unit. as an owner, this is a bigger expense.
if you do not know, something like central AC can’t go from $2500, up to $5000. purchasing on property like this means that each unit can have a $5000 system in it so naturally the investment is going to be higher.
instead of talking one or two entrances that are paved, or special stairs leading up to doors and the previous properties, there may be four separate entrances.
the point here is that the four Plex it’s more expensive, and for good reason.
the property that I was looking at all had two bedrooms in 1.5 bathrooms. the kitchens were tiny and the living spaces were not huge, but it was doable. the price of IT was $180,000 and that was because I knew the real estate agent and it was his property that he wanted to sell.
the rent for each property what’s going for around $600 to $800 per unit. if I had to live in one of the units for at least a year, I would have been putting $1800 to $2400 in my pocket each and every month. once I would have moved out and rented the unit I would have been living in, that number would have been even better.
so why didn’t I pursue this property, even though it is a cash cow? remember what I said about my wife. she did not want to live in something that felt like an apartment. these units had “apartment living” written all over them.
another reason I take advantage over the four Plex is because I would have needed to bring more money so the table as a down payment, which I know I could have saved up after a month or two. however the biggest problem was that I need it cash reserves four up to three to four months in the amount of the mortgage payment.
they wanted me to bring $7900 to the table. I couldn’t remember what the estimated mortgage was, but let’s just be conservative and say it was $1800 per month. on top of the $7900 for closing, I would have needed and extra 6000 to $8000 in cash reserves.
I was bummed because I really wanted this fourplex. I mean think about it. I had the chance to live in a unit where my mortgage was being paid for, and cash flowing $600-$800 per month on top of that!
Then I move out, maximize rent on all 4 units, and I’m officially a real estate tycoon who owns a fourplex in my portfolio in my 20s.
After dreaming, I realized that it wasn’t possible because I didn’t have extra reserve cash. So what are cash reserves?
Think about it like this…
The bank is giving you a loan. The loan is based on risk. There is minimal risk when you buy a single family house. You’re living in it. Chances are that you’re not going to default because the monthly payments are lower, it takes minimal upkeep if something breaks, and the bank is not giving much of a loan in comparison to the other types of preoperties.
Now, take the fourplex. If someone is going to give you almost half a million dollars, they want to make sure that you are fit to invest in because it is a huge risk. In case something goes wrong, they want to make sure you have the financial means to take care of it.
If you do no have the cash in your bank account, they want to make sure that you have other bank accounts, 401k’s to pull money from, an IRA to pull from, or maybe other money market options that you can pull from. This brings comfort to the bank, and so they are willing to give you a bigger loan.
This is why I had to start small with a duplex, AND this is why it is important for you to start growing your financial portfolios early so that you can have reserves, unlike me at this point in my life.
These are things that most of us minorities are not taught. If I would have been building my cash reserves from the time that I started working, getting the fourplex would have not been a problem at all!
Imagine being 28, living somewhere, and knowing that you have a property bringing at least $2000 a month on autopilot. Absolutely beautiful.
What Do I need To Purchase An Investment Property?
For the purposes of this article, we’re talking about purchasing your first investment property with an FHA loan. at the time that this article is published, it is said that you need at least a 660 credit score in order to be approved, and there are some programs local to your state that may even take a lower credit score.
you will have to go to your local bank, and get pre-approved. this just takes a few days. for some banks this may take a few hours. they will ask you for information such as your work history and your taxes from the previous year or two.
After you get a pre-approval letter, it is time for you to go shopping! contact a few real estate agents in your area and see if they can find some investment properties for you. the interest rate is still pretty low and so you should still be able to get away with paying 5000 to $6000 as a down payment before your house.
that number varies but it is a great starting point. This proves that you don’t have to be rich, and you don’t have to have a famous family like Kardashians in order to purchase real estate in order to change your life.
Now that you know it is something extremely affordable, go ahead and get that pre-approval letter today. as my brother would say…
“there’s nothing but space and opportunity”.
the only difference is that he was talking about fighting and throwing punches, not making money for investment properties 😊